Some of us older folks may remember the TV commercial where the oil filter salesman said, “you can pay me now, or pay me more later.” The implied admonishment was that saving a little money up front might cost more in the long run. The same advice applies on a much larger scale when considering the available choices for new vehicles. If only the up-front acquisition costs are considered, a shortsighted choice can lead to much higher costs over a vehicle’s entire lifecycle.

Comparing the return on investment or time to break-even for two or more equipment options on an otherwise identical truck is a common form of cost analysis, but limiting the comparison to the direct costs and benefits of an equipment option may not provide the entire story.

By using a lifecycle cost analysis approach, a more accurate comparison is possible. Lifecycle cost analysis takes into account the total cash flow associated with the total life of an asset. A lifecycle cost analysis can help make a decision to replace, rebuild or change component specifications on a vehicle, to lower the total cost of ownership.

According to Ed Pritchard, vice president of fleet management & purchasing at Houston-based Silver Eagle Distributors, “The benefit of establishing a process for determining vehicle or component lifecycle cost is the ability to accurately gauge optimum vehicle replacement cycles. Without a good lifecycle cost analysis in hand, you could be replacing vehicles too soon, which drives up capital expenses. If you miss your mark and wait too long, you could experience unnecessary maintenance costs that could otherwise be applied to the cost of a replacement vehicle.”

Pritchard presented a highly detailed explanation of lifecycle cost analysis at BevOps Beverage Fleet Summit 2009, held in Tampa, Fla. Offering valuable information for small-fleet managers and mega-fleet CFOs alike, Pritchard’s presentation was based on his successful use of lifecycle cost analysis at Silver Eagle, one of the largest AB InBev distributors in the southern United States.

While some of the more complex aspects of lifecycle cost analysis may fall to the company’s CFO or CPA, highly-detailed fleet operating records from the fleet management team are necessary.

“In order to establish a true lifecycle cost analysis for a particular vehicle or component, you must accurately track all associated costs including acquisition cost, fuel, maintenance, depreciation, licensing, vehicle use taxes, residual value and so on,” says Pritchard. “Failure to accurately track all costs associated with ownership over the life of the unit will result in less than adequate information needed to make informed decisions on vehicle specifications and future vehicle acquisitions.”

To perform an effective lifecycle cost comparison, it’s important to define and limit the variables being compared. For example, when making the comparison between a hybrid powertrain truck and a conventional powertrain truck, both trucks should be otherwise similarly/ identically spec’ed, operating on similar routes, with similar loads.

When the comparison is being made between entirely different truck configurations, a straight truck equipped with a side-load body vs. a tractor with one or more dry-van trailers, for instance, it’s that much more important to incorporate all costs over the entire vehicle lifecycle.

A tractor and two trailers will certainly cost more to acquire than a single straight truck, but the tractor-trailer configuration’s ability to cover two routes during back-to-back shifts with a single power unit means that most fixed costs (truck/tractor FET, Highway Use Tax, registration fees, etc.) get amortized across a higher level of delivery volume. In this example, it’s also necessary to consider the product volume delivered when making the cost comparison.

“Failure to account for variations in vehicle operating conditions will dramatically impact the outcome of your lifecycle cost analysis,” says Pritchard.

The comparison of incremental vehicle spec changes is where lifecycle cost analysis really shows its value. Big differences can be spotted without much help, but with many spec choices, it’s a game of inches, not yards, and lifecycle cost analysis can help identify enough “inches” over enough time to accumulate a substantial gain.

It’s important to avoid overstating the cost savings or productivity gains associated with the options being analyzed. A productivity gain must be significant enough to impact operations. Pritchard offered the following at BevOps 2009:

“If a local delivery truck averages four deliveries in eight hours, two hours per delivery, and it has been determined that the purchase of a new low-profile truck with a side access door will save 15 minutes per delivery, the total time savings will be one hour per day. Since this is less than the average time needed to make a delivery, the savings will probably only result in more free time for the driver as opposed to increasing actual productivity for the company. Additionally, if the time savings is significant enough to make another delivery, but the truck is already loaded to capacity at four deliveries per day, there will be no actual gain in productivity.

“The bottom line is that you must be able to actually capture labor savings and/or additional revenue associated with improved processes, methods and/or equipment.”

Purely financial considerations, including tax rates, interest rates and depreciation schedules may also affect the cost equation, so in those instances where comparing purely operational concerns isn’t conclusive, the financial variables may make or break the case for the options under consideration. This is where the CFO/CPA needs to be involved.

When comparing trucks or component options, it’s critical to consider the driver’s potential impact on operating costs. Studies of long-haul trucking operations have shown that driving behavior can affect fuel economy by as much as 30 percent in otherwise identical operating conditions. The importance of this is three-fold with respect to lifecycle cost analysis.

First, when measuring actual fuel economy for purposes of lifecycle cost analysis, it’s best to use the same driver, or a sufficiently large pool of drivers to help mitigate the variable of driving skill level that could easily exceed/obscure the variables being compared.

Second, because the driver can have this large of an impact on operating costs, money invested in driver comfort and convenience features has the very real potential to indirectly deliver measurable bottom-line savings through improved fuel economy. In route delivery operations, driving behavior also can have a significant impact on tire, maintenance and repair costs.

Third, beware of additives and bolt-on gadgets marketed with fuel economy claims based solely on the vendor’s own road-testing. Legitimate fuel economy test claims are backed up with SAE Type II testing performed by an independent laboratory.

From Beverage World January 15, 2010