A Dime at a Time | Is it Time for a New Tractor?
The semi trailer industry is a rollercoaster. With surges and dwindling availability, dips and spikes in prices, and swelling maintenance costs, there aren’t many straightforward factors. Therefore, determining when it’s time to swap out equipment can be a bit of a gamble. While some carriers have general guidelines, timelines and procedures, other companies need to decipher when it’s time to freshen the fleet on a situational basis.
It’s the age-old question for fleet owners. When is it time to trade in older equipment? The fact is, your bottom line should be the determining factor of whether you upgrade a trailer. Will a trailer upgrade relieve operators of a pileup of costs and prep them for the long haul? Or, is the outright cost of a new trailer daunting? The process is subjective, and, for the most part, dependent on the distance and frequency of travel, type of materials hauled, and current total cost of ownership (TCO).
Keeping a few tricks of the trade in your back pocket can keep you on the right track to avoid buying too new too soon or going overboard with maintenance costs.
Examine Your Assets
Many fleet managers don’t take the time to track maintenance of each asset and aren’t abreast with each trailer’s total cost of ownership. When you track maintenance expenses, TCO is easy to calculate. From there, you’ll have a more clear-cut idea of when to trade in or replace that asset. Naturally, there are three aspects that go into TCO: purchase price, maintenance costs and residual value. By refining your practices and setting up a program to track these factors, you can track, to the penny, the TCO of a trailer at any given time.
Purchase prices vary greatly depending on supply and demand and whether the fleet being purchased is new or used. Obviously, purchasers should be certain the company can afford the new (or newer) equipment, factoring in the fact that the cost will eventually be offset with the profit the trailers will bring in throughout their lifecycles.
When looking into a newer trailer, it’s important to consider a few very crucial points aside from the selling price. How will the updated technology of the newer trailer benefit you. Is the trailer lighter? It most likely is. Does it feature better technology? It probably does. Will maintenance be required less frequently than the older trailer it’s replacing? That’s almost a guarantee. Can you take on more jobs with a new trailer because of this? It would seem that you could. Ideally a newer dry van trailer would enable an operator to travel longer distances before re-fueling, carry heavier loads, and spend less time repairing the unit.
Most fleet managers have at least a rough estimate of what they spend per year on key items such as tires and brakes. However, a lot of companies fall short when it comes to drilling down to the cost of more nonstandard maintenance items like replacing doors or the interior lining of a semi trailer. These more sporadic needs commonly get overlooked in a fleet’s projected maintenance costs, simply because fleet managers don’t plan for them or see those more arbitrary maintenance costs surface.
Further, fleet owners commonly add maintenance costs across the board. In other words, they simply divide the dollars spent on repairs by the number of trailers in operation. That approach doesn’t help when it comes to value/cost comparisons for a specific trailer and deciding whether it’s time to trade in or replace that specific unit. Gaining a clear picture for what each specific trailer is costing, and whether it’s time to trade it in or replace it requires unit-specific tracking.
This is where electronic fleet management systems come into play. These programs help fleet managers capture labor in real time, schedule shop activities and employees, access fleet data for long-term planning and run detailed reports on each unit.
These programs, or some form of detailed tracking approach also helps reveal whether trailers with a certain spec aren’t working. For example, in a company’s fleet of 500 trailers, there might be 10 differently specced units. It’s crucial to hone into what trailer groups cost more to maintain. If a different model costs less to maintain, upgrading to that style is likely the best decision. Fleet owners should keep records of each individual trailer so they know to the penny what each trailer is costing. This will also help determine any specs that might be a culprit of additional costs and/or maintenance.
Take for example a company carrying a sensitive load – such as bags of dog food or bagged rock salt. A vendor loading a sheet-and-post-style trailer might struggle with the trailer’s snag points. The interior of this trailer would notably cost the company in several ways: in damaged cargo — and therefore strained relationships with customers — and wear and tear on the interior of the trailer. Just this simple plywood sheet-and-post specced trailer may be costing a fleet owner an additional $500 per year in maintenance and damaged product. That $500 expenditure will add up quickly in an entire fleet – a $250,000 expense each year for a company with 500 trailers, for example.
Not only is this a substantial financial hit, but the potential for lost business is also daunting if the trailer’s snag points continue to damage precious cargo.
Simple math should indicate when this type of upgrade makes more financial sense than continuing to operate with the sheet and post trailer. For example, if the sheet-and-post-style trailer costs an additional $500 per year per trailer, and upgrading to a trailer with a smooth interior costs $1,000 more than buying a newer sheet-and-post model, and eliminates the maintenance costs, it only takes two years to make up the cost.
This is a great example of why it’s so important to understand the application and evaluate – to the penny – what the asset is costing to run and maintain. It’s equally important keep a close eye on what the market is doing from a residual value standpoint to stay in tune with what a trailer is actually worth.
Although most companies already have their parameters outlined, there comes a point where a fleet manager has to determine whether the company is better off buying a new piece of equipment and have no maintenance, or should he continue to put money into something that still holds some value? Knowing the residual value of a trailer is a key part of this.
What is residual value? Say, for example, an operation cycles equipment every five years. Its residual value is how much that piece of equipment is predicted to be worth at the five-year mark. These numbers, which are based on past models and future predictions, is an important factor in helping to determine a company’s “breaking point.”
Along with residual value, a fleet owner also should know what the equipment is worth today, what it was worth a year ago, and what it should be worth next year — all key, determining factors in determining the “sweet spot” — or the ideal time to trade in. These values are a guide that should help managers avoid trading too early or keeping a fleet for too long.
When you’re at the crossroads, there’s a relatively easy equation to keep in mind. Say the residual value of the trailer $6,000. If costs $1,500-2,000 per year to maintain because of its age, it’s a good time to evaluate what you could get if you were to upgrade. As a general rule of thumb, on equipment more than 10 years old, if repair bills or maintenance expenses exceed 30-40 percent of the trailer’s value, its time to trade it in.
And during your purchasing transaction, be sure to ask questions about what today’s value will be in 5, 10 or even 20 years. This way, you’ll know what it will cost in depreciation as well as maintenance.
From Cradle to Grave
While major purchases don’t always seem straightforward, there are key elements to evaluate before making a big decision. Keep in mind, some suppliers and dealers are fully versed on selling and trading equipment from cradle to grave and can professionally gauge and track a company’s cost of ownership parameters. These companies have a total cost of ownership model and are trained to drill in and investigate the problems customers are having, what the pain in their day has become and then supply something to solve that pain. This expert opinion can help you solidify when it’s time to move that equipment, what makes sense for an upgrade, how to get the best value, and ensure that the bottom line impact is a positive one.
So even if you’re in this industry, you can step off the rollercoaster. When you know what to look for, determining when to swap out equipment will become second nature. Track diligently and know your limits and you’ll have an easier time deciphering when it’s time to freshen the fleet.