The total cost of ownership (TCO) is the estimate of all of the costs associated with a product. When it comes to TCO for a fleet, these costs come from the initial investment in setting up each vehicle, the ongoing costs of owning them, and the amount of money you expect to receive from disposing of them. This estimate does not only apply to vehicle ownership, either. It can also apply to leasing as well since expenses will be incurred from the ongoing use of leased vehicles in addition to the lease being paid.
Why is TCO Important in Fleet Management?
By calculating your fleet vehicle TCO, in conjunction with a financial benefit analysis, you can determine the base cost of your fleet so you can better calculate ROI. By understanding the TCO of each vehicle in your fleet, you can make better judgments about which vendors and vehicles are the most cost-effective, whether you should buy or lease your vehicles, how to make the most of your budget, and the overall lifecycle of each vehicle. TCO can be especially important if you’re considering purchasing electric vehicles since they tend to have higher initial costs but lower ongoing expenses.
Failing to understand the TCO of your fleet may lead to unforeseen budget issues where you may not be able to afford items such as:
- Repairs.
- Necessary upgrades.
- Labor.
- New hire training.
Taking the time to calculate fleet TCO can help you determine the profitability of your organization. Without it, you’d be making future investments and purchases blindly.
How Do You Calculate Fleet TCO?
Your TCO should incorporate a combination of the initial investment for each vehicle, the ongoing expenses of running and maintaining each vehicle, and the estimated amount of money you expect to receive from selling the vehicle or disposing of it. The initial expenses include:
- The vehicle’s purchase price.
- Licensing.
- Inspection.
- Local and environmental taxes.
- Administration.
The expenses incurred from ongoing operations will likely come from:
- Repairs, both expected and unexpected.
- Maintenance.
- Insurance.
- Fuel, both gas and electricity depending on the type of vehicles being driven.
- Renewing registration.
- Local and environmental taxes.
- Financing.
- Breakdown and recovery services.
- Downtime — Vehicles will not always be in use. When they’re not in use, they are costing you money.
- Cleaning, interior detailing or exterior washes.
- Tickets — Everyone gets them. It would be wise to determine how many tickets are generally incurred for each vehicle.
- Parking.
- Tolls.
- Labor — Not just the pay provided to employees, but also the costs that come from training them.
Once you determine an estimate for how much you expect to pay during a vehicle’s lifetime, you should then subtract the value you expect to receive from selling it.
It’s also important to consider the expenses you may incur from the selling process when determining the value of your vehicle’s disposal. The value of the vehicle being sold will be significantly influenced by its mileage, age, and the state of the economy. You will want to carefully consider how long you wish to hold onto each vehicle before selling since vehicles tend to lose value and require more maintenance the older they get.
TCO is not something that you calculate once and then use in future planning forever, either. It will fluctuate as your environment changes and as unexpected events happen to your vehicle. Some factors that may require an adjustment your TCO include:
- Rate of vehicle depreciation.
- Tax increases or decreases.
- Status of the economy.
- Changes in fuel pricing.
- Inflation.
- Status of the job market.
- Accidents.
- Changes in insurance pricing.
- Unaddressed or unnoticed mechanical problems.
- Climate changes.
- New financing pricing.
While there may be unforeseen events that could cause you to have to change your TCO over time, you should be able to quickly adjust your calculations by using the simple formula — initial investment + ongoing expenses - remaining value, or I + M - R = TCO.
However, there is no single formula that is considered to be the only TCO formula you should use, so feel free to research other formulas to figure out what works best for your business. To derive the values used in your TCO formula, you will need to use a combination of historical data and forecasts for each vehicle.
How to Minimize TCO and Reduce Fleet Spend
There are many ways you can reduce the TCO and how much you spend on your fleet. The larger you grow your fleet, the more likely you can develop bargaining power with dealerships so you can get new vehicles from them at lower prices. In addition, you may be able to be more efficient with your maintenance when working with a larger fleet.
If you have a smaller fleet, you can help reduce your TCO by putting more consideration into what equipment you purchase, determining the efficiency of using that equipment, and analyzing the performance of your few vehicles to help improve forecasting models. And since you have fewer vehicles in your fleet, your maintenance technicians will be more knowledgeable about each of your vehicles since there are fewer to keep track of.
Preventative maintenance can also help you make sure that your fleet doesn’t have to undergo repairs that could have been prevented, avoid the costs of downtime, and avoid legal issues. To take this a step further, you could set up a safety program to help ensure all vehicles are consistently functioning properly.
Even if you have an effective safety program in place with plenty of preventative maintenance, you may still get into an accident that can incur some serious costs. To help reduce these, we recommend setting up an accident management program.
Another method to help reduce TCO is installing features to your vehicles with the purpose of increasing their resale value. Installations like a sunroof or Bluetooth can help increase the value of a vehicle’s disposal and in turn, decrease your TCO. To help with increasing your resale value, you can set up a cleanliness policy with your drivers where they have to keep the vehicles clean. This can help reduce cleaning costs and prolong the life of the vehicle.
How Fleet Management Software and Telematics Help
It can be difficult having to figure out how to measure the metrics involved with calculating your fleet’s TCO. Fortunately, fleet management software and telematics exist that can help you keep track of your fleet’s conditions so you can make better-informed decisions. Fleet telematics solutions from Rand McNally Fleet can monitor idle time, hard braking, speeding time, fuel consumption, unauthorized trips, and more. All of these can help you come up with more accurate TCO estimates.
Get Fleet Management Software and Telematics from Rand McNally Fleet
Fleet total cost of ownership can be difficult to calculate, but its impact on helping fleet owners make better budgeting judgments makes it imperative for any fleet manager in the industry. The caveat is that the accuracy of your TOC calculations depends on the quality of data collected. Don’t assume the expenses of your fleet. Get specific reporting today with fleet management software and telematics from Rand McNally Fleet. Request a quote today!
