“Time is free, but it’s priceless. You can’t own it, but you can use it. You can’t keep it, but you can spend it. Once you’ve lost it you can never get it back.” – Harvey Mackay
Time, it’s the one resource we are all given an equal amount of every single day. Each day our time account is filled with 86,400 seconds and every day we drain the account completely empty, only to have it refilled once again the next day.
A key difference between successful companies and unsuccessful companies is how they use their 86,400 seconds. It is essential to spend every day as efficient as possible to make the most out of those valuable seconds we are all given at the start of everyday.
Mobile equipment plays an integral role in the efficiency of your operation by contributing to your overall productivity. The right equipment will enhance your efficiency and offer a certain Value Per Hour (VPH) which in turn will improve your bottom line. But even the right equipment has an opportune life cycle which is why having a proper turnout strategy is so critical.
So, what’s your strategy?
Do you have a set interval for replacing equipment based on a total cost per hour? Or is equipment replaced based on looking at the oldest equipment in the fleet and using a gut feeling to pick the worst of the lot? The majority of companies I speak with use option number 2 simply because they have “always done it that way”. The problem is, most of said companies have grown significantly since their inception and managing equipment has become a much larger task than it was originally.
Fortunately, there are best practices for creating a turnout strategy for your equipment. First, we need to understand the total lifetime costs associated with operating equipment and only then can we develop an optimum turnout time. At the end of the article, I’ll explain some of the challenges with managing costs and then show you a strategy which allows you to focus on your core business while your equipment is operating seamlessly in the background.
Did you know the price tag on equipment doesn’t come close to covering the total lifetime cost of the machine? In fact, the initial acquisition cost typically only equates to 25% of a machines life cycle cost. Here is the total cost equation and all of the components that cost you money over the life of a machine.
√ Acquisition Costs
√ Preventative Maintenance Costs
√ Service and Repair Costs
√ Downtime Costs
√ Intangible Costs
√ Less Residual Value
Arguably the most significant costs out of the above list are the downtime costs associated with an inoperable machine. The cost of downtime reaches out far past the equipment itself and can have a detrimental effect on the production of your facility. Think about the number of people who are tied up when a machine goes down, even for a small period of time? Or the number of machines you keep as spares just to mitigate the risk of lost production? These are all added costs that are associated with downtime as a result of aging equipment which should ultimately be replaced.
In addition to downtime, the remaining costs all contribute to the lifetime cost of a piece of equipment. It’s imperative to understand what you can expect to spend on your equipment above and beyond the initial purchase price.
Aside from the initial acquisition costs, the remaining items all increase over time as the machine ages and major component repairs are required. This is where it becomes clear how important it is to have a thorough understanding of the application before purchasing equipment. There are many variables to consider when determine when to pull the trigger and update your fleet.
Optimum Turnout Time
If your mobile equipment costs are going to increase over time, how do you know when it’s finally time to replace? It all depends. Every application is different. Some facilities operate 24 hours per day, 7 days per week whereas others might only use their equipment for an hour or two per day. There is no “one size fits all plan” and anyone who tries to convince you of that is flat out lying.
There is, however, a formula to calculate the optimum turnout time and it works for every application. The trick is to look internally at your own costs and turn out your equipment when it’s at its lowest average cost.
So, how is this determined?
The chart below is an example of the depreciation and maintenance costs on a large forklift. Notice any trends?
You can see how, in the first year, maintenance costs are very low with an average cost of around $650/month. But have a look at the depreciation; it’s the highest in the first year in order to account for the initial drop in fair market value. In the second year depreciation slows down and by year 4 the monthly depreciation costs levels out.
On the contrary, the line showing maintenance costs is getting steeper as the machine ages and expensive major components need replacement. The main difference between depreciation and maintenance is that eventually, the depreciation stops when the machine no longer has a value on your books. Unfortunately, the maintenance costs will continue to increase without an end in sight.
The best time to replace the machine? When the costs are at their lowest monthly average of course! This is when the equipment is costing you the least amount of money and the risk of downtime is still manageable. If the machine has been depreciated to match market value, you’ll be able to sell it without taking a loss on your books and carry on to the new replacement. Sounds easy, right?
Challenges Managing Total Costs
Unfortunately, this can be easier said than done. There are a number of challenges in trying to manage total costs and truly create a cost effective turnout strategy.
Depending on how costs are allocated within your company, it can be challenging to determine how much a machine is actually costing you. There are so many ways costs can be shuffled around to skew the picture and give the illusion of a lower operating cost on a machine. It’s also hard to track costs like downtime, administrative costs (cutting a PO), and supervision requirements.
Even if you do a great job of tracking your costs right down to the penny, you’re still going to have to justify why your capital requirements are more important than your colleagues. This is especially true when times are tough and cash flow becomes increasingly important.
Worst of all, what if you realize the machine needs to be replaced but it’s sitting on your books for a value which is way above the fair market value? Chances are you’re accountants will want you to keep it around as a spare or take on a large expense to keep it up and running until the book value is down.
Bringing It All Together
At the end of the day, your core business probably isn’t mobile equipment, and that’s okay! The key is understanding your strengths and more importantly, looking for areas to pass responsibility to an expert. Every good manager knows the key to efficiency is delegation, and the same goes for your mobile equipment fleet.
In my article 4 Methods of Equipment Acquisition I discussed the method of Fleet Management. To refresh your memory, fleet management allows you to pass the responsibility of managing your mobile equipment over to the experts at Leavitt Machinery so you can focus on your core business.
We eat, sleep, and breathe mobile equipment and have seen firsthand what works and what doesn’t. Our ability to understand fair market value means we can accurately depreciate and turnout your equipment at the optimal time. The goal of the program is to keep your total lifetime costs of the equipment to a minimum while also minimizing the risk of any downtime or lost production. You don’t have to worry about unexpected costs, old equipment, or even dishing out large amounts of capital year after year.
Your cash can be used towards other projects and you don’t even have to think about an optimum turn out time because we monitor it all for you. Not only do we monitor the turnout, we conduct quarterly meetings to find areas of improvement and we can make adjustments to the term if it looks like a change is required. The program is designed to meet your specific needs, no matter what they are and ultimately reduce your operating expenses.
Mobile equipment is a necessary evil to keep your business running, why not let someone else take care of the headache for you?
If you’re interested in learning more about fleet management or any of the services offered by Leavitt Machinery, please give us a call at 1-866-LEAVITT or click here to email us directly.
Thanks for reading, have a safe day!
Northern BC Territory Manager
Direct: (250) 645-2800 | Cell: (250) 640-0027