Manufacturing Firms Take a Different Approach to Ease Truck Order Backlog Entering 2019

Trucks and transportation have been the lifeblood of the U.S economic machine.

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Brian Holland, resident and Chief Financial Officer, Fleet AdvantageBrian Holland, resident and Chief Financial Officer, Fleet Advantage

Truck attainment has been the main challenge for private fleets, for-hire carriers and companies that rely on trucking across many industries, including construction, manufacturing, and retail. This challenge has been emphasized by the backlog of orders for Class-8 heavy-duty trucks, largely stemming from an American economy that has been booming ever since the Great Recession ended in 2010, and a decrepit industry viewpoint toward truck attainment which is now undergoing change.

Class-8 truck orders and sales continued at a wholesome pace through much of 2018, as many businesses saw the need to upgrade into newer equipment or add to their equipment to handle the increased demand in shipping goods via the nation's economic activity. According to ACT Research, Class-8 net orders equaled 506,300 units at the end of November, the second-strongest 12-month order period in history, straggling only the 12-month period ending October.

Monthly orders (28,082) still overtake the number of units being constructed (27,973) as of November, and while this gap is narrowing it continues to show an extraordinary demand for new trucks.

Principally for manufacturing, oil, and gas brands, these organizations will continue to feel the negative effects of an order backlog into 2019 if they continue their asset procurement strategy based on functional obsolescence as opposed to economic obsolescence. Firms that shorten their asset management lifecycles based on a flexible lease model will be able to plan their replacements better and thus evade the agony associated with the current backlog.

The frenzied economy means that more firms are shipping supplies to job sites or commodities across the country; more businesses are in need of re-stocking shelves and inventory; more consumers are in need of goods ordered online and thus the transport of those shipments; and as a result, trucks are working strenuously.

Trucks and transportation have been the lifeblood of this economic machine.

Replacement and truck attainment strategies that help the economy stay moving need to be carefully deliberated, particularly as we commence 2019 when companies take a closer look at their bottom line.

The long-standing business attitude was for organizations to make purchase orders of trucks en masse, while driving them for anywhere between five and ten years of service, or even longer, as a way to squeeze every cent out of the truck’s usage. However, data and analytics are proving this model to be costly and unproductive. Instead, private fleets and for-hire carriers are grasping they can achieve more savings on the truck’s overall impact to the bottom line, as well as maintenance and repair—the highest variable and unstable cost of a fleet operation by moving to a shorter lifecycle.

When manufacturing companies drive their trucks as long as they can, they run on functional obsolescence - making judgements based on the truck’s ability to stay on the road. In most cases, when firms let the truck dictate the schedule for replacement, firms are left struggling to order a new truck based off limited planning cycles. Today’s backlog of truck orders is a result of this, as the multiplier effect of many transportation firms and this attitude have caught up to them.

Instead, today’s leading firms are taking a different approach.

Organizations are now keeping a keen eye on a truck’s individual TIPPINGPOINT, the point at which it costs more to operate a truck than it does to replace it. Elements such as the cost of fuel, utilization, finance costs, and M&R, are all factored into arriving at each truck’s unique TIPPINGPOINT, giving fleet operations personnel and finance departments a closer look based on data and analytics into controlling and even predicting the optimal time to replace an aging truck.

As an example, a recent analysis of long-term ownership versus shorter lifecycle management illuminates a noteworthy cost savings over time. A fleet that opted for a four-year lease model on a truck would save around $27,893 per truck in comparison to a seven-year ownership model because of fuel, utilization, financing, and M&R. The shorter lease model is also cost-effective when compared to just a four-year ownership model, showing typical savings of $12,710.

This approach offers flexibility to acclimate to changing markets, reducing operational costs while maintaining a positive corporate image, driver recruitment and retention efforts by constantly upgrading to newer trucks. Firms are leveraging data analytics and widespread fleet studies that produce a fleet modernization and utilization plan, projecting when aging equipment will need to be replaced. This is especially applicable with today’s fluctuating demand and the current prosperous economy as companies trying to obtain equipment just based on demand are faced with equipment shortages and long lead times.

Just as significant, recent changes to the corporate tax rate, as well as new accounting principles, have made it more appealing to lease equipment. With these changes, at least in the case of truck attainment, purchase of equipment remains expensive compared with shorter-term leasing of the equipment. What’s more, leasing remains the ideal method for companies regardless if they have a stronger or weaker balance sheet. In addition, leasing also allows companies to dodge the risk of residual value and the expense of remarketing.

By adopting this new outlook of shorter truck lifecycles, industry organizations and transportation companies will become better equipped at swapping out their aging truck fleets in a more cost-efficient manner as we continue into 2019.

Brian Holland is President and Chief Financial Officer at Fleet Advantage, a leading innovator in truck fleet business analytics, equipment financing and lifecycle cost management.

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