Oil, Gas Companies Aim to Curb Truck Order Backlog
Truck procurement has been the foremost challenge for private fleets, for-hire carriers and organizations that rely on trucking across many industries, including gas, construction, oil and energy. 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 healthy and resilient ever since the Great Recession ended in 2010, and a dilapidated industry philosophy toward truck procurement which is now changing.
Class-8 truck orders and sales continued at a wholesome pace through most of 2018, as many companies saw the need to upgrade into newer equipment or add to their equipment to handle the boosted demand in shipping goods via the nation's economic activity. According to ACT Research, Class-8 net orders calculated 506,300 units at the end of November, the second-strongest 12-month order period in history, following only the 12-month period ending October.
Monthly orders (28,082) still overtake the number of units being manufactured (27,973) as of November, and while this fissure is narrowing, it continues to show high demand for new trucks.
Specifically for energy, oil and gas brands, these organizations will continue to feel the consequences of an order backlog this year as long as they continue their asset acquisition 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 substitutions better and thus avoid the agony associated with the current backlog.
The heated economy means that more businesses are shipping materials to job sites or commodities across the country; more businesses need to re-stock shelves and inventory; more consumers need goods ordered online and the transport of those shipments; as a result, trucks are working strenuously.
Trucks and transportation have been the livelihood of this economic engine.
Replacement and truck procurement strategies that help the economy stay lively need to be carefully contemplated, especially as we begin 2019 when companies take a closer look at their bottom line.
The long-standing business objective was for organizations to make purchase orders of trucks en masse, while driving them for anywhere between five to upwards of 10 years or more of service, 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 that they can achieve more savings on the truck’s overall impact to the bottom line, as well as maintenance and repair (M&R) – the highest variable and volatile cost of a fleet operation by moving to a shorter lifecycle.
When oil and gas companies drive their trucks as long as possible, they operate on functional obsolescence – making conclusions based on the truck’s capability to stay on the road. In most cases, when firms let the truck dictate the schedule for replacement, firms are left scrambling 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 ideology have caught up to them.
Instead, today’s leading companies are taking a different approach.
Companies 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 with a new. Dynamics 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 employees and finance departments a closer look based on data and analytics into determining and predicting the optimal time to replace an aging truck.
For example, analysis of long-term ownership compared to shorter lifecycle management illustrates a substantial cost savings over time. A fleet that opted for a four-year lease model on a truck would save nearly $27,893 per truck in comparison to a seven-year ownership model because of the aforementioned factors such as fuel, utilization, financing and M&R. The shorter lease model is also cost-effective when compared to just a four-year ownership model, showing average savings of $12,710.
This approach offers flexibility to adjust to changing markets, ultimately driving down operational costs while strengthening the corporate image and driver recruitment and retention efforts by continuously upgrading to newer trucks. Firms are leveraging data analytics and wide-ranging fleet studies that produce a fleet modernization and utilization plan, projecting when aging equipment will need to be replaced. This is especially effective with today’s fluctuating demand and the current booming economy as companies trying to acquire equipment solely based on demand are faced with equipment shortages and long lead times.
Just as imperative, recent changes to the corporate tax rate, as well as new accounting principles, have made it more attractive to lease equipment. With these changes, at least in the case of truck acquisition, purchase of equipment remains costlier compared with shorter-term leasing of the equipment. What’s more, leasing remains the favored 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 mentality of shorter truck lifecycles, industry organizations and transportation businesses will become better equipped at replacing their aging truck fleets in a more cost-efficient manner as we get further into 2019.
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