What is total cost of ownership?
TCO represents the true cost of each of your fleet assets, creating an accurate view of your expenses that lets you break down purchases, forecast anticipated costs and make decisions to improve operations and increase profitability.
Why is total cost of ownership important?
Fleet cost management relies on knowing exactly how much money is coming into your operation and how much is going out of it on a daily basis, and fleet vehicles are simultaneously the cornerstone of any fleet operation and the biggest potential liability in budgeting. TCO can be a guide toward more efficient and effective spending, showing you where your assets are draining your bottom line and indicating when an asset may have outlived its usefulness.
Calculating total cost of ownership
The key to calculating total cost of ownership lies in recording and categorizing all of the major expenditures associated with a vehicle, from things like maintenance to taxes and licensing fees. Before you can actually see accurate TCO numbers, you’ll need to gather a history of expenses for each asset and add them to their purchase price to see how much they cost you to operate.
Many companies have expense tracking software or integrated fleet management systems that can help account for these metrics, and even collect some of them automatically, but even keeping record of each vehicle’s data in a spreadsheet can help you work toward an accurate TCO calculation. Once you have those numbers in place, you can see what a vehicle’s true, holistic cost to your organization is and compare it against other assets in your fleet to determine which are driving profitability and which are dragging the fleet’s budget down.
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The major expenses of owning and operating a vehicle
- Capital costs, including interest paid in vehicle financing
- Maintenance costs, including parts and service fees
- Fuel cost and usage
- Asset depreciation
- Licensing and vehicle administration
Where does TCO fall short?
Because it’s a comprehensive number that combines multiple metric touchpoints, it can be easy to rely on TCO as a catchall for asset judgment – if a vehicle’s TCO is high relative to the fleet as a whole, the vehicle is a problem, and if it’s low, then it’s a good asset. But the individual numbers that comprise TCO can tell their own stories and grant even more insight into value than TCO could on its own.
Breaking down TCO’s components
Certain vehicles are going to cost more than others upfront, so that might boost a vehicle’s TCO over another vehicle that came in at a lower cost or is a completely different make and model all together. But on top of that, capital costs can point to issues in acquisition: Are you getting the best deals from the right vendors? Are you losing a lot in your financing? Capital costs can be a fickle number to try to control, but it can help you explore more opportunities to save on your vehicle purchasing.
It can be easy to look at high maintenance costs in a TCO calculation and assume that a vehicle is simply costing more in the shop than it’s worth. But those costs can point to more systemic issues in preventive maintenance and reactivity that are causing a vehicle to need more emergency repairs for recurring issues that could be caught in inspections.
High fuel costs on a vehicle could be a consequence of its make or model, or point to inefficient fuel consumption, but it could also be a reflection of driver behavior, lack of route optimization, or even fuel theft.
Depreciation is a lot like capital costs in that it can indicate a problem in acquisition approach, as well as disposal and replacement. Are you choosing vehicles that can hold onto their value for longer? Are you selling off the vehicles in a window that maximizes their utility in your fleet without losing too much money on its selling price?
So what is the takeaway here?
TCO is obviously an important metric that is incredibly relevant in measuring operational efficiency, but it doesn’t mean you should shirk off the value of the individual metrics that comprise TCO to give you a better look into your fleet. Numbers don’t lie, but they don’t always give you a full picture with context, so engaging with your fleet by observing the processes that generate those metrics can be just as informative as any spreadsheet would be.
Don’t treat TCO as the whole that is greater than the sum of its parts – instead, use it as a north star for profitability, while also considering the individual factors that drive that profitability, like maintenance processes and vehicle replacement strategies.