Fleet Total Cost of Ownership: Everything You Need to Know About TCO
Trying to accurately estimate your fleet total cost of ownership? There are many reasons why this calculation is important to your business. That’s why fleet managers and owners must know exactly what total cost of ownership entails and how to go about calculating it for their fleet.
Our fleet experts have comprised the most important factors to consider when establishing fleet total cost of ownership. This information will help you more accurately calculate total cost of ownership so you can improve your business’s bottom line.
What is TCO?
TCO, or total cost of ownership, is the total cost to purchase and operate a vehicle for its entire lifecycle. Fleet total cost of ownership, then, refers to the total cost of buying, running, and maintaining your fleet. TCO may also be referred to as fleet management costs.
There are many elements to consider when calculating TCO. Some factors are common and straightforward. However, there are others that fleet managers and owners often overlook. Regardless, all the elements below should be considered when evaluating the cost of your company’s fleet.
Why is Total Cost of Ownership Important?
Fleet total cost of ownership is important to calculate because it shows the true cost of your fleet. This data is essential for effective fleet management. When accurately calculated, fleet TCO can offer valuable insight that will assist with important business decisions.
For instance, TCO assists with:
- Accurate financial reporting
- Monitoring vehicle performance
- Decisions about when to replace fleet vehicles
- Increasing profitability
- Maximizing ROI
Therefore, you must arrive at an accurate total cost of ownership calculation, as inaccuracies can lead to uninformed business and financial decisions.
Fleet Total Cost of Ownership Components
As mentioned, there are many components to consider in your total cost of ownership calculation. This includes both fixed and variable costs.
For fleet managers, it’s important to incorporate the following when calculating TCO.
One of the first things you’ll want to include in your fleet total cost of ownership is the initial acquisition costs for the vehicles in your fleet. This is equal to the total amount paid to acquire each vehicle, including any costs associated with financing, or the cost of monthly payments plus interest charges.
Include the cost of acquisition in your TCO calculation even if your business acquired fleet vehicles using cash.
Another important cost to include in your TCO calculation is operating expenses. These expenses include any costs associated with operating the vehicles in your fleet on a day-to-day basis. Common operating expenses may include:
- License plate renewals
- Administrative costs
- Operator costs
- Tickets, etc.
These operating costs will vary from industry to industry, business to business. Therefore, fleet managers should ensure that they use the most suitable expense categories for their business model.
Tracking operating expenses over the lifetime of a vehicle can be helpful to fleet managers for several reasons. Most notably, it can help them monitor changes in these expenses. An increase in operating expenses, for example, can suggest that a vehicle needs to be replaced or that another aspect of the business needs to be optimized.
Fleet Maintenance Costs
Adding maintenance expenses to your fleet total cost of ownership means including the cost of both unexpected repairs and preventative maintenance costs. Typical maintenance costs include:
- Wipers, etc.
When associated with other factors, like productivity, operating expenses, and downtime, fleet maintenance information can help fleet managers determine when to replace a vehicle. Taken together, these factors demonstrate when costs are outweighing the value gained from the productivity of the vehicle.
It can also be beneficial for fleet managers to compare maintenance costs between vehicles. Comparing these costs for vehicles of the same type, as well as different types (if there are different vehicles in the fleet) can help a fleet manager recognize factors that are contributing to service and maintenance needs. Above all, monitoring maintenance costs can help fleet managers make vehicle purchasing decisions in the future.
Fleet managers and owners should also keep track of the depreciation on their vehicles. Depreciation will factor into fleet total cost of ownership, namely by helping to determine a resale value for each vehicle.
Although depreciation will differ from vehicle to vehicle, on average, new vehicles in Canada depreciate in value by approximately 34% within the first year of ownership, and 67% after five years. With the help of figures like these, depreciation can also be useful in determining the best time to replace a fleet vehicle.
Term of Service
To use the data above in a TCO calculation, fleet managers must know what each vehicle’s term of service will be. A vehicle's term of service is measured in time or kilometres.
As mentioned above, this term of service is also used to determine the resale value of each vehicle.
The resale value of a vehicle is extremely important to include when calculating total cost of ownership. By evaluating depreciation, using a depreciation rate and the vehicle’s term of service, fleet managers can calculate resale value.
Resale Value = Acquisition Costs - Depreciation
Resale value can also help fleet managers determine at what age or mileage a vehicle should be replaced. Comparing the resale values of various vehicles can also help with determining which vehicles provide the best value overall.
It is also recommended that fleet managers include the cost of downtime in their fleet total cost of ownership calculation.
Downtime can lead to lost production and revenue. It can also impact customer confidence and an organization’s ability to meet certain goals, objectives and contracts. Thus, downtime equates to opportunity cost. In other words, it is the value that is lost when a vehicle is not on the road.
Monitoring downtime statistics can help reduce lost productivity. Downtime data can help fleet managers recognize when a vehicle is costing more than it is contributing to the company. For example, expensive downtime can be the result of keeping a vehicle too long. At this point, the vehicle’s contributions will not outweigh the lost productivity. Therefore, in most cases, the vehicle should be replaced.
When compared between different types of vehicles, downtime can also help fleet managers select the best vehicles for their fleet.
Calculating Fleet Total Cost of Ownership
The first step in calculating fleet TCO is to determine the individual total cost of ownership for each vehicle in your fleet.
Individual Total Cost of Ownership = Acquisition Costs + Operating Expenses + Maintenance Costs [+ Downtime Costs*] - Resale Value
Now, simply add together the TCO for each vehicle in your fleet. This will give you your fleet total cost of ownership.
Keep in mind, not all industries will use the same costs and metrics to evaluate fleet TCO. To arrive at the most accurate calculation, be sure you are using metrics that are relevant to your industry.
*Although not necessary for every fleet manager, tracking downtime costs can be extremely helpful for optimizing TCO.
How to Reduce Fleet Operating Costs
Tracking the TCO factors discussed above is extremely valuable. Fleet managers can use this information to reduce fleet operating costs. This data is especially useful when used in conjunction to help uncover trends.
Acquire the Right Vehicles
Acquiring the best cars for fleets is one of the most important factors in minimizing fleet total cost of ownership.
Many fleet managers recognize that it is not always the vehicle with the lowest purchase price that results in the best overall value. Rather, the best vehicle for your fleet is the one that will provide the most utility. This means that choosing reliable vehicles should be the main goal of any fleet manager or owner. Doing so will result in higher levels of productivity and, therefore, lower fleet operating costs.
Finding vehicles that offer lower rates of depreciation, longer terms of service, and higher resale values can also help reduce TCO.
Reduce Day-to-Day Operating Expenses
There are many ways to reduce day-to-day fleet operating expenses. For example, purchasing eco-friendly electric vehicles can greatly reduce fuel costs. Organizational factors, such as driving routes and operator training, can also play a role. Monitor and address these aspects to help reduce TCO.
Perform Preventative Maintenance
Maintenance costs will likely account for a large portion of your TCO. Therefore, fleet managers can reduce maintenance expenses by performing regular preventative maintenance on all fleet vehicles. Regular maintenance will help reduce the need for costly, unexpected repairs and minimize downtime.
To ensure that preventative maintenance is effectively contributing to the reduction of operating costs, fleet managers must guarantee that they are working with a top-quality maintenance provider.
Replace Older Vehicles
The age of a vehicle can play a large part in its total cost of ownership. Most significantly, the age of a vehicle impacts the maintenance that it requires.
Older vehicles often need more maintenance than newer vehicles. In fact, after just three years of ownership, maintenance costs for a vehicle will begin to increase drastically. After a vehicle reaches approximately 240,000 kilometres, fleet managers and owners can expect maintenance and repair costs to increase by two to three times. More maintenance also means more downtime and less productivity. Therefore, it is essential that you replace vehicles when they no longer provide enough value to your fleet.
Replacing vehicles before they get too old will help you reduce fleet total cost of ownership by minimizing maintenance requirements and maximizing productivity. Many fleet experts recommend a four-year lifecycle. Replacing a vehicle after four years can help a business save more than $37,000 per year, per vehicle.
Reducing downtime is another essential aspect of maintaining a low total cost of ownership. There are several reasons why a vehicle may experience downtime. Maintenance is likely the biggest contributor but accidents, operator error, and other usage factors can play a role.
As mentioned above, preventative maintenance is one of the best ways to reduce downtime. However, maintaining metrics on accidents, and other usage analytics, can also help fleet managers minimize downtime.
Implementing new technologies and increasing driver training may be ways to address downtime issues. For example, introducing tech that will minimize accidents or features that help drivers recognize mechanical issues can be helpful.
Use the Right Tools
Finally, to ensure you have the data needed to effectively manage total cost of ownership, you must have the right tools in place. Fleet managers should have access to tools that monitor vehicles and drivers.
Reduce Your Fleet Total Cost of Ownership with a Kia Fleet
Did you know that Kia fleet vehicles offer some of the lowest total cost of ownership on the market?
Kia offers a wide range of outstanding fleet vehicles that will help you minimize TCO through their leading fuel economy, low insurance premiums, unmatched reliability, and minimal maintenance requirements.
Kia’s green fleet options can help reduce operating costs, and all fleet vehicles come with a comprehensive warranty, so you don’t spend more on vehicle maintenance than you need to. Plus, our advanced technology offers safety features that can help reduce accidents and assist with monitoring your fleet.
Our fleet specialists can help you choose the right vehicles for optimum performance and productivity.
Schedule a Kia Fleet consultation today!