Lifecycle costing

Understanding what it costs to run a vehicle over its entire life span is part of virtually every fleet manager’s job description

November 14, 2011
by Kara Kuryllowicz

Purchasingb2b: Fleet Management November/December 2012 print edition

Understanding what it costs to run a vehicle over its entire life span is part of virtually every fleet manager’s job description, yet it can be one of the most challenging tasks due to some common mistakes and misconceptions.

“Lifecycle cost analysis (LCCA) is fleet management 101—it is complex but it’s not that difficult, provided you have a basic understanding of fleet terminology and access to a good lifecycle cost analysis tool,” says Phillip Russo, executive director of NAFA, the fleet management association.

NAFA, which introduced its first-ever LCCA tool about 10 years ago, launched its most recent version in June 2011. It’s already beaten NAFA’s previous bestseller records, with more than triple the sales.

“You need to gather and understand the data, but once you have it, you just plug in the numbers,” says Russo.  “People in the industry have a tendency to make LCCA a lot more complicated than it needs to be.”

While over-complicating things may be the single most common mistake, let’s look at few more missteps:

Pitfall 1: Turning all responsibility for your LCCA over to your leasing company, CFO or purchasing manager. Run and analyze your LCCA reports yourself because it’s ultimately your responsibility to ensure the vehicles meet your firms’ specific goals.

“Regardless of the integrity of those relationships, no one watches your back better than you do,” says Russo. Working with the LCCA data and tools can give you an additional level of understanding and insights and allow you to take action you might not when relying exclusively on others.

Pitfall 2:Running the LCCA reports only toward the end of the vehicles’ lifecycles. LCCA is a powerful tool that should be used whenever your fleet faces change, either internal (policy change, unexpectedly high maintenance costs) or external (fuel costs, resale values).

“LCCA is ongoing because it tells me whether we’re on track with cost and performance—it can reinforce or support what I’ve already noticed,” says James Pinder, manager, fleet for the Ontario region at Superior Propane, which operates 225 vehicles locally. It can help you spot patterns, anomalies and even opportunity.

“Really smart, aware fleet managers are proactive and react quickly,” says Russo, who has seen a company’s bottom line reap the benefits when a fleet manager replaced a vehicle early to take advantage of better than expected resale prices on a particular nameplate.

Pitfall 3: Assuming that US or even European data is good enough or that you can mix and match. Remember that the output is only as good as the data that was input.

“The results may be less than legitimate if you’re mixing data from, let’s say the US and Ontario,” says Russo. “Data needs to be consistent because the object of the entire exercise is to compare like vehicles operating in like scenarios and conditions.” To get the best results, commit to Canadian data and insist on the most current data available, which will typically be just six to eight months old.

Pitfall 4: Being cagey around LCCA. “LCCA information isn’t something that’s readily shared and there is an element of secrecy,” says Pinder. That attitude could be due to the fact fleet managers do recognize that there are wide discrepancies in how people do lifecycle costing. They’re also understandably leery of discovering that vehicle A’s lifecycle cost is 83 cents/km but vehicle B’s is $1.85/km. Rather than assume the worst (eg incompetence, errors), see discrepancies as a reason and an opportunity to learn more. Discuss formulas, calculations and definitions to make sure you’re actually comparing apples to apples, then dig deeper if need be. You may uncover problems and errors, strategies and best practices, and even partners and suppliers who can benefit your fleet.

Pitfall 5: Avoiding doing an LCCA on alternative-fuel vehicles because of the upfront costs and the unknowns (e.g. maintenance costs, resale values).

Alternative-fuel vehicles do cost more but that can be offset through incentives and credits and even fuel savings. “To measure and assess the true financial impact, do the LCCA,” says Russo. While there isn’t as much data available on resale values as one might like, resale realities can change. “You can prognosticate and predict all you want, but when it comes down to it, the only way you’re going to know if an alternative fuel vehicle works for you financially is to do the analysis and see the costs over the life of the vehicle,” Russo says.    b2b