Maximizing Profitability for Rental Companies through the Total Cost of Ownership Metric
Posted on: 31 Jul 2018
True total cost of ownership (TCO) is determined by factoring in everything that goes into operating that machine over its lifetime: initial purchase price, fuel costs, maintenance costs, utilization, organizational overhead, resale value, etc.
When you talk about total cost of ownership for rental companies, it has to play into their rental rate calculation as well as the return on investment, or return on asset, more so than just the purchase price of the machine. So if one brand has an advantage—and it may be something as simple as Brand A’s oil change interval is 500 hours, and Brand B’s is 2,000 hours—if you start extrapolating that over the duration of ownership, that starts to add up. Specifically for the rental side, all of those costs have to roll up into a profitable rental rate. Then you look at taxes and depreciation and retail value, auction value, things like that.
Managing Service Intervals
One of the struggles for rental companies is that different manufacturers have varying service intervals. So if a Brand A skid steer is 500 hours and a Brand B skid steer is 215, and a Brand C skid steer is 700 hours, that can be very difficult for a rental company to keep track of all that. So, what a lot of rental companies will do is just say, “All skid steers per 500 hours.” Or even, “All machines 500 hours.” So they’re missing that key cost savings of taking advantage of some of those features that certain manufacturers may have.
Telematics technology has made scheduling service intervals easier than ever. Eliminating the need for whiteboards and logbooks, telematics data can show rental companies where machines are in their maintenance schedule and how many hours are on the engine with up-to-the-minute accuracy. Telematics systems are also capable of sending alerts when a machine approaches a maintenance milestone, or is operating outside of an acceptable parameter.
By knowing exactly when a machine needs to be serviced, it allows for service personnel to better plan for maintenance activities and ensure that all of the proper parts, filters and components are in stock because they know right when that machine will need to be serviced. Over time, sticking with the manufacturer-recommended service intervals will help maximize a machine’s profitability.
Total Cost of Ownership Calculations Made Easy
CASE recently introduced an online TCO calculator tool that allows equipment owners and prospective buyers to get a realistic picture of the lifetime costs of a particular machine. The math is all done in the background, so estimated time of ownership, estimated hours per year, you can plug in your cost of fuel, or how long you’re going to depreciate it on your books, and it takes all that in to consideration. And you come out with an anticipated total hourly cost for the life of that machine, which can help rental companies set rental rates that will maximize a machine’s profitability.
The TCO Calculator can be accessed here: https://tco.casece.com/northamerica/en-us
Not all manufacturers have tools available like this, but most of them have the information available—most of the time you just have to ask for it.
The calculation itself can go pretty deep. Depending on the type of equipment, the calculator starts with owning costs, which include the initial purchase amount, interest, taxes, extended warranty, and resale value. You’ve got operating costs, which include the cost of fuel, DEF, oil, tracks, bucket teeth and other consumables. Next is routine maintenance costs, which covers estimated labor rates as well as working conditions and utilization. Finally, you end up with a total owning and operating cost summary, which provides you with a total hourly cost for the machine.
Most of the larger rental companies are usually on top of things like this. They’ve been around for a while, they have huge fleets—I’m sure they have blanket costs for this kind of thing. But the smaller rental companies really should talk to their manufacturers about total cost of ownership. And they should especially be taking a closer look at things like service intervals between manufacturers. If a company is changing the oil every 500 hours when the manufacturer says 2,000 hours, they could save thousands of dollars a year.
Equipment rental is a very competitive industry. Rental companies of all sizes need an edge, and having a clear picture of the hourly cost of a machine over the course of its lifetime is a surefire way to set the most profitable and competitive rental rates.