What is Total Cost of Ownership, and why is it important?
Total Cost of Ownership (TCO) measures the true cost of a vehicle over its lifetime in your fleet. It measures every dollar you spend on a vehicle from acquisition through disposal. Total cost of ownership is a tool you can use to pinpoint the optimal time to cycle a vehicle out of your fleet and minimize your total expenditure on each vehicle.
In this blog, you’ll learn what expenses to include when calculating total cost of ownership, and strategies for minimizing your fleet expenses for your business.
What is Included in Total Cost of Ownership?
Total cost of ownership can be broken down into four key life cycle categories: depreciation, maintenance, fuel, and downtime.
Acquisition costs are everything you spend to acquire a new vehicle for your business, including any costs associated with financing or the cost of monthly payments plus interest charges. Even if your business pays for a new vehicle with cash, the purchase price needs to be included in TCO. However, leasing vehicles is the best strategy for minimizing total cost of ownership as it allows you to monitor costs more closely than when purchasing vehicles and often reduce your vehicle depreciation expenses.
Operating costs are everything your business spends to keep a vehicle on the road, including:
- Fuel
- Maintenace
- Taxes
- License and registration
- Insurance
- Administrative expense
Almost half of all operating costs are fuel, maintenance, and repairs. As vehicles age, these costs rise, eventually making the vehicles more expensive to operate.
Depreciation is the decline in the value of a vehicle over time. Most depreciation occurs in the first two years of a vehicle’s life. Wear and tear, age, mileage, and maintenance all impact the value of a vehicle when it’s time to dispose of it.
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You Have More Control Over Some Costs Than Others
The components of TCO can also be split into fixed and variable costs.
Fixed costs include insurance, registration, and taxes. While there is less you can do to reduce these costs, you can avoid extra charges and fees by ensuring they are paid on time. The other side of fixed costs are acquisition and depreciation. While you have less control over these, they can be managed with proper vehicle cycling.
Variable costs are where you really have the opportunity to save money. You can reduce your fuel, maintenance, and administrative costs with proper fleet management.
How to Reduce Your Total Cost of Ownership
Fleet Fuel Costs
A fleet fuel card can help your business manage fuel costs. Most are accepted at over 98% of fuel stations across the United States, and allow employees to access all fuel vendors to take advantage of the lowest prices. They assist in preventing unauthorized fuel purchases and reduce the administrative load as all purchases are on one invoice.
Good driver habits like reduced idling, maintaining the speed limit, and proper route plan also contribute to fuel cost savings. Amending your fleet policy or investing in driver training can help discourage bad driver habits and increase your vehicles’ miles per gallon.
Fleet Maintenance Costs
A managed fleet maintenance program will help ensure your vehicles are getting the service and repairs they need. Preventive maintenance extends vehicle lifespan, increases resale value, and reduces the occurrence of major breakdowns and costly repairs. Downed vehicles result in missed billable hours or added costs of sourcing an interim replacement vehicle.
Fleet Lifecycle Management
Fleet lifecycle management is the strategic acquisition and disposal of vehicles to get the most value out of them and minimize total cost of ownership. It compiles all of the data surrounding vehicle expenses and pinpoints the optimal time to cycle a vehicle out of your fleet. The optimal disposal point occurs while the vehicle still holds resale value and before fuel and maintenance costs have skyrocketed.
As vehicles age, maintenance and fuel costs rise while resale price falls. Monitoring these costs is crucial to pinpointing the best time for disposal. Learn more about fleet vehicle replacement and lifecycle management, and how it can minimize your TCO.
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Working With Ewald to Reduce Total Cost of Ownership
Here at Ewald, we focus on real cost reduction rather than adding another cost layer. Our customized programs track fuel and maintenance costs while minimizing administrative workload for our clients. We turn raw data into actionable reports so businesses can visualize how much each vehicle is costing them.
We use our years of experience to recommend fleet life cycle strategies and optimal disposal points for businesses that have proven to be effective at minimizing total cost of ownership in their respective industries.
Final Thoughts
If total cost of ownership is not a key component of your fleet vehicle strategy, you are missing out on significant opportunities for savings.
By tracking vehicle expenses against vehicle value, you can optimize the return on your investment in vehicles and boost your bottom line.
