Benefits of Negotiating Based on Total Cost of Operation
Data is a key component in the collaborative process. By analyzing the historical and projected total cost of operation of the asset, each influencer can see the effect of their decisions on the overall cost.
Fleet operations, procurement specialists and finance/treasury employees operate in their own siloes, each having a stake in the process that is needed to secure an asset and achieve the lowest total cost of operation (TCO).
Many organizations are challenged with bringing all influencers associated with various procurement decisions together in a collaborative decision-making process. This is very common when it comes to the management of private fleets. Unfortunately, each of these departments tend to look at only the information that impacts their specific area of the business.
Procurement will run an RFP for a general asset specification trying to put all the OEMs on a level playing field. Once they have received all the quotes, they will decide based on the upfront asset cost, assuming that all assets are equal when it comes to performance and reliability. An asset that costs $7,000 less than another similar asset may look like a great deal.
However, if the durability and reliability of that cheaper asset are substandard, the lower initial purchase price may be wiped out by higher operating costs in the form of additional maintenance and repair. It is also critical to evaluate the serviceability of the equipment. If the closest OEM service location is 200 miles away from the asset’s domicile location, that will present fleet operations with additional cost and added downtime.
Operationally, the fleet manager may make decisions based on specific KPIs and may not take into consideration the upfront cost of equipment and/or the resale value of the asset. Unique specifications and “nice to have” specifications can end up as wasted money with a negative ROI. It is critical that fleet operations and procurement collaborate on the design and specification of equipment.
Finance and treasury will always drive to the lowest cost of funds/interest rate and in some cases do not participate in the overall asset evaluation. When considering leasing versus buying and TCO, a critical consideration is the forecast residual value of the asset. In a fair market value lease the only item to consider is monthly payment. In a TRAC lease and ownership the residual value of the asset is a critical component that can have a massive impact on the overall financing cost of the equipment.
In order to get the asset purchase equation right, you need to find the balance between all of the variables to make sure you achieve the lowest possible TCO for each asset.
Collaboration between fleet operations, procurement and finance has never been more critical. With everyone participating in the decision-making process and considering the purchase from a TCO perspective the net outcome will be the best outcome for the company not just one department.
Data is a key component in the collaborative process. By analyzing the historical and projected TCO of the asset each influencer can see the effect of their decisions on the overall cost. Visualization of data is very powerful and promotes data driven decisions.
If the lowest TCO is your goal, then everyone needs to get out of their individual silo and look at the big picture.
As the leader for Corcentric’s capital equipment solutions, fleet procurement, supply management and remarketing teams, Pat Gaskins brings in over 30 years of financial experience to develop data driven solutions to complex transportation transactions, driving efficiencies and reducing expenses for Corcentric’s customers.