Supply Chain Disruption: Smoothing Out a Bumpy Road
Corcentric’s Ray Ellingsen, vice president of syndications and Patrick Gaskins, senior vice president Corcentric Fleet Solutions sit down to discuss ongoing supply chain issues, fleet management impacts and possible ways to navigate through these challenging times and position your fleet for calming waters.
Ray Ellingsen: Pat, it appears market pundits believe supply chain restrictions may last well into 2022 if not beyond. What general insights can you share about the near-term asset availability shortage and longer-term impact assessment? Availability forecast? Model year implications? Any leading indicators that to help forecast return to normalized supply?
Patrick Gaskins: All great questions Ray. We are really in uncharted waters, pun intended. We have all seen the ships waiting to offload thousands of containers. In each of these containers are products critical to our assembly economy. Yes, I referred to what we do as an assembly economy not manufacturing. Most of the parts and supplies we need to produce the finished products in the U.S. are sourced internationally. So new asset availability will continue to be an issue into 2027. As we see production catch up, we will most likely experience somewhat of a whiplash effect, where pent up demand will continue to pressure supply.
In the near term, we will continue to be faced with supply issues and as a result we will also see upward pricing pressure in all segments. Not only are raw material costs rising we are also faced with increasing costs of transportation due to capacity constraints, increase equipment costs, and most importantly increased fuel costs.
Fleets will be forced to operate equipment longer and be faced with increased maintenance cost and down time. This will force fleets to carry more equipment, this will translate into fewer used trucks and increase the cost of used equipment. It is the very simple economics of supply and demand.
Post-COVID normal should reenter the picture in the second half of 2023. But I don’t think we are going to see real normal until 2027 because of changing CARB and EPA emissions standards that will take place in 2024 and 2027 respectively.
Ellingsen: With timing uncertainty of obtaining new replacement vehicles, how, in the near-term, may fleet operators best offset/manage increasing variable asset level fleet maintenance and fuel degradation costs?
Gaskins: As I mentioned, the increase in variable expenses will make the decision to replace assets even more critical. If a fleet can only acquire 20 new units when they need 50, the 30 that they keep must have the lowest total cost of ownership (TCO). Deep dive analytics are the only way to know which units to keep.
We are in an environment where identifying every dime spent is critical.
Ellingsen: Shifting gears from cost/operational management to strategic asset replacement prospects, how should transportation fleets address getting in line for new equipment orders and managing a balanced fleet portfolio asset investment distribution approach? With pent up demand building, OEM allocations, pro rations and aged asset operation cost escalating, an operational knee jerk reaction would be to grab as many units as possible to replace higher cost units. Is that best approach? Does there need to be a strategic periodic asset procurement/finance staging?
Gaskins: In the near term and the long term, we will see a natural trend towards longer lifecycles due to both availability and increased equipment costs. The gains achieved in variable costs will not be able to outweigh the increases in fixed costs in shorter-term lifecycles. Now keep in mind a longer-term lifecycle can mean anywhere between six months to two years.
Cost identification and long-term planning are so critical now and for the foreseeable future. Increased asset costs will challenge all our current models, financing will look different and residual values will be challenged. New technology will play an important role in efficiency and safety. The trucking will look very different in the next six years.
At Corcentric, we stand ready to help any fleet bridge that gap. To learn how we can help, contact Corcentric today.
Patrick Gaskins, Senior Vice President Fleet Solutions, Corcentric
Patrick Gaskins is a financial services professional serving the transportation industry for over 30 years. He began his career with Corcentric in 2010 as VP of Financial Services, was promoted to SVP of Sales and Operations, and is now taking on this new role, where he leads Corcentric’s Captial Equipment Solutions, Fleet Procurement, Supply Management, and Remarketing teams. Patrick brings to the Fleet practice his expertise in developing data-driven solutions to complex transportation transactions, driving efficiencies, and reducing expenses for Corcentric’s clients.
Ray Ellingsen, VP Syndication and Operations, Corcentric
Ray Ellingsen has more than 25 years of experience in the syndication, equipment lease finance and commercial banking industry. At Corcentric he is responsible for growing and maintaining national funding source relationships with complementary valued-added financial institutions and equipment finance organizations, as well as developing customized, customer-focused, life-cycle fleet management financing programs.