Building an effective leasing program, regardless of the asset class, requires establishing clear objectives from the outset. Defining company goals provides a deeper understanding and helps companies make informed decisions regarding the bidding process for the equipment that will be leased. Through leasing, companies strive to:
- increase productivity,
- increase efficiency,
- reduce cost,
- mitigate waste, and
- avoid unpleasant surprises.
Most companies focus on the cost reduction element. They compare monthly lease payments to the costs for other forms of acquisition. For companies that typically purchase their equipment, deciding whether to lease requires performing a lease-vs-buy analysis. Using internal rate of borrowing, interest rate, present value of the rents, future value and monthly payment, the finance team can conclude whether leasing is the most cost-efficient method. The reality is that this type of decision requires a deeper understanding than merely looking at the monthly payments.
Why companies lease
Leasing is as much an operations and logistics tool as it is a financial tool. In fact, none of our clients, majority of whom are Fortune 500 companies, lease material handling equipment (MHE) because they lack the cash to purchase. Our clients lease MHE because they’ve identified that after a specific number of hours, say 15,000 hours of total usage, the maintenance cost spikes to a point that makes it more financially and operationally efficient to lease the equipment. As a result of avoiding that hour usage threshold, our clients avoid increases in their maintenance cost and reduce equipment downtime.
Hypothetically, companies could make a forklift work for 50,000 hours if they really wanted to. However, it would be inefficient and their operations and logistics teams would be under increased pressure to keep the equipment up and running. Thus, an important element that needs to be considered when exploring leasing is how many hours it takes to exhaust the optimum useful life of the asset.
Optimum useful life
The optimum useful life isn’t the same as the useful life. The optimum useful life is the period of time in which the equipment works at 100% capacity, or close to 100% capacity, while getting only the regularly scheduled preventative maintenance recommended by the manufacturer. The useful life of a forklift can be between 40,000 to 50,000 hours. Whereas the optimum useful life is typically between 15,000 to 20,000 hours. The difference between 15,000 and 20,000 hours depends on the work environment in which the equipment operates. For this reason, identifying the different work environments, or types of facilities, that a company has in its enterprise is one of the steps that should be taken prior to bidding out equipment for lease.
Knowing the effects different work environments have on equipment can prevent miscalculations regarding maintenance and repairs. One important distinction is that distribution centers are known to run forklifts harder than production plants. Due to this, the optimum useful life at distribution centers is typically shorter than at production plants. For companies that produce different products, it’s not unusual to have different work environments for each distinct product. This could lead to the assets at each respective site having varying useful lives. Variations can even be seen within the same site when different departments run their equipment at different levels of output.
The benefit gained from knowing an asset’s optimum useful life and identifying the types of work environments within an organization is that it becomes more practical to determine the ideal lease term for a piece of equipment. This leads to a decrease in equipment downtime and mitigation of the maintenance cost. This information also increases the accuracy of equipment acquisition forecasts which plays a positive role in operational efficiency.
In order to have a well-planned forklift leasing program, companies need to consider the cost for equipment maintenance and repairs. By some measures, maintenance is more important than deciding the type of equipment and lease term when you consider the impact of having a poor maintenance policy. An ill-prepared policy can drastically damage the operations and logistics functions of a company resulting in a loss of market share or worse. The way to avoid substantial damage is to design the maintenance component of the leasing program prior to launching the equipment RFP. Companies should know the amount of maintenance required for maximum equipment performance at the lowest cost. The ideal policy eliminates excessive maintenance expenditure without being so frugal that the risk of reducing the useful life of the asset increases. In other words, the goal is to avoid paying more than necessary in order to keep the equipment running like it’s supposed to. Excessive payments benefit the maintenance vendor, and possibly the lessor, but they disadvantage the company paying to lease the equipment.
To determine the most appropriate maintenance level for forklifts, companies need to consider the speed at which they consume the tires of these units as well as the batteries on any electric equipment. Changing forklift tires can cost approximately $800 – $1,200 per set. The battery and charger for electric forklifts can range from $5,000 – $30,000 depending on quality. The larger the forklift fleet, the more expensive the maintenance cost. Additionally, the harder the assets are run, the shorter the intervals between required maintenance.
Finally, the equipment replacement deliveries and management of the end-of-lease considerations are additional areas for substantial cost savings opportunities. We help our clients with the management of this process in order to mitigate double payments and reduce the overall cost of leasing. Speak with an expert on our team to discover how RCA can provide costs savings for your organization.