Warehouse/DC Management: Invest in productivity with lift truck financing

Managers have long appreciated the lift truck’s role as an essential component of a productive warehouse. In recent years, the growing adoption and capabilities of fleet optimization technology are exposing even more potential for value and savings. As visibility into an asset’s total cost of ownership has improved, more operations have realized the impact fleet financing methodologies can have on productivity, operator satisfaction, costs, and efficiency.

Unfortunately, an organization’s procurement and operations functions are often disconnected, working toward entirely different objectives that might not be mutually beneficial.

“In an ideal world, the operations group evaluates equipment, defines requirements and specifications, identifies needed accessories, and provides usage data to the procurement group to accurately tell that story,” says Bill Buckhout, manager of Raymond Leasing for the Raymond Corp. Ideally, the procurement group then takes that data and puts it into a request for proposal that includes what the operations group needs.

“In reality, when procurement takes over, it’s not necessarily a good thing, and unfortunately that’s happening more and more,” says Buckhout. “Those silos are not breaking down; if anything they’re being more reinforced.”

A disconnect between lease terms and actual use can lead to overage penalties, unnecessarily high payments or limited options for process improvement throughout the term. “You don’t want to be in a position where your fleet dictates your process,” Buckhout says.

Yet, as more companies explore flexible leasing arrangements that allow them to maintain a state-of-the-art fleet, the concept of “total cost of ownership” is creeping into the discussion, prompting many to bridge the gap between purchasers and lift truck operators.

Rotation, retirement, and returns
One of the primary benefits of leasing is the establishment of a replacement cycle for lift trucks at the end of their economic life. This strategy can prevent a customer from throwing good money after bad to maintain an aging piece of equipment, but it also ensures the fleet is equipped with the most up to date safety, efficiency, and ergonomic features.

These features obviously benefit operators, but Eric Gabriel, senior manager of marketing for Mitsubishi Caterpillar Forklift America, says you can find financial benefit in increased productivity. Comfortable operators experience less fatigue, fewer back problems, and more consistent performance throughout a shift.

In addition, equipment has become more reliable in the past 10 years, driving maintenance costs downward. “Energy consumption, productivity, efficiency, and ergonomics are all critically important to reducing costs,” Gabriel says. “And these factors are very measurable. We know exactly how much each has improved.”

Over the last 12 years, three generations of equipment have been on the floor, says Raymond’s Buckhout. A 10-year-old lift truck is a dramatically different piece of equipment from a new one, where energy savings alone could differ by 20 percent to 40 percent. “Most of the advancement has occurred in the last five years,” he says. “Leasing is the tool that lets you keep up with that.”

At the end of the term, more than 90 percent of lift equipment is turned in, according to Matthew LeSage, managing director of vendor finance at GE Capital, Equipment Finance. “People typically choose that option because they want to get new equipment—with all of the latest bells and whistles—that’ll continue to be a workhorse day in and day out,” he says. “They don’t want the hassle of dealing with aging equipment that may start to have maintenance issues.”

In some cases, such as Tier 4 diesel emissions standards, new equipment could better achieve regulatory compliance, according to Brian Markison, director of North American sales for UniCarriers. Also, the cost and availability of parts gets easier with newer equipment, he says. A generation or two away, that availability starts to diminish.

Determining the value of bells and whistles
It’s common to see support for ergonomics, efficiency, and productivity tools on the operations side of the business, but because those tools come with a cost, some procurement groups might not value them as highly.

Jeff Bailey, director of Crown Credit Company, says both positions should take all factors into account before acquiring equipment. “What the purchasing agent sees as the ideal terms for the company might not take into account features and benefits that could ultimately make it a better choice,” Bailey says. “I do see more companies starting to realize that cheaper up front is not necessarily better. Both positions are looking at total cost of ownership.”

For customers unsure about the value of add-ons and features, renting equipment for an extended test drive has become a popular way to find the right truck. “I’m seeing more and more of a trial approach,” says Jonathan Loyless, assistant finance manager for Hyundai Forklift. “Dealers are increasing rental fleets with the hope that they can convert rental customers to leases or purchases.”

According to Loyless, operations tend to use the various options that sound good and then see whether they’re worth it. They collect feedback from employees and see if it’s a good fit for their business.

“Then, they see if they want to lease, purchase, or move on to a different lift truck.”

The test drive can expose complaints as simple as the placement of pedals or gear shifters, which Loyless says can be a deal-breaker for some. He recommends a trial period of between one to three months to collect the necessary data and feedback.

He also offers a word to the wise: Be sure a lightly used machine enters a lease based on its actual current condition as opposed to what it was when new. If the test drive consumed less than 100 hours, the residual is not likely to fluctuate. But if it reaches 500 hours, it could be possible to discount the residual and secure lower payments.

Bundled leases and service contracts
About 25 years ago, Tina Goodwin says Yale Materials Handling Corp.’s captive finance company used to see about 70 percent of all equipment purchased outright, and 30 percent leased. That has changed to 80 percent leases and 20 percent full payout, says Goodwin, who is director of financial services for Yale.

Unless a lift truck will be used very little, it’s often best to lease it, Goodwin says, and unless a facility has a very efficient and effective in-house maintenance department, it’s often best to purchase a service package as well. These separate products can be bundled into a single, fixed monthly payment for easy billing, but she suggests the benefits of pairing them extend much further.

“If I were a customer, my preference would be to have a maintenance contract in place with an authorized dealer so I don’t need to worry if I’m meeting the return terms at the end of the lease,” says Goodwin. “If the two are bundled, the upkeep of that equipment is a shared responsibility. If customers do in-house maintenance then they’re on their own.”

Markison says that a fairly large number of customers remain who do their own maintenance, but those operations tend to put as much as 50 percent more parts on their equipment. “It appears on the surface you can save money doing it yourself, but that’s often not the case,” he says. “Those who do a very good job are few and far between.”

Gabriel estimates that at least 50 percent of leases include some form of maintenance, and that number is growing. Leases are ideal for people uninterested in being in the business of fleet management, he says. The goal of the lease is to consume the majority of the economic life of the truck over the term, and then replace the unit before maintenance costs get out of hand. “When those costs become too much, the economic life is over,” he says. “Therefore, leasing and maintenance go hand in hand.”

In addition to capturing information on a driver’s safety and performance, the use of telemetry devices can help minimize maintenance costs in a few important ways, according to LeSage. Before entering into a lease agreement, the data these devices provide can help customize the term and the payments, particularly for hourly billing associated with usage-based leases.

Perhaps most importantly, “telemetry also allows users to proactively identify service and maintenance requirements before a truck goes down,” LeSage adds.