Buying or renting a car is only the beginning of the costs of running it. What is TCO, what does it consist of, and what should you look at to reduce the cost of keeping a fleet? We answer these questions in today's article.
Vehicle TCO: what is it?
TCO (Total Cost of Ownership) is the total cost of owning something. The term covers the sum of all the costs the owner of a given item incurs from the moment of purchase until the moment of disposal. In many cases the amount that has to be spent on buying the item is not the largest part of the TCO. That is how it is with cars. Although such a statement may seem absurd in the face of the high cost of buying a car, it often turns out that saving at the purchase stage means much higher spending later. This is particularly problematic for large vehicle fleets: ignoring TCO when buying vehicles can significantly increase the company's overall costs.
What makes up a vehicle's TCO?
The direct costs naturally include financing the vehicle, either from the company's own funds (that is, the sum spent on buying the car) or through external charges (for example, when cars are leased). Further direct costs relate to keeping the vehicle in good condition and running it. These include the costs of:
- Fuel
- Operating fluids, such as screenwash and oil
- Insurance and depreciation
- Inspections and services
- Repairing the consequences of breakdowns and accidents, for example the bill for fixing a bumper dented in a minor collision
- Tyres and tyre changes
- Road tolls, for example for motorway journeys
- Purchasing additional equipment.
It should be added that TCO is also affected by the vehicle's loss of value. This can vary and depends on many factors, often entirely unrelated to the car's condition and quality. Some makes, for example, are very popular and are therefore less exposed to depreciation.
Indirect costs relate to managing the fleet. They include, for example, the salaries of the people assigned to this task or the fees for the software needed to administer the fleet.
It is worth stressing that a vehicle's TCO can differ greatly depending on the financing model chosen (cash purchase, purchase on credit, leasing, occasional car hire) and should be taken into account when deciding on the form of that financing.
What does a "cheaper" car mean?
A "cheaper" car is not always the one we pay the least for in a given category. The cost of running it must always be taken into account. This is particularly important for a fleet, where an ill-considered choice of vehicles can mean a long-term rise in vehicle upkeep costs of more than ten per cent for the company. Some vehicles are considerably more expensive to run than others: for example, they use a great deal of fuel or their spare parts are expensive. That in turn means higher indirect costs. Cars of some makes also lose value much faster, which reduces the proceeds from their disposal and thus affects TCO. For fleet vehicles, the lack of certain equipment can also prove problematic, making work harder for the fleet manager or the people using the car. That is why research is so important, not only into potential costs, but also into the needs of the company and the employees who will use the car. A "badly chosen" car may, for example, delay the completion of certain tasks, which will not benefit the business either.
The most "cost-effective" company car is therefore one that, firstly, has exactly the equipment that is needed and, secondly, has the lowest possible TCO.
How to predict a vehicle's TCO?
In the webinar "Fleet management: how to make the fleet manager's work easier", Radosław Kraciuk, who has many years of experience in the fleet industry, mentioned that we can only really know the TCO in full once we have disposed of the car. That does not mean, however, that estimates are impossible. They are helped by past experience (that is, knowledge of the TCO of previously used vehicles and the running costs of current ones), knowledge of the automotive market and thorough research.
It is worth preparing analyses of how upkeep costs, excluding fuel, whose consumption is usually constant over time, will change over time. In other words, analyse the vehicle's life cycle. This will make it possible to determine how long keeping a car in the company remains cost-effective. This can vary greatly depending on the type of vehicles, the type of business and the financing method adopted. In the webinar mentioned earlier, for example, the conclusion was that analyses showed that rented passenger cars are best used for around three and a half years. Over time the costs rise. For trucks, however, this period was considerably longer: they should be used for at least seven years.
It can be helpful here to ask leasing or car rental companies for offers, requesting cost breakdowns for different time variants. Comparing them later and setting them against your own observations will allow you to draw conclusions and choose the most favourable option.
Fuel is a separate matter. It usually represents a relatively large cost in running a vehicle. When choosing between several vehicle models, it is therefore worth comparing their fuel consumption too, and checking what savings over a few years could come from choosing a car that is more expensive but uses less fuel. Reliability and the cost of spare parts are also important criteria. These can also be checked, by looking at statistics, opinions about a given make or the price that has to be paid for parts for specific vehicles.
How to reduce the TCO of company cars?
As mentioned above, first and foremost by carefully choosing the type of vehicle, its equipment and the form of financing. Decisions on this should be made with TCO in mind. If, for example, we choose a relatively cheap car that uses far more fuel than a car costing a few thousand more, after a few hundred kilometres the TCO of the cheaper vehicle will be considerably higher. Similarly, when choosing between two very similar models at purchase, picking a make with a poor reputation among drivers exposes us to greater depreciation. So by making wise choices right from the start, we can reduce the total cost of running a car.
But how to reduce TCO later?
Here it is worth analysing the costs the company incurs in maintaining its vehicles. Comparing them, you may find that the lion's share of spending goes on fuel, often reaching around 40% of total fleet costs. Assistance, by contrast, is closer to 1–2%. A fleet manager looking for savings should focus on the elements with the largest percentage share of total costs, because reducing them even slightly can bring real savings. Radosław Kraciuk advises focusing above all on fuel and financing, and fighting especially hard there to negotiate the best possible rates.
Reducing operating costs and lowering TCO is also possible in other ways. For example, by taking care of good driver education. Eco-friendly, safe driving usually means lower fuel consumption and a lower likelihood of an accident. It is therefore worth instilling good habits in drivers: instructions, courses or fleet systems can be useful here. Navifleet, for instance, can collect information about drivers' driving technique, which helps draw conclusions on that basis.
Using a fleet management system can also help reduce TCO. How? The statistics collected and the options provided by a fleet system can make optimal route planning easier (and thus reduce fuel use) and make it possible to detect dangerous situations and respond to them (thereby avoiding repair costs). Good organisation of the fleet's operation and the right way of managing it, assigning tasks, making sure the car is in good condition, responding quickly to problems and planning routes, all affect costs. In this way it can reduce TCO.
Summary
How to reduce TCO? You always need to keep the bigger picture in view, know the market well and be aware that the cheapest purchase or the lowest leasing offer is not what matters most. The total cost of owning a car should be as low as possible. To achieve this, you need to make informed decisions when choosing the make, model, engine and form of financing. But you also need to ensure that fleet management processes run smoothly. And that requires knowledge of the market, as many statistics as possible and often additional tools that enable data collection and better fleet monitoring.
