Material Handling Equipment Acquisition and Economic Fleet Management

Many managers struggle with the acquisition of material-handling equipment for busy, multi-shift or harsh-environment operations via the capital budgetary process. Many departments, including sales and marketing, production, health & safety, facilities, distribution, R&D and IT, are vying within a company for a share of the cash available for equipment purchases.

Finance, senior management and even engineering departments often consider material-handling equipment something that can be maintained indefinitely with a sound preventive-maintenance program. The fact is that material handling equipment does have a best-before date or, if you rather, an economic break-even point. The trick is to identify this point before you reach it.

Many things factor in reaching that break-even point. Environment, usage, driving habits and maintenance practices all influence the useable life span of the equipment. Let’s break these out for further understanding.

Environment

The following environmental factors accelerate the need for replacement, potentially making it necessary before a firm can depreciate the equipment.

• Corrosives, such as brine, fertilizers and meat-processing substances, cause premature component failure.
• Atmospheric particulates, such as grit, dust, pollen, lint and fibres, prematurely wear engine components.
• Outdoor use in rough or unevenly surfaced yards can cause early mast and steering component fatigue and failure.
• Heavy industrial work, such as moving large shipping containers, causes mast twisting and fatigue.
• Old, chunky floors cause steering-component, frame and mast jarring and eventual fatigue.

Usage and Utilization

Equipment used often and for many hours a day will obviously wear out faster than equipment used for fewer hours. Heat, plugging (changing direction quickly without using brakes) and extensive dock work will jar and wear components quickly. A company that uses a piece of equipment for much of each day is going to experience downtime with it and, likely, failure occurring more rapidly than expected.

Driving Habits

All drivers are not created equal. Poor driving habits can cause damage, leading to expensive repairs and downtime.

• Bumping into objects, riding the brakes, spinning the tires, turning sharply with the load elevated and slipping off the edge of dock boards are examples of damage-causing and dangerous habits.
• Poor driver supervision and accountability create a huge operational and financial burden on material-handling-equipment budgets. Impact alarms and other devices related to the accountability and location of equipment can assist in controlling these costs.

Maintenance Practices

Through good maintenance practices, supported by a measurement program, employees can identify when equipment repairs and replacement are required, and probably delay those needs. It is almost certain that poor maintenance practices and a lack of tracking will accelerate the outcomes of unscheduled downtime and extensive repair costs.

Economic Fleet-Replacement Scenarios

Replacing equipment at the right time is, of course, always desirable. Let’s look at some scenarios that usually develop if the equipment in a high-cycle operation isn’t replaced when it should be.

Scenario 1
If money isn’t made available from the capital budget for several years running and the fleet doesn’t get updated:

• Operating budgets must increase to accommodate higher repair costs and/or short-term rentals.
• The annual repair investment could exceed the value of the equipment being repaired.

Scenario 2
Some equipment is acquired via the capital budget, but old equipment is retained, thereby:

• Increasing the overall size of the fleet
• Increasing the repair budget required to maintain old equipment
• Making necessary the use of short-term rental units due to downtime of old equipment

Material-handling equipment has an economic life cycle similar to those of delivery vehicles or transport tractors. If the equipment is used beyond its appropriate economic life cycle, it is being misapplied and will present a company with:

• High repair costs
• Wasted repair investment
• Excessive downtime and operator-labour costs
• Potential catastrophic failure of mast, steering or structural components

Consider that 10,000 hours of operation in a forklift is equal to 300,000 kilometres in an automobile.

The Solutions

Material-handling equipment, like transport tractors, and service and delivery vehicles, depreciates rapidly, especially if used in demanding multi-shift operations. The maximum allowable annual depreciation levels can’t keep pace with the actual economic life cycle of the equipment.

Operating leases or long term rentals where there is no option to own or purchase the equipment at the end of the term can be written off as an operating expense in their entirety. At expiry, you have the option to extend, renew or terminate.

The primary benefits of long term rentals are:

• Optimal flexibility
• Maximum uptime
• No capital investment
• Use of cash flow for production investment
• Fixed, predictable, long-term operating costs
• Minimal administration
• Focus on core business
• Safe, up-to-date equipment
• Smaller fleet size

Acquisition via Capital Budget Process

If the business philosophy and available-cash situation allow for acquisition with capital funds, equipment purchases should not be approached in an ad hoc manner. The goal should be to replace equipment in a structured system as the equipment hits its optimum replacement time. The key to successfully accomplishing this, from an economic standpoint, is the collection of relevant performance data.

Cost justification can be provided by a fleet-monitoring system that may be supplied by your material handling equipment service provider if they have a system to do so. A fleet-monitoring or -management program can identify key flags or performance indicators, such as utilization, cost per hour and return on investment. This information allows the company to make informed decisions on repair versus replacement when large repairs are required to sustain the equipment. It can also help identify problem areas, if repairs are coded as they occur, to point out recurring component failure.

The key component of such a program for most businesses is the function that calculates the return on investment if a piece of equipment is to be replaced. This information helps the company evaluate an investment in new equipment. If the expected ROI is less than two to three years, the older equipment has little to no asset value on the company’s books and the equipment has over 10,000 hours of service, then it should be seriously considered for replacement. Each unit should be reviewed individually at budget time to ensure that a good business decision is made on the above merits.

Fleet Dynamics

Graph 1 provides information on the median costs of a forklift for a large user of the equipment and the median repair cost versus the value of the equipment cycle of the equipment being serviced over a 10-year period. This equipment was used in a two-shift operation and hadn’t been replaced for 10 years.

Note: The annual cost of maintenance per unit exceeded the value of the equipment per unit after five years or approximately 10,000 to 12,000 hours of use (not shown in graph).

Graph 2 shows the result of aggressively replacing equipment (17 - 20% of the fleet per year)  with new equipment commencing in 2006-7.  Note the increase in 2007-8 in operating costs when capital funds weren’t made available due to poor economic conditions.  Over the 5 year period, the maintenance and fleet size savings actually financed the cost of the new equipment and increased utilization by 43 percent.

Comparison: Battery-Powered and Internal-Combustion Equipment

Another need in the equipment-acquisition process is to identify the type of equipment that will meet the needs of your business in the most cost-efficient and practical manner. There are many types of equipment and, therefore, many considerations but, for this article, we’ll simply touch on the merits of battery-powered versus internal-combustion equipment.

Recent innovations in battery-charge technology, brought on in part by alternative-fuel research and development, have made possible fast-charging, also known as opportunity-charging, systems for battery-powered equipment.

Conventional battery charging requires that you have multiple batteries for multi-shift requirements. Typically, a conventional battery has a daily work cycle of discharging for one shift, charging the next shift and cooling for the third shift on a recurring daily basis. This requires an area in the facility to store, transfer, charge and ventilate multiple batteries. As well, personnel have to be trained and supervised for the safe transfer, charging, connection and maintenance of these batteries.

Over the last 15 years, fast charging has gradually changed that approach and is introducing internal-combustion users to battery-powered equipment, with the allure of significant fuel-cost savings and a smaller carbon footprint. The concept is quite simple: rather than charge via the aforementioned multi-battery cycle, the same battery is charged during breaks, lunch or downtime of more than five minutes. A higher-capacity “smart” charger communicates with a battery-monitoring device installed on a fortified battery that is measuring the state of charge, voltage and heat. The charger and monitoring device ensures that the battery stays between 30 and 80 percent charged. This minimizes gassing that occurs during the top 20 percent, as well as heat and voltage spikes in the bottom 30-percent state of discharge.

All the operator needs to do is connect the battery to the charger during breaks and any extended times when the equipment is not being used. At the end of the workweek, the battery is left connected; it is equalized on a Sunday or when not in use for eight hours. The savings can be significant in a multi-shift environment, even with the approximately 50-percent higher cost of an electric forklift equipped with a battery, fast charger, battery-monitoring device and peripheral hardware.

The cost in Ontario and Quebec to charge a battery is approximately $2 per shift, while the cost for a bottle of propane is approximately $20 for high-volume users. The $18-per-shift savings annualize to $4,500 per shift, which usually more than covers the cost of the higher investment in battery-powered equipment. If your business has a second or third shift, then the fuel-cost savings are yours to keep.
Before you decide to invest in battery-powered equipment, you should have a power-requirement evaluation performed by a professional dealer and a battery/charger manufacturer’s representative to ensure the system will work for you and that you get the right system for your business needs.

Some applications are not suitable for this type of equipment and not all suppliers are experienced in the full requirements for dependable trouble-free usage.

Utilization

Utilization is often underestimated as a cost to the business, especially in large fleets in large facilities and if acquiring via the capital budget as previously indicated.

Constant measurement and review are required to manage this cost. Consider that each piece of poorly utilized equipment will cost money to maintain year after year, takes up space and increases motorized traffic congestion in the plant.
For example, if you have 40-percent utilization in your plant with 30 units, wouldn’t you better off with 20 units at 60-percent utilization? The savings could help you upgrade your fleet faster and clean up your operation.

In Closing

As you can see, there are many factors to be considered when managing the economic acquisition and replacement of equipment.

A professional material-handling organization can assist with the collection of pertinent data, understanding that data and helping you prepare a business case for the economic replacement or addition of equipment in a capital-budget format. Alternatively, you can rent the equipment on a fixed-term basis, picking the best value proposition for your business and letting the supplier manage the details. Remember, at the end of the day, you want to have minimal downtime, a current, up-to-date fleet and a perennial, cost-efficient replacement and management program, so that you and your colleagues can focus on your core business.

I hope this article has given you the basics of understanding how to achieve this goal.

Jamie Stephen, General Manager of Liftow Western Ontario. The article has been published from the magazine 3PL Americas