Investing in Resale

Kristen Simpson Simpson Communications Shaker Heights, Ohio

REINING IN EXPENSES while increasing profitability can be challenging for public and private waste haulers. Salt Lake County, Utah, however, is recovering almost 70 percent of what it spends on refuse collection vehicles by selling them after just three years. The sales are critical to the county's approach to maximizing its return on investment in equipment.

When Nick Morgan took over as county fleet director in 1997, the fleet was $7 million in debt. In the sanitation division, maintenance costs for 39 aging refuse collection vehicles had escalated to more than $3 million per year. Now, the fleet has an annual surplus of approximately $1 million, and the annual maintenance budget is substantially less than $1 million for 34 vehicles.

Morgan credits the fiscal turnaround to standardizing equipment, looking beyond purchase price to the overall total cost of equipment ownership, and instituting standard replacement schedules based on the capitalized cost of operation.

Previously, the county's refuse fleet included vehicles from three manufacturers, with different maintenance schedules and replacement parts. Now, all the vehicles are Heil DPF Formula 7000 automated side loaders.

“We believe in standardization,” Morgan says. “Standardization with one manufacturer's vehicles puts the mechanics in a better position to work on those vehicles. It reduces the number of parts we have to stock. And it makes the vehicles interchangeable for the drivers.”

When choosing equipment, Morgan looks at whether the proposed vehicle can meet required performance standards. Then, he considers its total cost of ownership. For many operations, maintenance costs are key in calculating the total cost of ownership. But because Salt Lake County replaces its equipment so quickly, resale value is most important.

Fleet personnel determined that refuse collection vehicle maintenance costs usually increase after the third year. So the county instituted a replacement schedule under which every refuse collection vehicle is replaced after three years.

The first time the county replaced its vehicles under this system, it sold them individually through a distributor for $74,000 each — $14,000 more per vehicle than it needed to break even. In 2003, a national hauling company offered to buy Salt Lake County's entire fleet for $97,000 per vehicle. Since the county had paid about $141,000 for each vehicle three years earlier, it recovered 69 percent of its upfront costs with the sale. That made the capitalized cost of operation for those vehicles just 31 percent for a three-year period, or about $14,667 per year.

The system benefits the buyer, as well. The vehicles are well-maintained with low mileage and are sold with complete maintenance records. Plus, the private company purchasing the used vehicles is no longer required to pay the 12 percent federal excise tax it would have had to shell out if it had purchased new vehicles, according to Morgan.

Because of the savings and equipment reliability, the company that bought the last batch of vehicles already has expressed an interest in buying Salt Lake County's current fleet two years from now, Morgan says. But Denny Mecham, county sanitation director, has developed a new system to further enhance his fleet's resale value that may mean fewer trucks to sell at a time.

Instead of “flooding the market” with more than 30 used vehicles every three years, Mecham plans to start replacing approximately a third of the fleet annually, starting with 11 vehicles in 2005. Not only should this keep prices solid, he explains, but “it also will aid in keeping fresh, new trucks in my fleet.” Under the new system, the county will still keep its refuse collection vehicles an average of three years rather than five years or more, like most haulers.

One of the benefits of a young fleet is a reduction in maintenance costs and downtime. “We have very little unscheduled downtime,” Morgan says. “Better than 90 percent of the work that's done is preventative maintenance-oriented.”

Newer equipment combined with increased efficiency in the maintenance garage also has led to a reduction in the number of refuse collection vehicles needed. The fleet went from 39 vehicles in 2000 to 34 in 2003, with no service decrease.

So, can this approach work for other communities?

“The biggest drawback is that you need to have the money upfront to make it go,” Morgan says. “But fleets that don't have [enough money] now can build it up over time so that in seven to 10 years, they'll have the funding to do it.”

Morgan suggests a fleet pay into a special fund each month until it accumulates enough assets to finance the first equipment purchase. Reduced payments to that fund must continue after buying the equipment so that the fleet will have money to pay for the next round of trucks. Another option for municipalities is to use a municipal lease, which allows communities to get new equipment without the upfront expense. At the end of the lease, the municipality owns the equipment, which it can then sell to buy new vehicles.

When Salt Lake County saw its fleet costs in the red, it knew it needed a cost-cutting strategy. But by keeping the big picture in mind when considering the cost of equipment ownership, the county created a strong fleet while also getting a better return on its equipment investment.