There is no better feeling than when a truckload of new equipment arrives at a rental center. Counter guys, mechanics, customers, salesmen, and even the owner often gather around and admire the new equipment. As rental consultants, we share the pride with our client and the employees. New equipment means the company is doing well, right?
Of course, as rental consultants, our next questions are: how much did you order and on what metrics do you base your purchasing decisions? More often than not, we get a blank look, often even defensive. Usually the response is something to the effect of: "After all these years, I pretty well know what to order and what to replace. Plus, XYZ manufacturing was offering a special on multi-unit orders, so I got a good deal."
As a rental owner, your rental inventory is your single largest investment; your job is much like a stock portfolio manager, with your rental inventory serving as the various stock investments within your portfolio. Managing that portfolio is vital to ensuring your business delivers the necessary return to keep your operations profitable. At The Stansberry Firm, we regularly consult with and advise rental businesses across the nation and we find even some of the highest performing rental businesses aren’t making truly informed decisions when it comes to fleet management. Instead, many owners assess their fleet on a gut instinct, making expensive divestiture and purchasing decisions based on what they think they know or what has always seemed to work in the past.
Truth is, the days of “gut feel” are gone. Consider national chains like United Rentals and Sunbelt Rentals: what would their investors do if told purchasing decisions were made solely based on gut feel and unsupported by hard data? Let’s just say some heads would roll and their stock prices would suffer.
Tom Landry once said, “the secret to winning is constant, consistent management.” Though he was referring to football, this ideology is universal and can be directly applied to your business, specifically to managing your rental inventory “portfolio.” Admittedly, gut feel can get an experienced rental operator pretty far but, it won’t solidify a winning medal at the Rental Olympics. The winning team follows Tom Landry’s philosophy, approaching their rental fleet by making educated decisions based on consistent, constant management of their rental “portfolio.”
Developing a successful fleet management strategy is actually simpler than it seems when we apply Tom Landry’s advice. Let’s start by reviewing some general industry guidelines as they relate to fleet management. First, appearance matters; a fleet in good condition is more likely to be treated well by your customers and employees, cutting down on repairs and maintenance expenses as well as boosting your company reputation. (See Gary Stansberry’s article “Mirror, Mirror on the Wall”). Next, your fleet should remain at a maximum acceptable average age of 4-5 years at total original cost; this means half your fleet is 4-5 years old or newer and half is likely four to five years or older.
As a general rule of thumb, a rental business can maintain its current fleet condition, level and average age by reinvesting 10 percent of the fleet’s original equipment cost (OEC) in new fleet purchases on an annual basis, while at the same time divesting 10 percent of that same OEC each year. This “10 percent in: 10 percent out” rule is referred to as maintenance capex; any investment above that maintenance level is considered growth capex, which will, in turn, expand your fleet and your revenue capacity.
Utilize your rental software
Maximizing the use of your rental software is vital; utilize the available features in your software package to record and track data for each individual rental unit. Having good equipment records will allow you to analyze and calculate important metrics within your business that will not only allow you to strategize on an operational level, but also on “portfolio management” level. Furthermore, this data is essential if you are dealing with lenders or investors or, if you want to explore a potential sale of your business.
If you are properly utilizing your software system and keeping reliable records, tracking these important benchmarks can be done quickly, automating much of the process with just a few clicks of the mouse. As we develop a fundamental strategy for consistently and constantly evaluating the rental fleet, we will be applying a function of these metrics, which should be easy to calculate if you are recording the following essential data points per rental unit within your software system:
Make, model, year model, serial numbers
Repairs and maintenance expense
Time on rent
Acquisition date, original cost
Rental rates and revenue generated
Management by exception: when to divest equipment
When it comes time to sell units out of your rental fleet, the decision shouldn’t be made based solely on equipment age, yet based on a function of multiple metrics and performance benchmarks. Likely, you have several high return units that are six or seven years old, and that is ok as long as those machines are not costing you money. The easiest way to determine which units must go is managing by exception, or “cutting the tail” (reducing the amount of under-performing assets). Cutting the tail involves drilling down on rental fleet data, first category-by-category, and then unit-by-unit, red-flagging problematic or underperforming units and disposing of such. The first red-flag is excessive repairs and maintenance expense, while the second red-flag is low financial (dollar) utilization; a single red-flag is a warning sign a unit may need to be expunged, while two red-flags on a particular unit means it’s got to go.
A fleet’s overall repairs and maintenance expense should generally be in the range of 6 percent to 8 percent of total rental revenues (excluding revenues from re-rents), and no individual machine should exceed repairs and maintenance expense of 10% of the rental revenue it generated. Repairs and maintenance includes routine, preventative and major repairs, the cost of which should be recorded at every service. Any machine exceeding 10 percent maintenance expense to rental revenue should be immediately red flagged for further review.
Financial utilization is the ratio of rental revenue (excluding damage waiver, delivery, environmental fees or re-rents) generated as compared to OEC ($ Utilization = Rental Revenue ÷ OEC). Financial utilization targets should be set for overall fleet and for overall categories, such as trenchers, mini-excavators, boom lifts or generators. (A general guide to financial utilization targets can be found in Gary Stansberry’s previously published article “What is Your Rental Identity”) Any category or individual unit not achieving the targeted financial utilization rate should be “red flagged,” and cause for such underperformance analyzed. Low financial utilization rates will either be a result of chronically problematic, older or underperforming units or low rental rates. We often find that low financial utilization goes hand-in-hand with high maintenance expense (a two red flag scenario).
Once you’re done identifying low financial and high maintenance units, check physical (time) utilization by category for any particular fleet category with excessive quantities. Physical utilization is the amount of time a unit is out on rent versus non-rental ready or rental-ready status. One issue we often see by ordering from "gut feel" is quantity issues: Maybe your "gut feel" ordering resulted in 10 backhoes in the rental fleet, yet the hard data indicates you should only have eight.
At any given time, roughly 72 percent of your fleet (or any one category/unit) should be out on rent, while 20 percent of fleet should be on the yard in rental-ready status and no more than 8 percent of fleet should be in non-rental ready status (in-transit, in need of preventive/routine maintenance or hard down). Check your metrics on physical utilization by category; if your physical utilization is less than 72 percent you probably have too many units. If more than 72 percent, maybe you should buy more.
The 8 percent benchmark for non-rental ready units is an often overlooked fleet management standard. Non-rental ready units should be treated as “hot potatoes.” Rent it, fix it or sell it. No unit should ever be on hard-down for more than 2 weeks.
In addition to these data benchmarks, we have seen some independent rental owners apply supplementary or less sophisticated methods of determining which units to sell by tracking lifetime revenue against OEC to determine a unit’s useful life. For example, when a unit reaches a specific rental revenue multiple (such as three times the OEC), it’s put on a watch list, as at this point the unit begins to experience a rise in repairs and maintenance expense and decrease in resale value. Revenue to OEC ratio life cycles vary significantly, with smaller sized units reaching useful life limits much quicker than larger units.
Disposing of equipment is your final opportunity to maximize the return on your investment. Taking time to explore multiple avenues for equipment disposal and evaluating current fair market value rates is your best bet to achieving the best sale price. Never set your sales price based on book value, yet educate yourself on the current value for a piece based on condition, hours and features of the unit. Rouse Services data points to a wide range of rental items with a typical return on disposal between 44 percent and 47 percent of the original cost. Keep that target in mind while determining sale prices and try to obtain the highest resale return possible to apply towards your new fleet purchases.
Making informed purchases
Making purchasing decisions should also involve many of the same benchmarks we have already reviewed when making divestiture decisions. First, concentrate on your highest financial utilization categories, as these equipment items will always bring the highest returns and therefore increase your return on investment. Next, just as physical utilization will identify excess equipment in any one category, it will also identify insufficient quantities in any category. Likely, if a category has an excess of 72 percent physical utilization on rent, additional units are in demand. Remember our friend from the opening story. Experienced rental operators may make good decisions on the majority of their "gut feel" purchases, but likely made a few poor decisions too; did you really need 10 more 60-foot booms, or was it actually five more with some 40-foot booms and a few full sized backhoes instead?
Another great data point to track is “missed rental” opportunities. The majority of software packages have an option to enter customer requests your company was unable to fulfill. Train your employees to input this information on a regular basis and review the missed rental log frequently. You may find the company receives multiple requests for a particular unit not in the rental fleet, or the company often substitutes a larger unit for a requested smaller unit, which means it’s time to consider implementing additional fleet in a specific category.
When purchasing new equipment, don't just "place the order" for the same units at the same pricing as you have in the past. Consider different unit configuration, staggered deliveries, special pricing and terms. Consider checking alternative suppliers and brands, if for no other reason than to use as leverage with your current supplier. However, purchasing new is not always the best approach. Since the Tier 4 final implementation, equipment costs have continued to rise, while we have seen rental rates remain stagnant. The ratio of equipment acquisition cost to rental revenue affects your financial utilization. One way to improve financial utilization is to buy late model, low hour used equipment on high ticket units. Used equipment availability and pricing has been favorable to buyers in the last 12 to 24 months, making it a viable option for many rental companies
Continuously monitor to maximize ROI
As mentioned, benchmarks like physical and financial utilization are also affected by other factors such as rental rates and repairs and maintenance practices. Utilize your software and other available tools such as Rouse Analytics to consistently evaluate your market and company efficiencies; monitor your rental rates, track sales team results by individual and implement new service procedures to improve shop productivity.
When developing or adjusting your fleet management strategy, remember consistent, constant management is key to maximizing the return on your fleet investment. Evaluating your fleet portfolio is much like doing laundry: the chore is really never done. We recommend reviewing the key benchmarks discussed today at least on a monthly basis, always utilizing a 12-month average to account for any seasonality in your business. Your rental software package can automate these reports and deliver them to your desktop with little or no additional effort. Review, rinse, repeat and watch your returns gradually increase from your hard work!
Carolyn Stansberry is the Director of Strategy at The Stansberry Firm. The Stansberry Firm specializes in business sale representation, operational consulting and fair market business valuations. More information can be found at www.TheStansberryFirm.com. Carolyn can be reached directly at (817) 965-9838 or [email protected].