Beware of Unsound Equipment Cost Cutting

Rod Sutton, Editor in Chief | September 28, 2010

What do you do in a tough year such as we've had so far? We were talking to an owner-operator who's been in the excavation business for 30 years, and he's never had a worse year. Not much in the pipeline, either.

Most large fleets aren't faring as poorly, but that's not to say they don't have extra machine time on their hands. Utilization isn't where they want it, and shop labor may be just as idle as the machines. According to our annual Giants report, those with estimated fleet-replacement values above $25 million are using this extra time to go into maintenance mode.

In a cyclical industry such as construction, companies are tempted to take full advantage of opportunities because they know the downsideof the cycle is inevitable. This is a sound business move if the company has the fleet to accomplish all it sets out to build.

Yet this strategy will backfire if the fleet and fleet resources cannot keep up. The obvious corners that are cut are scheduled preventive maintenance and component replacements.

The less obvious corner, and more dangerous from a fleet-management perspective, is the reduction of fleet-replacement budgets. About one-third of Giants expect to spend less next year than they have this year. Corporate finance departments consider this a logical component of the cost-cutting strategies that need to be implemented, rightly so in most cases, in order to adjust to the current economic conditions.

But equipment managers must articulate to their managers the importance of staying on track with machine-replacement plans. The economy is indeed putting pressure on cost control, but other forces are putting serious pressure on residual values. If equipment scheduled for replacement is instead retained in the fleet, the organization risks losing asset value. Any reduced costs may be more than offset by the loss in residual values.

Construction Equipment and the Association of Equipment Management Professionals will address residual values in a webinar Oct. 3. If you've viewed one before, you know its value. If not, there's no better time to see how online education can help you manage your fleet. Register today.

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