Know Thy Costs

Sept. 28, 2010


Las Vegas Valley Water District measures cost per mile, says fleet manager James Morwood, and life-cycle costing enabled the district to radically reduce that benchmark. Now, as LCC is fully integrated, the District has been able to stabilize and hold this cost.

In a way, it's like planning the funeral of a brand new piece of equipment before its birthday. Yet, at the time of the unit's demise, everybody's happy: The management team is pleased because its initial investment paid off, fleet managers are upbeat because of the decline in equipment downtime, and customers are satisfied because they know they can depend on the reliability of the machine or vehicle.

That's been the experience of Las Vegas Valley Water District (LVVWD), which operates a fleet of 1,800 units ranging from front end loaders to dump trucks, cars to lawn mowers. Recently named fleet manager James Morwood keeps track of the fleet.

About a dozen years ago, Morwood's predecessor, Doug Keene, CEM, now retired, introduced the idea of life-cycle costing (LCC) to the water district. "Life-cycle costing is basically pre-determining a point in time when the unit has used up its useful life cycle or either pre-determining when the vehicle becomes unserviceable," Morwood says. "You try to weed out these vehicles from the fleet before they become a problem."

If you keep a vehicle longer than its life cycle, he says, maintenance dollars go up and the serviceability of the unit goes down. "Then you have a vehicle that spends more time in the shop than on the street. In soft dollars, that adds up to quite a lot of money. You have a crew standing around with no vehicle, plus you're spending money trying to repair the vehicle to get it back in service."

How this plays out in day-to-day operations, says Morwood, is clearly demonstrated by this scenario. Several years ago, LVVWD operated 1-ton units as distribution service vehicles. Most of the equipment had cranes mounted on them, others had hydraulic circuitry or PTO generators, and some hauled tools and equipment that were used by service people in the field. Because of this weight, the 1-ton units were either overloaded or loaded to the max.

"We'd get maybe 80,000 or 100,000 miles out of these vehicles, then they were completely worn out," Morwood says. "With the in-town stop-and-go driving, the brake systems didn't stand up well and neither did the transmissions. We decided we wanted to get 100,000 to 125,000 miles each out of those units before we had any major problems."

As with other public fleets, when the LVVWD buys new equipment, it is required to request bids. To reach the mileage goal set for the distribution service trucks, the district upped its specifications by one truck model. Rather than soliciting bids for 1-ton trucks, it requested bids on 1.5-ton units.

Downtime dropped by "a huge amount simply by going to a heavier chassis," Morwood says. "That's how we came up with our specs to get a longer life cycle out of a vehicle and avoid problems."

Establishing a LCC strategy many times is a hit-and-miss proposition, he says, but the key element in the process is research.

"We have a data bank that enables us to look at variables across the board," Morwood says. "We statistically sort that out and decide that a certain type unit should last a certain length of time. We look at cost-per-mile on an annual basis and put all that in a mixing bowl, so to speak; mix everything up; and determine when the vehicle is not useful any more.

"You have an X on your graph that tells you when the usability of the vehicle is going down and the maintenance cost is coming up. In the center of that X is the place where the vehicle needs to be replaced."

This approach — looking at your own data or data from other fleets and "mixing it all up" — generally turns out well, Morwood says. "We can look at the history of our vehicles, which is a good data bank, and come up with an accurate life cycle, whether it's based on time, miles or hours."

One indication that life-cycle costing works for the water district fleet is reflected in its cost-per-mile. The fleet racks up 4 million miles per year, Morwood says. Because of an increase in fuel prices, cost-per-mile during the past two years has gone up.

"Cost-per-mile is the cost of doing business," he says. "We used to run around 26 cents per mile right across the board. That includes everything — welding, fabrications, communication systems, emergency lighting — All that is figured in. Today cost-per-mile is about 30 to 35 cents due to fuel hikes. Twelve years ago, our vehicles were running around 50 cents per mile. We had a lot of unserviceable equipment in the fleet then, and as a result, cost-per-mile went through the roof. It was 50 cents per mile and that should have been 20 or 21 cents per mile."

When the water district first started life-cycle costing, it had to replace a lot of vehicles during the first couple of years. "Capital cost then was horrendous," says Morwood. "But if you look at the cost-per-mile through the years, life-cycle costing has made up for that capital cost."

Although LVVWD couldn't control the cost of fuel or, for that matter, the cost of the steel that goes into manufacturing the equipment, once LCC was implemented the cost-per-mile figures leveled off.

"As we come up with new solutions for certain problems, cost-per-mile may taper down in certain areas," he says. "Once you get it rolling, you don't see a lot of decline. It just levels off. Then we tweak it from there. If we gain a half cent here and a penny there, it's a big deal."

Caterpillar recommends a five-step process for life-cycle costing, which requires your equipment dealer to guarantee repair expenses over the life of the equipment. The dealer also must be willing at the time of purchase to guarantee resale value after an agreed upon period of time. Here are the steps:

Start with the equipment purchase price

Add the dealer-guaranteed repair expenses over the life of the equipment

Add the scheduled maintenance cost over the life of the equipment

Subtract the guaranteed resale value

The result is the total cost of the piece of equipment over its servicable life.

Life-cycle costing has been around for years, Morwood says, and LVVWD will continue to use it. "In today's world, it is a necessity. If you don't have any idea when your vehicles are going to become unserviceable, you haven't done your homework.

"As a fleet manager, that would be a travesty. If you don't know when the vehicle will become unserviceable, you can't plan replacements in the future."