Quite often, businesses only focus on individual repairs and fuel when calculating their patrol vehicle costs. In reality there is much more that goes in to calculating the cost of a vehicle. We need a way to factor in the price of the car, the insurance, depreciation, and the repairs. (Just to name a few of the costs).
Plus, wouldn't it make since if we measured the cost of a patrol vehicle in terms of its production? For example, Car A and Car B both cost $40,000 over the lifetime of the vehicle. Car A drives 200,000 miles but Car B only drives 175,000 miles.
In the end, Car B was a much more expensive vehicle because it did not produce as much as Car A, even though it cost the same amount.
In order to calculate the cost of a vehicle in terms of productivity, you'll need to use a method called Life Cycle Costing.
Life Cycle Costing
Life cycle costing is the only way to judge vehicle costs or, a more effective measurement, vehicle productivity. This cost analysis is key to launching and maintaining a successful mobile patrol.
Let me explain. The cost of your security patrol vehicles is different than the price. Many operators with small and mid-sized fleets try to calculate costs on a transactional basis, focusing on the price of a tire or an oil change. Although that is certainly a consideration, the sum of all transactions doesn’t tell a manager any more about true vehicle cost than it would in a manufacturing environment.
The key to calculating the true vehicle cost is factoring in the productivity of the vehicle
Before we can calculate the life cycle cost, we first need to consider all of the cost categories.
The cost of your security patrol vehicle can be broken down into two categories, fixed and variable. Both categories must be considered before productivity can be measured.
Fixed costs include depreciation (the difference between the original cost and the proceeds from sale), lease or finance costs (interest, fees, etc.), and insurance.
Variable costs include fuel, maintenance/repair, tires, oil, and miscellaneous (washing, tolls, parking, etc.).
Most will generally range from 25 to 30 cents per mile. Of this, about 7 or 8 cents will make up variable costs; the balance will be fixed costs. Capturing all of these costs is the first step in determining life cycle cost/vehicle productivity.
Businesses should establish ways to capture and track these costs on a monthly basis. All of this information should be maintained in a database, like our free patrol cost calculator, until the vehicle is decommissioned or sold.
Life cycle cost expressed in total dollars is useless. A good analogy is fuel efficiency. Simply looking at total dollars spent, or total gallons used, is a waste of time. Fuel usage must be expressed as a cost/use ratio, in this case miles per gallon.
The same thing goes for total vehicle costs. Life cycle costs must be expressed in a cost/use ratio in order for productivity to be determined. The most common ratio used in the security industry is cents per mile. This gives an operator a clear picture of how a security patrol vehicle performed during its time in service. When a vehicle is been taken out of service and sold, you can then complete the total Life cycle costs.
Let’s say, for example, that a security patrol vehicle is sold after 36 months, with 80,000 miles on the odometer. Here is how vehicle productivity can then be calculated and expressed:
Original Cost: $18,000
Resale proceeds: $7,500
Depreciation: $10,500 ($18,000 – $7,500)
Total Finance Expense: $1,890
Total Insurance Expense: $900
Total Fuel Expense: $4,800
Total Maintenance/Repair Expense: $1,440
Total Tire Expense: $400
Total Oil Expense: $352
Total Miscellaneous Expense: $250
Grand Total: $20,532
Now that total vehicle expenses have been determined, you must calculate the cost/use ratio in order to judge vehicle productivity.
Total Expense: $20,532 X 100 = 2,053,200 cents
Divided by mileage (80,000) = 25.67 cents per mile
For each mile driven, the sample vehicle has cost the company 25.67 cents. Looking at the sum of the expenses is irrelevant when determining true vehicle cost.
For example, a different vehicle with the same or similar dollar cost, but only driven 65,000 miles would be be far less productive than this one (31.58 vs. 25.67 cents per mile, almost 6 cents per mile).
Life cycle costing is even more valuable when comparing vehicles side by side. When you look at only one vehicle it is hard to take away any value from the process. Using the cost per mile ratio will make comparisons legitimate because it takes into consideration the different mileage requirements different routes have.
Now I'm sure you're thinking, "what good does knowing the cost after the fact really do me? To get an exact cost, we have to wait until the vehicle is retired. However, we can use estimated depreciation in order to get an estimated cost per mile throughout the life of the vehicle. Developing a history of your patrol vehicles, over a long period of time, will provide a useful “bank” of data for forecasting.
This type of analysis is the start to making real money on your mobile patrols.
Life cycle costing isn’t really a complex process. Here is a quick summary of what we covered:
- Accumulate all fixed and variable costs
- You can have your officers use Silvertrac to record the variable costs on the go)
- Express the costs in a cost/use ratio – cents per mile
- Use our free patrol cost calculator
The resulting data will reveal true vehicle productivity and allow you to measure whether or not your initiatives to increase efficiency are working.