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On Jan. 1, 1998, Roger Smith experienced what he thought would be the most significant event of his career as a utility fleet manager: Toronto’s six municipalities amalgamated, uniting Toronto under a single city government. Each had its own electric utility with vans, pickups, cherry pickers, and sundry heavy equipment, and amalgamation would merge them into one organization — Toronto Hydro, forming the second largest public utility in North America with more than $2 billion in annual revenue and roughly 1000 vehicles in tow.
For Smith, Toronto Hydro’s manager of fleet operations, bringing the six vehicle pools together was a daunting task. “In combining the fleets, we hoped for some of the advantages that come with size and scale,” Smith recalls. “Instead, we found ourselves sorting through endless variations of vehicles. The trucks were like snowflakes — no two were the same, and they were piling up. We just had too much.”

Then, less than 18 months later, another jolt: the Ontario government deregulated the hydroelectric power market. Open to competition, Toronto Hydro became a
private corporation intent on generating profits, and like many private fleet managers, Smith found himself on the wrong side of the balance sheet. A big fleet is a cost, and in 1999 at Toronto Hydro it was not a well-managed one.

“Information about how all this equipment performed was not very detailed, and it was housed in three separate fleet management software programs, none of which was Y2K compliant,” Smith says. “Back then, if someone were to come up to me and say, ‘Some people from a leasing firm were just here with a proposal…,’ there was no way to defend myself.”

So Smith made a decision that “forced us to think more like the leasing companies that wanted to take over our business.” Today’s Trucking editor Stephen Petit sat down with Smith to talk about the transformation.

Q: So what was your first step in this “business-like” approach?

ROGER SMITH: We took a long, hard look at our costs and our pricing. We “bill” departments within Toronto Hydro for the use of vehicles and the labour to maintain those vehicles. Traditionally, we charged a blended hourly rate. We took all of our costs for operating all of our bucket trucks, for example, and averaged them. Then we took the hours that were charged to that equipment and divided one into the other to come up with a rate. Customers like it because it’s predictable: if you operate a vehicle for five hours in a month, you only pay for five hours.

Q: Yeah, but what’s happening to the vehicle the rest of the time?

Nothing. That’s the problem. Our fleet utilization was just terrible. People hoarded equipment because they could afford to — it didn’t cost them anything to have vehicles sitting around. So we decided that if we had to compete with the likes of Ryder and Penske for Toronto Hydro business, we would price our services the way a leasing company does: we’d charge a monthly lease rate, including maintenance, whether the customers turned the key or not. When word of this plan got out, we were able to downsize the fleet by almost 200 units right away. All of this equipment nobody used came out of the woodwork.

Q: How do you set your pricing?

With a project manager, we sat down and attached a cost to every single thing we do — it’s called activity-based costing. We identified which processes contribute to our profitability and which ones detract, leaving nothing out.

We were able to establish a labour rate or “door rate” at each of our three garages that recovers the total cost of any given task. The rate fluctuates from month to month, because we factor in all kinds of variables: dollars of inventory, productivity, vehicle availability, etc. We track about 40 key performance indicators for each garage. If the labour rate is coming down, we’re doing good things, if it’s going up we have work to do. It turns out we’re cheaper, by 50% to 80% on average, than outside suppliers.

Q: With so many different types of vehicles in so many different types of service, how do you make sure none falls through cracks?

If you can measure it, you can manage it. We broke our vehicles down into 13 categories, and within those categories we broke things down further, by gross vehicle weight, for example. We measured all of the costs as they relate to our shop and the economic lifecycle of a piece of equipment.

Now, each vehicle is basically three separate components: the cab/chassis, the aerial device, and the body. A compressor or generator, that might be a separate component or unit, too. So when you add all the compound units, we’re actually tracking the performance and life of something like 1600 separate components. Right now, our class-6 through -8 trucks have a lifecycle of eight to 10 years, and we rebuild the attached equipment at 10 years. When we mount older equipment onto a new chassis, we don’t want to lose the maintenance history that belongs to the aerial device.

Q: How do you account for the type of service the vehicle performs?

You have to consider specs and service. In our business, we might have two trucks with identical specs, but one might run a slip-seat, 24-hour-a-day program, while another just works an eight-hour day. So to optimize our maintenance cycles for each unit we have different maintenance triggers: 300 engine hours; 5000 kilometres travelled; litres of fuel consumed (2500 to 4500 litres, depending on the engine type); or time (every four months).
We have an excellent software package [Fleet Management, from Peregrine Systems of San Diego] that helps us keep track of it all. We can associate all maintenance costs and life cycle cost and everything related via VRMS (Vehicle Maintenance Reporting Standards) codes — cost per hour, cost per kilometer, or however we want to measure. We could track the cost of operating and maintaining a Cat engine versus a Cummins engine, for example. We can factor in the weighted average cost of capital and inflation. We don’t want to overlook any cost.

Q: Aren’t you worried about overloading your managers with data?

There are two things you have to understand about maintenance data. First, it’s important to present benchmarking data in a way that’s easy to understand. If you’re going to show the ratio of dollars in inventory per vehicle, for example, use a bar graph. Raw numbers can be intimidating, and most people react by ignoring the information.

Second, data should support management decisions, not dictate them. You’re a manager or a shop supervisor because you’re an experienced, intelligent person. Use your head, use your gut, use the numbers to help you make good decisions.

In my case, I find that the data more often than not just confirms what my gut is telling me to do. If you want to stretch your drain intervals, you’re going to save money up front, but what happens to your maintenance costs down the road? The data can show you.

Q: At what point do you start looking for ways to generate revenue?

We’re at that point now. One of the beauties of activity-based costing is you have to go through an exhaustive model of possible actions and costs, which forces you to consider all kinds of corporate expenses — and opportunities.

We look at full-service leasing companies and think, Heck, our rates beat what those guys are offering.

So, while Toronto Hydro is our No. 1 customer, we’re taking small steps toward doing work for other companies. We’ve opened up our in-house training programs to outsiders. We’re copyrighting our equipment specs as intellectual property and selling them to other utility fleets. Why not? We’ve made a big investment in these areas. We think they’re worth it. Those investments have paid off for our own fleet through savings and safety. Now they can pay off in revenue.