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Service Van: Lease vs. Purchase

As a fleet of road service vans approaches 40 vehicles, there are some who choose to lease these vehicles as fleet leases. Is there any real big advantage to leasing vehicles as opposed to outright purchase/bank loan? If so, what are the advantages? Also, as a service crew matures and many of us have 10 to 15 year loyal employees, how do most dealerships address the wage rates? Do any MHEDA dealers have a ceiling on technician wages?
David Rizzo, President, A.J. Jersey, Inc. (South Plainfield, NJ)

Loren Swakow: We do not have a ceiling on our service wages. Generally, our wage increases coincide with our billing rate increases. When we issue raises to our technicians, we generally raise our labor rate at the same time. Until we find deflation in labor rates, I think this system will remain.

A more interesting question would be what percent of your labor rate is wages? This would take into account the varying rates around the country. The old rule of thumb used to be one-third. If your average wage was $20, your labor rate should be at least $60. With your mechanics receiving wage increases for 10 to 15 years, your billing rate should have been increasing also for the last 10 to 15 years.

Dave Griffith: The key issue with the decision to lease or buy service vans would be cash, cash flow, and the residual value at any point of the van’s useful life. Lease payments vs. interest and depreciation lay out a straightforward picture, and your available cash from operation or your line and investment alternative lay out the second picture. Finally, you will want to look at residual as part of the overall story and how long you keep assets in your service fleet. How do you want to look at your balance sheet? I am assuming you do the maintenance in all cases and track this carefully so as not to keep a “free” van too long. It really depends on what your balance sheet looks like today and what you want it to look like tomorrow and what investment opportunities you have.

We evaluate every job with an outside salary study every 18 to 24 months. We also use the MHEDA study every year. We want to be competitive and we seem to be able to position the jobs fairly and then address both merit and COL raises. On occasion, we have given a one time bonus for outstanding performance when the individual is at the top of the salary range. We also have significant variable comp for every employee in terms of a cash bonus and retirement contributions. These all seem to balance out.

Ken MacDonald: The question of ownership versus leasing is a question that you should discuss with your CFO or accounting firm. There are numerous reasons, i.e., (expensing vs. capitalizing) cash flow, insurance or financial ratios that outside people may look at. Each company may have certain financial goals, growth issues (or lack of). These things are best discussed with your financial staff and accountants. They are reviewing your company’s financials and will help you plan.

Jim Ripkey: We currently lease our vehicles rather than outright purchasing. Leasing is what makes the most sense to us right now. Tying up $1,000,000 in cash in 40+ vehicles simply is not the best use of our assets in this economy (or most economies). A fleet lease is something that we are currently investigating which would provide us with many of the same benefits that we provide our clients in the area of long-term rentals. The program includes our ability to replace, move or reallocate vehicles at our discretion via a third-party provider. Maintenance, also at our discretion, can be included with each vehicle for a flat rate or on a negotiated time and material basis by repair item.

Regarding wages, all technicians, regardless of tenure with the company, are slotted in our wage matrix. Placement in the wage matrix is based on both experience and qualifying test results. Advancement through the matrix is based on our objective-based criteria of efficiency and productivity. Subjective criteria such as PM audit scores, van organization and attitude are also included in this evaluation. Our evaluations are done quarterly for each technician; merit increases are awarded at that time. Our matrix is reviewed annually by our service managers for market competitiveness and adjusted as needed. Additionally, a great benefit to being a MHEDA member is access to the annual Employee Compensation Survey, which includes wage rates for most positions in a material handling distributor’s operation. Starting and “top” wages are reported in this survey for service technicians.

Bob Weeks: Leasing advantages are: ease of accounting, full amount can be written off, cash flow. Disadvantages: mileage over-run, can be more costly, vehicle condition at conclusion of lease. Lastly, if trucks are used in a very high mileage situation, it is sometimes less expensive to purchase the vehicles and use them until the cost of repair is too great.

We have talked about setting wage levels and wage ceilings on all jobs at our company. We haven’t done this, but this is a good idea and would make any company a more professional organization.

Material Handling Equipment Distributors Association

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