You buy some, you lease some
With a fleet of 80 lift trucks, Bruce Mantz has the kind of buying power most managers would kill for. So why is he so sold on leasing?
Don't expect to find Bruce Mantz tooling around Edison, N.J., in a battered 1978 Dodge Dart with a nonworking AM radio and rusty muffler dragging behind. Mantz is nothing if not finicky about his vehicles. At work, he drives only late models with all the bells and whistles, and he prides himself on the care he takes of them. Not a day passes when he doesn't check under the hood, and he has yet to miss a scheduled maintenance check.
But Mantz isn't some Hollywood celebrity with a passion for classic Corvettes or Aston Martins. The vehicles upon which Mantz lavishes so much attention are the 80 lift trucks used to shuttle pallets and cases around the distribution centers run by Automated Distribution Systems. ADS, as it's known, is a third-party logistics service provider that operates five distribution centers totaling 1.6 million square feet of space, and Mantz is the company's director of operations.
Though he may be fussy about the lift trucks' ergonomic features and options, he's downright finicky about the financing—the leasing and buying particulars. "We want to make sure we're getting machines that will not only serve us well from the standpoint of productivity and driver comfort," Mantz says, "but that will also serve us well financially."
With a fleet of 80 vehicles, Mantz has the kind of negotiating clout and buying power most managers can only dream of. And over the past 10 years, Mantz has purchased his share of lift trucks outright. But lately, leasing's been his option of choice. "When you couple [the convenience] with some very attractive promotions from the manufacturers and dealers, [and factor in] the very favorable interest rates," he says, "leasing has become a no-brainer for us."
High interest in low interest
Mantz isn't alone. Lift truck manufacturers like Raymond and Yale report a surge in leasing activity in the last several years. Part of it's the low interest rates, says Warren Eck, vice president of Yale Fleet and Yale Financial Services. "[A] lot of it has to do with the cost of money being as low as it has been the last couple years."
You've seen the demo model and kicked the tires, but do you really know what you'll be getting into when you sign that lift truck lease? To avoid unpleasant surprises, the Equipment Leasing Association recommends that you ask yourself the following 10 questions before you sign on the dotted line.
1. How am I planning to use this equipment?
2. Does the leasing representative understand my business and how this transaction helps me to do business?
3. What is the total lease payment and are there any other costs that I could incur before the lease ends?
4. What happens if I want to change this lease or end the lease early?
5. How am I responsible if the equipment is damaged or destroyed?
6. What are my obligations for the equipment (such as insurance, taxes and maintenance) during the lease?
7. Can I upgrade the equipment or add equipment under this lease?
8. What are my options at the end of the lease?
9. What are the procedures I must follow if I choose to return the equipment?
10. Are there any extra costs at the end of the lease?
Another part is that with leasing, customers don't have to scrape up cash for a deposit and all the incidental expenses surrounding a lift truck purchase. Banks normally won't allow customers to roll the incidental costs—freight charges, installation fees and maintenance costs—into an equipment purchase loan. But leasing terms aren't nearly so restrictive—customers can usually obtain 100-percent financing. Leasing can also cut down on record-keeping and paperwork. If the lease includes maintenance costs, for example, the lessor usually issues a single invoice each month that covers the entire fleet, instead of sending separate invoices for each truck. For large fleets, in particular, the savings can add up quickly.
"Leasing is clearly becoming more popular because it leaves cash in your company," says Loren G. Swakow, vice president at Scott Lift Truck Corp., a Komatsu dealer based in Chicago. "Cash is king with businesses, and leasing retains cash."
It hasn't hurt that lift truck manufacturers have been out on the road educating the industry about the advantages of leasing. In the past, many customers shied away from leasing, bewildered by the many options and intimidated by the financial, legal and tax terminology. Now there's help. Kevin Trenga, director of marketing for Raymond Corp., says almost all major manufacturers and dealers have Internet tools on their Web sites to help customers determine if leasing is the right choice for them. Truck buyers are proving to be willing students. "Customers are a lot smarter," says Eck. "They're thinking more about planned replacement programs so they can structure their lease for the right period of time and replace their machines when they need to."
Not my problem
Low interest rates may attract customers to leasing in the first place, but once they try it, they often discover a host of other benefits. One is insurance against obsolescence. Managers like Mantz who run third-party DCs tend to place a high premium on using the latest technology. By leasing its trucks, ADS can operate them for a specified term—say, five years—and then upgrade its fleet at the lease's conclusion.
Another advantage is that reselling the equipment becomes someone else's problem. That's also a big plus for Mantz, who says it can be difficult to recoup his investment when it comes time to sell his highly specialized trucks. To operate in ADS's highly automated centers (which feature pick and put to light systems, bar-code tracking and wire guidance systems), lift trucks must be outfitted with expensive RF devices and equipped with wire guided technology for picking in very narrow aisle (VNA) applications. All those costly extras tend to limit the pool of potential buyers when the equipment comes up for resale. "It's hard to get those dollars back,"Mantz admits. "We're running some very specialized machines, and after you've run them for a few years, it can be tough to sell them in the aftermarket. Not everyone has those kinds of applications."
These days, ADS leases its trucks from Raymond, Crown and Sweden-based Atlet, typically for a five-year term, then exchanges them for an upgrade at the conclusion of the lease. That works out well for a company like ADS that's scrupulous about maintaining its equipment and runs a clean facility. At the end of the term, the vehicles are still in excellent condition and have a high residual value.
But that's not true for everyone. Companies that operate their trucks for multiple shifts or use them in harsh environments may well find that their trucks have a pretty low residual value at the end of a lease. For them, purchasing might be a better option. "A real dirty application like a steel mill or a foundry is probably not the best candidate for leasing," says Eck. "The same holds true for somebody running a lot of hours, maybe 3,000-plus hours a year."
About the Author
John Johnson joined the DC Velocity team in March 2004. A veteran business journalist, John has over a dozen years of experience covering the supply chain field, including time as chief editor of Warehousing Management. In addition, he has covered the venture capital community and previously was a sports reporter covering professional and collegiate sports in the Boston area. John served as senior editor and chief editor of DC Velocity until April 2008.
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