Mike Fergusson, industrial sector at CHG-Meridian, explains why leasing is the present and future of prudent procurement.
Nobody needs to tell any manufacturing or industrial business that times are tough. The supply chain remains compromised following Covid-related disruption; materials and energy costs are mushrooming, and inflation is affecting the price of everything: inputs, outputs and customer purchasing power. If businesses in the manufacturing and industrial sectors thought their financial management was prudent before these challenges arose, they might well be redefining the word prudent right now.
And yet, to stay in the game, businesses need to keep doing what they are doing: keep turning over, keep plant rolling, and keep investing. Inevitably this involves maintaining equipment, revising processes, and replacing the old plant with new. Finance teams and business decision-makers need to use every trick in the book to ensure they can build and protect the business.
A shift from owning to leasing
This financial imperative is one key reason why we see a shift from owning to leasing. Whether a firm relies on machinery, robots, forklifts or other plant types, the trend is very much towards the rental of this vital equipment. Again, the reason is apparent: an effective leasing arrangement reduces the total cost of ownership, and in our experience, it can do this by as much as 35 per cent.
Leasing provides multiple advantages over the outright purchase. One leasing contract provides a single point of contact for acquisition and delivery to various sites, all maintenance and servicing, periodic replacement and refresh, and asset and contract management. At the end of use, any assets that are no longer required are removed off-site – often not easy tasks – before being refurbished and remarketed, further helping to reduce the total cost of ownership.
Doing all this removes many layers of complexity for a firm. Moreover, the benefits are multiplied when we look at the whole portfolio of plant and equipment any one business might decide to lease rather than own.
It is not uncommon to find that there is not a clear picture of all the assets in a portfolio. This is not necessarily surprising, especially for larger, multi-site, multinational businesses, which will have grown and changed over time, perhaps through acquisition. As a result, they might have different systems for monitoring or managing equipment across various sites and contracts with numerous third parties who provide similar, sometimes overlapping services. There are even instances of a business paying twice for the same service.
Shifting from ownership to leasing can fix these issues and provide clear visibility of the asset portfolio and all spending and contract data. Just this one consolidation exercise can have significant financial advantages.
And from this position, a firm can plan for the future from a solid foundation, with a secure knowledge of current financial commitments on which to base future projected spend, refurb and replacement cycles, and sale/remarketing of equipment no longer needed.
Boosting the circular economy
It does not matter whether a business is shifting gear using sit-on forklift trucks or taking advantage of the latest automated solutions; the advantages of leasing are the same. But automation is an interesting example of the leasing model because businesses using automation often leapfrog ownership entirely and realize the benefits of leasing from day one.
In a leasing model, the customer works with a partner throughout the lifecycle of technology investments. The process starts with a vendor-neutral procurement strategy, where the customer has the freedom to choose and procure the equipment they want and need. Then, the customer leases the assets, such as forklift trucks, AMRs and AGVs, and uses them like any other owned asset. However, at the end of their optimum useful life, which is to say, before service costs and downtime skyrocket, it hands the assets back, where they can be remarketed.
In this way, when equipment is no longer needed, it is collected, refurbished, and provided to another business, which can use it effectively instead of taking up precious real estate on site. Perhaps that might be in a new country or even a new continent. Still, the financial benefits accrue to both businesses, and this circular economy approach has a clear environmental advantage. In addition, a proportion of the estimated resale value is used to reduce the monthly lease instalments, so customers also benefit from permanently low TCO and less administrative effort.
The future of prudent procurement
The principles of optimal financial management in industrial procurement remain the same, whether related to newer equipment like robotics or more established gear like sit-on forklifts. And they apply right across industrial manufacturing and warehouse automation.
The need for financial prudence has never been greater than it is today, and this sits beside a compelling need to invest in keeping competitive. Leasing is far more practical than purchase, and businesses of all sizes increasingly understand this. These days, the wise company should consider leasing as their primary option and only decide to own if the reasons for doing so are utterly compelling.