A New Savings Opportunity: Equipment Rental

Spend Matters would like to welcome a guest post from DRK Research.

Since 2007, we at DRK Research have been examining the rental equipment segment. What we have found presents a very interesting opportunity for most companies today -- to reduce equipment rental spend by 30-50%.

We discovered a very fragmented segment from the end user perspective. Individual project managers and supervisors make the decision to order the rental (as they should) based on corporate agreements for unit costs (daily rental rates) and terms and conditions. Since it is such a fragmented process, most corporations have no visibility to their aggregated equipment rental spend. We also found a consolidated supply market with the information power in the hands of the suppliers and the reverse logistics process managed by the suppliers. Any inefficiency in this process is to the benefit of the suppliers (the later the return, the more days on rent). This is a conflict of incentives and process ownership.

A little background is needed. Many companies spend millions of dollars in equipment rental spend each year. Many have spent time negotiating strategic sourcing agreements that focus on unit price, operating rules and possibly rebates. Many have a category manager assigned to this segment. So, what's the problem? The problem is that the rental segment is bleeding cash. Why?

The operations or usage process ownership of the rental is very fragmented and disconnected. Usage or days on rent is a key benchmark in this segment. Who owns this and who is in control? Who is managing this process? Who has the information needed to manage this?

The lifecycle of a rental is very simple. Planning, ordering, delivery, use, return, invoice and pay. End users focus on getting the right equipment there, on site, on time, to do the work. Once the work is done, getting the equipment back is not a priority. The job is done and this is just post project clean up, a few more days of rent is a small cost to the individual project. The end users often think, "its the vendor's equipment so it's up to them to get it back." They leave it up to the rental equipment vendor to recover the equipment. But who pays the rent while the equipment "waits" to be returned? The end user does. From an overall company standpoint, all these individual rental late returns can quickly add up to big losses. Who manages this efficient return? Who has the aggregated company wide information on what is on rent, what needs to be returned, what is damaged, what is lost? Only the respective equipment vendors. Is the fox guarding the hen house?

So, in our estimation (and actual experience fixing this) there is a big opportunity to manage the reverse logistics process and reduce the total rental days by 30-50%. Having the visibility of a company-wide view, having an owner of the process that has aligned incentives focused on getting the equipment in and out efficiently and a focus on optimizing this segment from an overall company basis is the prescription, not "lower unit costs" [or "lower daily rental rates"].

If you are a procurement executive looking for a new opportunity, here it is.

Spend Matters would like to thank Dr. Kevin McCormic of DRK Research for his contribution today.

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