Tyre Management Contracts
The importance of getting a firm grip on tyre costs was rammed home last year by a series of tyre price hikes the like of which has never been seen before. Many of the big tyre manufacturers pushed through three list price rises that compounded to year-on-year increases of 15-25%. That outstrips even the escalation in the diesel price, making tyres the fastest growing element of truck operating costs in 2011.
That statistic surely serves as a wake-up call for anyone who is not convinced of the need to keep their finger on the pulse of tyre management. Putting on a new tyre and then doing little or nothing to it until it reaches the legal minimum tread depth falls a long way short of the modern definition of tyre management.
The pay-as-you go approach to looking after tyres can include various levels of additional management, such as an agreed fitment and service policy, a menu of service procedures with a negotiated price for each, collation of invoices into a single monthly bill, with options on management information and reporting. “Pay-as-you-go is normally the best option for operators who want to minimise tyre costs, providing it is well-managed,” says Dave Alsop, fleet sales director at Vaculug Traction Tyres, another retreader that is big in tyre management contracts.
Alsop adds that operators need sound management information if the pay-as-you-go approach is going to be really good. That entails monthly fleet audits to measure a whole range of criteria such as tread depths, regroove potential, adherence to fitment policy, missing valve caps etc. Alsop says the audits normally cost around £2 or £3 per vehicle/month. “Some operators baulk at that,” he adds, “but it is money well-spent. Look at it this way, when we [Vaculug] are managing the tyres on a PPK contract, we do not skimp on fleet audits.” No amount of fleet audits absolve the operator of safety responsibility and drivers are still expected to pick up tyre defects in their walkaround check. And although the criticality of maintaining correct tyre pressures is oft-repeated advice, pressure checks may not be part of fleet audits unless they are written into the contract, so they must not be neglected in routine vehicle maintenance.
The challenge for the tyre service industry is how to carry fleet checks more cost-effectively. “What would really help is a digital display in the side window showing the truck’s odometer reading,” comments Vaculug’s Alsop. ATS Euromaster technicians already use handheld computers to record and transmit tyre wear data but ATS is now “looking at the next step” according to head of business development at ATS, Kevin Steward. Could involve the use of laser-operated tread-depth scanners with online connectivity? Steward would not be drawn.
The idea of embedding radio frequency identification (RFID) microchips inside tyres has been mooted for over 15 years but finally seems to have become a commercial reality. Goodyear has just launched an RFID version of its RHT II 435/50R 19.5 trailer tyre, reckoned to streamline fleet tyre checks. The tyre technician holds a portable scanner against the tyre’s sidewall, downloading the details of the individual tyre and its fitment straight into Goodyear’s internet-based tyre management system, FleetOnLineSolutions. Goodyear plans soon to offer more tyres with embedded RFID, ultimately perhaps extending their functionality from mere identification to real-time pressure and temperature monitoring.
Pence per kilometre (PPK) and fixed-cost contracts
The problem with tyres is that they cost you very little for two years and then wham – a £600 bill for a pair of new steer tyres. So it is hardly surprising that swapping this lumpy pattern for smooth, predictable monthly billing sounds attractive. Step forward PPK contracts, where the bill varies only with the number of kilometres run each month. Fixed-cost deals are a variation on the same theme, leading to consistent monthly tyre bills, irrespective of the actual distance run. “The two systems are based on the same cost forecast – it’s just that the total is divided up differently,” observes Vaculug’s Dave Alsop.
“It’s all about budgeting,” says Alsop, explaining why so many fleets go down these routes. “They’ve got a known tyre cost for the next 12 months.” Risk avoidance is the other feature of these contracts, with operators insulated from price hikes. Risks of damage or punctures also are transferred from the truck operator to the contract supplier, who makes an educated estimate about the frequency of such occurrences and adds it to all the other assumptions about the fleet’s tyre performance that underpin the PPK rate.
Operators must expect to pay for this budgetary convenience and risk avoidance, so as a rule of thumb, expect PPK and fixed-costs contracts to work out more expensive than a pay-as-you-go arrangement. “PPK is not about reducing tyre costs,” says Kevin Steward at ATS. “We know that some operators want consistency and predictability, and are prepared to pay a little bit extra for that.” This prompted ATS to introduce a PPK scheme last year as the premium offering in a new multi-choice menu of tyre management contracts called Fleet Plan, aimed at mid-sized regional truck operators. Although a Michelin subsidiary, ATS offers a wide range of other tyre brands too with Fleet Plan. When asked how much more one would pay for PPK instead of pay-as-you-go, Steward says there is no single answer. “It all depends on the degree of risk,” he replies, “and that varies with the individual operator and where we feel tyre prices may go.”
One side-effect of last year’s soaring tyre prices is that it has become far easier to justify so-called ‘tyre husbandry’ such as regrooving, twinning or turning tyres on the rim. “Service charges haven’t really gone up much, so service procedures represent better value for money.” says Richard O’Connell, director at retreader Bandvulc, which has a thriving tyre management contract arm.
New tyres alone account for 80-85 per cent of the total cost of a typical tyre management contract. So any tyre husbandry that cuts the number of new tyres fitted stands a good chance of being cost-effective. The acid test is whether the cost of saving each millimetre of tread depth is less than the cost of each millimetre of tread on a new tyre. For example, a typical retread super-single (385/65 R22.5) trailer tyre starts life with 17mm of tread and now costs about £200, so each millimetre costs £12. A good regroove, costing around £25, could add another four millimetres, so the per millimetre cost is around £6 and is clearly worth doing, even before you factor in the additional benefit that the last few millimetres of a tyre’s tread wear more slowly than the tyre’s average wear rate.
Although some operators have been reluctant to adopt regrooving, there is clear evidence that attitudes changing. Six years ago Michelin reported that only 31 per cent of the casings returned to its retreading plant in Stoke-on-Trent showed signs of having been regrooved. Now, that proportion is approaching 50%, but that still leaves plenty of untapped potential. “We are planning a big campaign for 2012, to raise awareness of regrooving,” says Michelin’s UK head of truck tyre marketing Martin Covington. The final hurdle still to be overcome is convincing more operators that it is safe to regroove steer-axle tyres. “We follow the policy set down by the operator,” says Simon Tattersall, head of national truck at ATS Euromaster, the Michelin-owned tyre service company, “but I think there is a growing awareness that it is perfectly acceptable to regroove steer tyres.” He reckons that the recession of 2008/9 and the soaring rise in tyre prices in 2011 have helped to persuade more operators of the benefits of tyre husbandry. But he reckons not everyone has got the message. “We still find plenty of cases where the asset is not being sweated,” says Tattersall, suggesting that across the industry as a whole it is still feasible to increase expenditure on husbandry in order to reduce the total tyre bill.
10 steps to cost-effective tyre management
- Focus on pence per kilometre, not the cost of tyres
- Tyre husbandry is preventative maintenance for tyres, like vehicle servicing - it is not an expensive luxury
- Copy how tyre companies manage their PPK and fixed-cost contracts; they are determined to squeeze every km out of tyres
- Knowledge is power: don’t skimp on fleet checks and make good use of tyre management reports
- Tyres - including steer tyres - are made to be regrooved so don’t throw away the opportunity if it is cost-effective in £/mm
- Consider if you have the ability to manage your tyres in-house – it is not rocket science
- Correct pressures are critical so ensure checks – and inflation – are not over-looked in routine vehicle servicing
- Sustainable cost savings come from smart tyre management, not from sharp negotiating with tyre management companies or service providers
- Switching management contractor in less than the lifetime of a tyre generally makes little sense, so aim for contract periods of at least two years
- Tyre technology, sizes and prices are in a continuous state of flux, so revisit and challenge established tyre policies
DIY not PPK
If you mention ‘tyre management contracts’ to Stuart Lobley his response is unhesitating. “Who needs them?” Lobley is fleet engineer at Heygates, a big Northamptonshire-based flour milling company, and is responsible for the maintenance of a fleet of around 65 trucks and 148 trailers. He manages their tyres almost entirely in-house.
“Why pay a tyre service company to fit a tyre or regroove one when we are perfectly capable of doing it ourselves?” reasons Lobley. Why indeed. The service charge to fit a tyre can be as much as £30; a regroove is around £25. Lobley sidesteps those charges by absorbing the tasks into the routine work of his workshop. Tyre checks are part of the regular vehicle safety inspections.
“You don’t need to make a huge investment in equipment,” continues Lobley. The most costly item is the compressor but workshops are likely to have one of those anyway. “It must be capable of around 130psi (9bar),” advises Phil Thirsk, technical training manager at Bridgestone. He lists the rest of the equipment needed: air-line and gauge, inflation safety cage, bead breakers, tyre levers, regrooving tool, valve key, fitting soap, etc. The total investment is under £2,000.
At Heygates, Lobley suspects that many workshops have lost the confidence or skills to fit tyres. “It is part of our apprentices’ training here, and they get used to doing it,” he explains. It is not difficult to find tyre-fitting training or refresher courses for vehicle technicians. For example, Michelin runs a range of courses of between one and five days at its training centre in Stoke-on-Trent, costing £190/day per person. Bridgestone’s Thirsk will provide a day’s refresher course at a fleet’s workshop for £120. Nuneaton-based training company Profit from Training Partnership runs a start-from-scratch truck tyre-fitting course that lasts three days and costs £285. That provides an accredited qualification, as do some of Michelin’s courses.
Lobley uses the Independent Tyre Distributors Network (ITDN) to handle any roadside tyre problems. This network of 500 independent tyre dealers has its own breakdown call-handling centre. Heygates current choice of new tyres is Giti’s GT radials. “We normally buy them in bulk, about a dozen of each size, to get a good price,” explains Lobley. “If you buy a good tyre at a good price and then look after themself, it’s got be cost-effective,” he concludes.
Most PPK and fixed-price contracts are written for periods of between one and three years. Five years ago, that did not seem particularly challenging, with a simple link to an inflation index such as RPI or CPI taking care of rate adjustments during the contract period. The last couple of years have shown the deep flaws in that system. RPI inflation turned negative in 2009 but new tyre prices continued to rise. Equally, last year’s RPI average of around 5% fell a long way short of the sharp rise in tyre prices. “General inflation has no relevance to tyre costs whatsoever,” admits Dave Alsop of Vaculug. “Even adding a factor for raw material prices doesn’t necessarily produce the right answer.” Raw materials like rubber, steel and carbon black make up 50 per cent of a tyre’s cost; the other 50 per cent is manufacturing, overheads and logistics.
The last couple of years of rising tyre prices has persuaded Michelin to change the pricing mechanism for its Michelin Fleet Solutions PPK contracts. It has gone from an annual RPI adjustment to a twice-yearly rate shift based on a combination of three indices - natural rubber, oil and RPI. Acknowledging that this means the rate is not nearly as ‘fixed’ as was once the case, Michelin Fleet Solutions director Paul Davey describes this approach as “transparent” and understood by Michelin’s big fleet customers.
ATS has chosen to use a capped system for the annual rate reviews of its new Fleet Plan PPK contracts. If tyre prices rise within a certain percentage, ATS absorbs the additional costs: only if the increase exceeds this price cap does ATS seek an increase on the PPK rate. The system works in reverse if prices fall. “We could not afford to fix prices completely,” explains Steward, “but we couldn’t simply pass on every price rise to the operator – that would not be a fixed-price contract. Capping is a way of sharing the pain of rising tyre prices and limits exposure to risk for the operator.”
Although the price review is annual, movement in tyre prices is one of the subjects raised in the quarterly contract review meetings ATS holds with its customers. “We want operators to be up to speed with the tyre market,” explains Tattersall. “There should be no nasty shocks at the annual rate review.”
Bandvulc’s favoured approach to pricing its long-term contracts is what it describes as “reconcilable.” The agreed monthly is adjustable in either direction according to the actual cost of running the contract. Contracts are reviewed regularly so that variance in spend is quickly spotted. Savings can be rolled over in the form of credits for the next year. “It means we are pulling in the same direction because it is in both parties’ interests to keep costs under control,” reasons Richard O’Connell.
O’Connell is dead set against any form of fixed-cost contract that leaves either party exposed to big risks. “Almost inevitably, one side wins and the other side loses,” he explains. “That is not a good basis for business relationships. Nobody should be trying to make a fast buck out of the other side.” Vaculug’s Alsop agrees, adding that if either side abuse their negotiating strength to make a killing on the contract it is almost certainly likely to be a short-lived victory. “We don’t want to use the termination clause,” he comments, mentioning the three-month notice period built into most Vaculug contracts.
There appears to be widespread agreement that PPK/fixed-costs agreements of around three years make sense to both sides because the effort and cost of setting up new contracts and exiting them is substantial. “When starting a contract we need to gather a huge amount of information so that we fully understand the operation and can draw up a condition report covering every tyre on the fleet,” says Tattersall at ATS. “There is a cost to change.” There is a risk too, for both parties. Dover-based haulier John Bywater Transport ended a 20-year-long tyre supply and servicing relationship with ATS Euromaster in late 2009. “It was on a pay-as-you-go basis,” says John Bywater, explaining that he felt that his traditional choice of Michelin tyres for his 45-strong truck fleet had become too expensive. “It’s playing the percentage game,” says Bywater. “How much more is it worth paying?” He switched to Goodyear tyres, supplied and serviced by an independent tyre company. “The service was good,” emphasises Bywater, “but the tyres didn’t live up to expectations.” Last year, after 16 months he came back to Michelin and ATS, having concluded that Michelin tyres justified their premium after all.
Tyres and fuel
Apart from specialised vehicles such as tippers and refuse collection vehicles, most trucks conform to a rule of thumb that says their annual fuel bill is about 13 times as big as their annual tyre cost, including trailer tyres in the case of artics.
The consequence of this ratio is plain: a substantial increase in tyre spend is worthwhile if it produces even a small improvement in fuel economy. For example, upping the annual tyre bill by 20% would be balanced by fleet-wide fuel economy improvement of 1.5%: anything above 1.5% generates a net saving.
In fact, most manufacturers suggest their low rolling-resistance tyres are capable of cutting fuel consumption by around 3% under the right conditions, generally reckoned to be where motorway running accounts for at least 80% of total distance.
These rough figures suggest that many operators would do well to at least investigate low rolling-resistance tyres, and be prepared to up their tyre spend accordingly.
Their investigations will become a little easier later this year when European rules on tyre labelling kick-in. As of 1 November, new truck tyres (17.5-inch and above in diameter, classified as ‘C3’ tyres in the legislation) must be classified into one of seven different classes according to their rolling resistance.
The classification is to be found in tyre technical literature, not necessarily on physical labels or sidewall markings.
Truck tyre costs surged upwards in 2011 due to a combination of strong global demand from booming new truck sales and rocketing natural rubber prices. The rubber price started rising in summer 2010 and peaked at an all-time high in February 2011. It then subsided because market confidence was eroded by the economic slowdown in Europe and the US and monetary turmoil in the Eurozone. Nevertheless, taking the year as a whole, the average rubber price in 2011 was one third higher than in 2010.
UK tyre prices were also driven up in 2011 by a lack of supply. Repeatedly we are told that tyres in the UK are too cheap and that they command better prices elsewhere in the world, particularly where economies are expanding. Unsurprisingly, that means the UK is some way down the supply priority list, leading to product shortages and rising prices. Supplies of super-single trailer tyres are especially tight because their casings are scarce.
Scarcity of casings pushes up their values too – premium super-single casings are fetching almost £50 now – so that means remoulds were substantially more expensive in 2011 too. But their price rises in £ were generally less than those of new tyres, partly because they use less rubber.
We also heard UK price hikes attributed to the weakness of the £ against the euro and the US dollar. In fact, this should not have been a factor in 2011. The £’s average value against the euro in 2011 was only 1% lower than in 2010 and 2% higher than in 2009. The £’s value against the US dollar was higher in 2011 than in either 2010 or 2009.
TSR 20 rubber price 2010-2011
View as table
Nobody we spoke in the tyre industry felt able to forecast with much confidence how truck tyre prices would shape up in 2012. However, the falling cost of natural rubber over the last nine months must surely soon filter through to tyre prices, slowing the rate of increases. Faltering economies and signs that the Chinese growth rate is slowing should ease supply pressures. With luck, the worst is now behind us and prices will soon stabilise, albeit at what feels like a high level compared with the past. But don’t hold your breath.
Armonic Freight International
Fleet size: 13 tractor and 18 trailers
"We currently manage our fleet tyres in house during vehicle inspections and replace tyres when needed. However, we are currently looking at a pay-as-you-go contract management tyre service from ATS. We would like to try this system to see for ourselves if it is more cost effective."
Marc Payne, MD Plymouth-based Armoric Freight International
Fleet Size: 170 vehicles
"With a large fleet we find that it is far better and more cost effective to have a full service contract for tyre management. We currently use Bandvulc to manage our tyre requirements and this works fine. We most certainly would not be interested in the idea of regrooving steer-axle tyres at all."
Phil Horne, workshop manager Bale Group