Equipment Utilization – What is it and why is it important?

Many opinions on equipment utilization – What does the utilization number represent?

Everyone agrees that equipment utilization is a Key Performance Indicator (KPI). Fleets prioritize utilization differently on the list of KPIs, but generally keep it near the top five analysis priorities. High utilization is a great indicator of a high revenue, low cost per mile, and a healthy bottom line.

However, even fleets that understand the importance of the utilization number eventually wonder “What does the utilization percentage number actually represent?”

Fleet Utilization Trend for 10 days

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The premise appears simple – vehicles are utilized by moving and pulling a load, and vehicles are not utilized while sitting idle in the yard – but does everything fit cleanly into those two categories?

In this post, we will discuss utilization based on miles, in terms of miles driven per day. In another post we will discuss utilization based on hours and revenue.

We find that a majority of fleets measure utilization based on miles. For example, your fleet may set a goal of 3000 weekly miles as a 100 percent utilization threshold.  Meeting or exceeding that goal counts as 100 percent utilization, and anything below your goal is calculated as a proportionate percentage of your goal, all the way down to zero miles, or zero percent utilization.

So far, so good, and very simple. However, there are varying approaches to how to count miles. Some fleets consider it adequate to calculate utilization based on all miles. If the truck is moving, then dispatchers cannot use it elsewhere. The truck is utilized.

Weekly Utilization Trend for a vehicle

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Other fleets prefer to discount empty miles from the calculation – if there is no revenue generated per mile, then the truck is not utilized. Empty miles can skew utilization metrics. For example, you may send a Milwaukee-based truck to pick up a load in Chicago, ninety miles away, then take the load to Grand Rapids, bring another load back to Chicago, and then send the truck home, to Milwaukee. The truck has a 580 mile day with 400 revenue miles. If the utilization percentage is based on all miles, with a goal of 600 daily miles as 100 percent, then the truck is utilized 96 percent. That looks great, but is potentially misleading. If the empty miles are discounted, this truck is utilized only 66 percent. Big difference! Of course, if the rate per mile is high enough, then a fleet can make a case for counting empty miles.

Larger fleets profit from further refinement of utilization calculations, and may introduce weighted categories into the equation. For example, one fleet’s utilization calculation might  count only 50 percent of the stem miles, but 75 percent of the deadhead miles that occur between two loads. Another fleet may count 100 percent of miles for headhauls, but only 95 percent of miles for the backhauls.

Fleets can also count the revenue per mile as a weighted factor in the utilization calculation. For example, the miles on a fronthaul at $2.49 per mile would account for a higher utilization percentage than the same miles on the way back at $1.99 per mile.

Daily Utilization by Hour for Five Units

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So, which is the best way? That depends on a few factors. If your fleet does not use a dispatching software able to connect to on-board devices, your only option may be a simple ‘all miles in’ approach. If you run a dispatch software as a part of your transportation management system but lack personnel and time to interpret sophisticated weighted parameters, you may benefit most from the revenue miles utilization schema. Arguably, you could achieve the most accurate results with the comprehensive approach that uses weighted parameters.

Increasing the relative precision of a utilization calculation has a trade-off. As you introduce more factors into the calculation of a number, that number becomes harder to understand. When the calculations are too obscure, the information itself may become less actionable. What do you actually need to fix if you see a problem?

We would like to hear your opinion. What is utilization to you? What method do you use, and why? If you are a LoadTrek Software customer, what methodology would you like us to use as a default?

Please leave a comment on this post! We will read the comments and consider your suggestions for our next software release.

Originally posted on LoadTrek’s blog.
Written by: Egor Korneev
Edited by: Dushan Yovovich

Is It Too Early to Think About 2017 in the Oil Patch?

2016 is only two weeks old, but it sure does feel longer than that. In just two weeks, oil is down 18%, oil service stocks have lost 14%, and shares of E&P companies are down 17%. It is widely expected that 2016 will be a year of rebalancing, which will be unpleasant.

Today, we are trying to look beyond the 2016 carnage in front of our noses and imagine the O&G world of 2017. Regular Oilpro readers know that our house view is everything bottoms in 2016. This doesn’t necessarily mean growth comes roaring back in 2017, but it does mean that contraction fades into stability.

2017 may seem an eternity away, but a blurry shape is starting to form, and some baseline expectations have been set. So without further ado, here are some early high-level thoughts on what 2017 may look like in O&G:

  • Sharp Oil Production Declines. There is no defined consensus, but most observers (ourselves included) share the view that global oil production will be contracting meaningfully by 2017, particularly in the US. Even with OPEC going full tilt and shale more resilient than expected, low oil prices will take their toll. The massive global spending reduction of approximately 45% from 2014 levels + time = production curtailment. The question is: will it be enough to consume the glut?
  • Oil Demand Should Be Higher. Consensus expectations are for an increase in global oil demand of 1.2mmbpd by early 2017. Chinese growth concerns and spreading macro economic concerns are potential flies in the ointment, but we still expect more oil will be burned in 2017 than in 2016.
  • NAM Capex Bounce? We evaluated Wall Street consensus expectations for a group of 59 independent E&Ps. After falling 48% in 2015 and another 26% fall forecast in 2016, the market is looking for a spending rebound of 16% in 2017. This seems a bit on the high side of likely, but if oil fundamentals improve, companies may be willing to spend a bit more next year to fend off production declines.
  • Less Oilfield Competition. A wave of bankruptcies, distressed sales, equipment attrition, and rig scrapping will occur over the next 12-24 months. This means the oilfield service landscape will look very very different in 2017. Fewer companies and less equipment chasing work could enable a pricing / margin rally in 2017 for oilfield service even with no incremental drilling. In other words, an activity-less recovery may be in the cards.
  • Jobs Growth Possible. Because of the massive cash burn the industry is going through this year, lay-offs will likely overshoot to the downside. By 2017, companies should be dipping their toes in the job market again, selectively hiring out of the pool of skilled, sidelined workers. Companies will be motivated to nibble in the jobs market even ahead of a big activity recovery because i) stability will foster recovery predictions, ii) they will realize the loss of skilled workers has adversely impacted operations, and iii) they’ll want to hire the best available talent before their peers do.
  • E&P Focuses On Short Cycle, Lower Cost Projects. The industry is rethinking its approach to field development. By 2017, new protocols will be in place to evaluate final investment decisions. The industry’s appetite for long lead time and cost intensive developments will be a fraction of prior levels in 2017. As a result, offshore investment allocations could increasingly move towards onshore projects.
  • WTI Oil Price Expectations. We don’t maintain an in-house oil price forecast, but we monitor the consensus view. The median forecast for the 38 analysts polled by Bloomberg is $60/barrel in 2017 vs. $50 in 2016 and the current spot price of $30.60. Downgrades lie ahead as the consensus view needs to catch up to the recent sell-off. The futures price for 2017 delivery is currently $41/barrel (market in contango).
  • HHUB Nat Gas Price Expectations. We don’t maintain an in-house gas price forecast, but we monitor the consensus view. The median forecast for the 23 analysts polled by Bloomberg is $3.25/mmbtu in 2017 vs. $2.85 in 2016 and the current spot price of $2.28. The futures price for 2017 delivery is currently $2.77/mmbtu (market in contango).

While it’s still early to completely give up on 2016, it is looking like this may be a lost year for our industry. By 2017, further downside will be limited, but how much upside can be reasonably assumed for 2017? Answering this question is more an exercise in imagination than fundamental analysis as we remain adrift in uncharted waters.

Joseph Triepke, Oilpro Managing Director