Your Fleet Replacement Cycle
Knowing how to calculate your fleet replacement cycle is critical to maintaining low costs for your business. It’s no secret that the cost of maintaining vehicles rises with age and usage. The trick is knowing when the optimal time to replace those vehicles that will achieve your company’s lowest total cost of ownership (TCO). It is both an art and science. It will involve judgment, prediction, forecasts, and assumptions, and most importantly, analysis of available data by your fleet management company.
There’s plenty of factors that need to be taken into account and are typically divided into two categories. The first are ownership costs tied to the cost of the vehicles purchase. They are typically fixed costs, such as Depreciation, Costs of Money, Capital Costs and insurance. The second category of costs to be factored, are operating costs. These costs are tied to the ongoing expenses of driving the vehicles, such as, preventive maintenance, repairs, tires, fuel, costs of downtime, administrative costs and mileage depreciation.
This is all data that is tracked when you’re utilizing our fleet management services.
Fleet Replacement Cycles Depend on Accurate Data
We often get asked why a fleet would use a fleet management company. Don’t they have their own fleet manager, why do they need you? There’s a big difference between managing a fleet re-actively, and managing a fleet proactively. On the surface it’s a fair question, but it is ironic, because this question comes up a lot during conversations, after we’ve been invited to consult, and we’ve been asked to consult for a reason. In a matter of fact, in our experiences, many companies do not have a strong sense of their fleet TCO and are actually biased when evaluating fleet options. Cost per mile is a standard fleet management cost metric, and many companies do not know it, and could not produce this basic bench marking metric. Others have simply been working on the, they know best policy, or the, we’ve always done it this way policy. We usually ask early on, what a company feels its maintenance cost efficiency is based on a scale of one to ten. The reply usually comes back 8 to 10. There are typically 3 areas of issue we find when called in to consult for fleets, a lack of awareness, biases, and inability to accurately benchmark costs.
You have to know how to compare, and cost per mile is the bench mark you use. It’s not easy, cost per mile varies for different companies, industries, vehicle types and regions. It’s important to have your own accurate data, and to compare it to identical fleet types.
Replacement cycles
When deciding on a replacement cycle, there are basically 3 to choose from.
Replacing fleet vehicles at established Intervals
- This method is exactly as it sounds. Vehicles are replaced at prescribed intervals based on mileage or hours. Although simple to execute, it is not the most efficient method and can be influenced by biases. Some vehicles are more reliable than others, and this could cause them to be pulled from service early. On the opposite end of the spectrum, less reliable vehicles could be kept in service to long, experiencing major repairs.
Replace when repairs exceed the vehicles value (Otherwise known as drive it till it dies)
- Typically this occurs when vehicles are kept in operation until the cost to repair them exceeds the vehicles value. Likely after a major component fails, such as a transmission or engine. Again, not the most cost efficient approach, as an inoperable vehicle is only worth scrap value then. We’ve found many companies falling into this trap unintentionally, and we’ve all heard the outcome. We lost the engine so we changed it, because a truck not running isn’t worth anything. Now we need to recoup some of that cost and extend the replacement cycle. Oops, now it needs a transmission. We just replaced the engine, so we have to replace the transmission. We can’t be out all that money for the engine. Uh oh, now we need two thousand dollars in suspension work and the rear end is making a weird noise.
Life cycle costing
- Life cycle costing is the method of determining your fleet replacement cycle using the lowest total cost of ownership. Now it’s really a window of opportunity, rather than a definitive moment. Each year fleet vehicles depreciate in value, and the costs of maintenance go up. Where these two lines intersect on a graph, or your costs of ownership and operating costs are at their minimum, would be your lowest total cost of ownership. Life cycle costing is very important to develop replacement cycle guidelines before vehicles are put into service. 2nd, It can be used to determine if existing fleet units should be retired or kept in service. 3rd, It can be used to determine if re-manufacturing a vehicle makes economic sense.
Other deciding factors
There are other deciding factors that need to be considered when deciding on fleet replacement cycle. Some of which are:
- Tax benefits
- Maintenance Predictability
- Fuel economy
- Safety advances
- Driver comfort and aesthetics
In Closing
Life cycle costing is our preferred method for determining a fleet replacement cycle for fleet vehicles before purchase, coupled with a predictive/preventive maintenance program and monitoring to extend the replacement cycle, which continues to lower the TCO. The better your preventive maintenance program, the more reliable the asset will be for a longer period of time, enabling you to extend your replacement cycle. We’ll delve into more on these cost categories in the coming weeks.
If your company requires fleet management services, contact Glen Ridge Fleet today. We offer a Total Fleet Management Program to help you and your company with the ongoing management and optimization of your fleet. Contact us for more information on how your company can benefit from outsourcing your fleet management needs.