The Dangers of Extending Replacement Cycles
May 12, 2009
By Mike Antich
In a recessionary economy, senior management demands expense reductions and limits capital expenditures. Since fleet operations are usually among the top 10 contributors to corporate capital expenditures, there is pressure to defer vehicle replacements. However, there are dangers to arbitrarily extending fleet vehicle replacement parameters. These policy changes could actually prove to be counterproductive to the intended goal.
Vehicle replacement policy is one of the most critical aspects of fleet management. Nearly all fleet-related expenses, both fixed and operating, are influenced by when a vehicle is replaced. The best fleet replacement cycle is when vehicles are replaced at a point in time when the combination of holding and operating costs per mile are at their lowest. It is important to keep in mind that we're not talking about absolute costs, but the ratio of cost to use as expressed in cost per mile. Historically, for most fleet cars this has been either around 65,000 miles or after 36 months in service. The average fleet replacement policy for light-duty trucks ranges from approximately 48-51 months and 75,000-100,000 miles.
Cyclicality of Operating Expenses
Over the life of a vehicle, operating expenses, if graphed out, have the appearance of an upward-slanted sine wave. For the first 35,000-45,000 miles, operating costs are generally limited to preventive maintenance, such as oil changes, wheel alignments, tire rotation, etc. Operating expenses spike upward when wear items, such as tires and brakes, need to be replaced. These operating expense events are predictable and usually occur between 30,000-45,000 miles. Upon replacing these wear items, operating costs decline, but not back to the previous level. This upward "ratchet" effect continues throughout the life of a vehicle. Operating expenses remain at this new level until the second round of tires and brakes are needed, which occurs in the 60,000-80,000 mile range. Of course, actual maintenance and repair expenses are not quite so cooperative and sometimes fall outside these predictable increments as tires go flat, hoses breach, belts fray, or windshields need replacement as a result of flying road debris. The key point is that maintenance expenses are cyclical. By extending replacement beyond 65,000 miles runs the risk of incurring additional expenses such as a new set of tires and brake replacements.
Even when a vehicle strictly adheres to the fleet PM schedule, the normal wear and tear on the drivetrain and engine causes fuel economy to degrade below the level when the vehicle was newer. As vehicles accumulate mileage, drivetrain efficiency declines, affecting gas mileage. This was especially relevant when gasoline was selling for more than $4 per gallon. In addition, the potential of increased overall fleet fuel efficiency with higher-mpg models is not possible if replacement is postponed.
Triggering Additional Hard and Soft Costs
One consequence to extending replacement parameters is the impact on OEM incentive dollars, especially if they are tied to tiered volume purchasing. Extending replacement parameters could decrease purchase volume to a lower tiered incentive rate.
By extending replacement parameters, you reduce average resale value. Although there is less of a stigma to purchase used vehicles with 80,000-plus miles on the odometer, retail buyers pay more for a used-vehicle with 65,000 miles than they will for a vehicle with 85,000 miles. Plus, most likely, the vehicle will be another model-year older, further decreasing resale value. Another remarketing consequence is that employees will be less likely to purchase out-of-service company vehicles with higher mileage and deteriorated interior and exterior conditions.
Employee safety risks increase due to vehicle breakdowns and parts failures when operating higher-mileage vehicles. There is also the higher probability of an expensive catastrophic failure, which could put the driver in a dangerous highway situation.
An extended replacement cycle also incurs soft costs. The older the vehicle, the greater the probability its overall condition will deteriorate. The potential increases for diminished driver productivity as the probability of downtime escalates with more unscheduled maintenance requirements. With the average fleet car driven more than 2,000 miles per month, there will be wear and tear to the driver's seat, carpeting, and cabin odor, affecting driver comfort. At 65,000-plus miles, a vehicle has experienced its fair share of dings, dents, scratches, and other minor damage. This cosmetic damage is not cost-efficient to repair and reflects poorly upon the company's image. Also, driver morale sags if they know they must drive their vehicles another year or more.
A Counterproductive Strategy
In the final analysis, fleet replacement parameters vary by fleet application. Proper expense tracking, operating expense management, knowledge of new vehicle/equipment availability, and the used-vehicle market is necessary to determine proper cycling for company vehicles. Simply postponing vehicle replacement does not reduce net costs and most likely increases them, while adversely affecting driver productivity.
Let me know what you think.
Author: Mike Antich | Posted @ Tuesday, May 12, 2009 9:59 AM