Depreciation is the largest fleet cost. In fact, when cumulative maintenance cost (parts and labor) equal the original purchase price (no interest included), that is the threshold, the watershed moment, when a truck’s wheels will economically “fall off.”
This moment is completely predictable and consistent. And, interestingly this predictability has been with us since the earliest days of the automotive industry, a general benchmark that states when the cumulative maintenance cost (parts and labor) is equal to the original purchase price of the truck, that’s the moment that’s predicted when the wheels are going to economically fall off.
For our purposes, we’ll use a benchmark of $18,500 of accumulated maintenance as the moment when the wheels are going to economically fall off.
The accompanying chart, “$18,500 Light-Duty Truck,” illustrates the predictability of the process, showing that in year eight the wheels will economically “fall off.”
Since it’s a predictable value, it makes sense to replace the truck sometime in year seven — just before the wheels fall off (forget resale value in this scenario).
Also, note that in operating year five, six, and seven, the truck is cheaper to operate than in years one through four. The reason: There’s no depreciation cost.
Now, the key to maximizing operational life is to stretch out years five through seven with good regular maintenance, and configure the vehicle to do its work within its capability or spec. In year eight, the wheels will economically fall off.
Timing Is Everything
When should the clock be started to begin measuring the accumulation of time toward the choice to proactively repair, replace, rebuild, sell (resale), scrap (liability), or remove instead of replacing a vehicle? I believe the measurement should begin when the maintenance cost for the previous 12 months is 30 percent of the vehicle’s residual value (year six in the chart).
At that time, the fleet is already in the next year (year seven) and 49 percent of the residual value, because next year (year eight in this example) the wheels will economically fall off. Maintenance will be 228 percent of the vehicle’s residual value. Also, the 228 percent additional maintenance costs will have other consequences, namely the headaches associated with a less reliable vehicle.
As the chart “$70,000 Vocational Chassis + Equipment” illustrates, the same process can be used no matter the equipment type. The only difference is the timing of the 30 percent tipping point, which occurs at the seven year mark.
So, to be proactive, for either capital or operating funding, use 30-percent of the residual value (maintenance costs instead of resale costs) as the optimal time to decide whether to continue to repair, rebuild, replace, sell, or scrap the vehicle in question.
Interestingly, there is a 30-percent maintenance cost over the residual value. Conveniently, the cumulative maintenance cost at the same point (year six) is 30 percent of the original purchase price. The 30-percent benchmark is ideal because it usually gives the fleet a year or two at least to plan for replacement. The numbers take the emotion out of the equation. It’s a black and white equation.
There’s a caveat to this. Anytime within the first six years the truck is in an accident and it takes more than 50 percent of its residual value, an analysis should be done to see if it’s worth fixing. In most cases, it won’t be worth fixing.
A Predictable Process
The truck lifecycle process is predictable and cost-effective. It is the fleet manager’s responsibility to fund the repairs, replacements, and rebuild actions, with the appropriate funding, a year ahead for the next capital or operating budget.
Now, the choice to rebuild makes sense if the fleet can safely spend ½ the cost of the new replacement vehicle and get ⅔ to ¾ the life of a new vehicle. The key to making this another cost-effective alternative as long as the vocational vehicle is configured correctly by the manufacturer to do the job it is supposed to do.
For the $18,500 unit example, a new replacement is $24,000. If the fleet can afford to spend $12,000 to rebuild the unit instead of replacing it after seven years, and get an additional five years of life from it, then this option is a cost-effective alternative to consider.
Originally posted on Work Truck Online