Using Life Cycle Cost Analysis
This is post two in our series on fleet replacement cycles. Our last post, Calculate Your Fleet Replacement Cycle, gave you a general overview of different replacement cycles available to fleets, why it’s important to have one and to know your estimated lowest TCO (total cost of operating) before you purchase. It also explained that we recommend using the life cycle cost analysis to determine your TCO and setting up a guideline for your fleet replacement cycle. Now you’ll notice I said guideline, because as a fleet management company we believe coupling that guideline with a proper predictive and preventive maintenance program is key to lowering your TCO even further.
Now, most of the large corporate fleet management companies will give you a cookie cutter proposal that will save you hundreds of thousands of dollars a year. (Of course when they don’t, you’ll fire them and go with the other one, because they’ll definitely save you hundreds thousands of dollars a year). The problem with this is, fleets are complex, and there are varying aspects to all fleets, and all fleets have varying aspects. So in other words, no two fleets are the same, and most fleets have varying equipment within them.
One thing we hear quite often, “Isn’t it cheaper if we handle things ourselves?” While it’s true, there can be some cost savings when acquiring vehicles through a fleet management company (If those savings are passed on), generally, if you know what you’re doing, then yes, it is cheaper to handle things yourself. Why wouldn’t it be?
Now that flies in the face of everything you’ve been told. The mighty fleet management company, will save the fleet world one customer at a time. Seriously though, fleet management companies are trained and experienced to handle your needs and will save you money in the long run. If you don’t have the know how, or administrative support to manage your fleet in house, then you’re likely leaving money on the table.
Cookie Cutter Fleet Replacement Cycles
Fleet management companies love short replacement cycles, because it’s easier to predict costs and requires less administrative work. Everyone knows the cost of maintenance increases with usage and age. One of my favorite graphs that they will use in proposals, is the maintenance and repair graph for a ten year period (keep in mind, they don’t usually show mileage driven). Over the first five years, you’ll see a gradual increase in maintenance and repair costs, then the graph will start to climb steadily, usually increasing 2.5 to 3 times what the 5 year total was. So if maintenance at 5 years was $5000 annually, it increases to $12,500 to $15,000 by year 10. Again, because fleets differ in usage, and mileage, I won’t argue this point too much. Costs do increase dramatically over 10 years. The one thing I will point out is that, following that logic, maintenance costs would be somewhere in the $31,000 to $37,500 annually range for a 20 year old vehicle. I’ll give you a moment to ponder that figure before we move on.
Look, fleet management is a like a shell game. The long and the short of it is, you basically want to get rid of fleet assets before they start costing you big money. It’s partly about judgment, analytics, prediction, forecasts, making assumptions and the amount of risk you’re willing to take. The less risk you want to take on, the higher your TCO will be. The more risk you take on, means you should be able to lower your TCO if done right. Accurately collecting and analyzing data is key. In the paragraphs below, we’ll examine the cost categories more closely and give some tips for small fleet operators that can lower their TCO.
The Vehicles Themselves
On average, a light vehicle will last approximately 13 years and 150,000 miles before it’s taken out of service and scrapped. Now those numbers include vehicles written off in accidents. Every year manufactures are making vehicles that last longer and are more durable. A well maintained vehicle can last 200,000 miles or more.
Some vehicles historically will last longer because they are more durable and reliable. If your replacement cycle is set in stone, then these vehicles may be taken out of service too early, or visa versa, less reliable models will be left in service too long increasing you TCO. Because more reliable vehicles will have a different lowest TCO point, it therefore makes sense that not all vehicles should be replaced on the same cycle. This is why we recommend using the life cycle cost analysis as your guide, to your fleet replacement cycle strategy, coupled with proper predictive maintenance to identify vehicles that need to be removed from service before it’s too late.
Before any vehicle is purchased, the most important thing to do is to make sure it’s spec’d properly, with input from individual departments that is ideally verified through an audit. Also right sizing vehicles for the job, so as an example, don’t purchase a big bore diesel engine for a sales rep to run sales calls with. A bit extreme, but you get the point. Running a life cycle analysis to come up with your recommended replacement cycle is an important step in spec’ing your vehicles. A properly spec’d vehicle will help you lower your TCO over the long term, both buy cutting costs, and by extending the vehicle life expectancy. Fuel mileage is another important TCO factor here. Also, if the vehicle can be used in a secondary role later in its life. Perhaps it’s in a demanding, high mileage role, can it be moved to a less demanding role later in life?
Depreciation
As everyone knows, new cars depreciate in value quickly. Depreciation can be divide into two basic parts, utility and prestige value. The Utility value is based entirely on the vehicles mileage. A vehicle loses value for every mile driven. The 2nd component to depreciation is new vehicle prestige, which is exactly that. New vehicle prestige drops dramatically once that vehicle is driven off the lot and continues to do so over the first six years of life. In contrary, over the final 6 years of life, it will only depreciate 20%, whereas the first six years will see the vehicle depreciate around 70%. Typically a new vehicle will depreciate a whopping 37% in the first two years. That brings us to one of our first tips for small business owners, try to purchase a vehicle that’s 2 to 3 years old. Because the first two years of owning a new vehicle has a high TCO thanks to the high depreciation. One of the disadvantages of this approach, is that you lose the ability to properly spec. the vehicle.
Cost of Money
The cost of money is exactly that. The interest cost of borrowing the money to purchase the vehicle. If cash is used to make the purchase, then the interest your business would have earned, if it was invested in a risk free security. Yes, that’s right. Paying cash has a cost as well. Cash can be used to make investments that generate income. If you spend it up front, you lose that income potential. Remember, fleet’s depreciate in value, they generate income yes, but in reality they are a cost of doing business and should be treat as such.
Insurance
Insurance is a relatively fixed cost. Spec’ing you vehicle with safety advances may help lower these costs.
Fuel
Is a major variable operating expense. Anything fleets can do to help reduce fuel consumption and increase efficiency will help lower their TCO. This can be accomplished when it’s time to spec the units, and determining fleet right sizing. Advancements in fuel efficiency should factor into the decision making plans for fleet replacement cycles. Technological advancements have made it possible to increase HP while maintaining or increasing fuel efficiency. Assuming a unit travels 15,000 miles annually at $3.75 a gallon for fuel, a 3 MPG increase in fuel economy can mean a savings of $600 to $700 a year. If you had a thousand vehicles in your fleet, that would equate to $700,000 in savings a year. Lets not forget, cost savings are profits. For every $1 saved through cost savings, goes directly to your bottom line. That can’t be said for every $1 your business earns. There are many expenses that have to come out of that dollar.
Maintenance & Repair
Maintenance and Repair costs can be somewhat offset by properly spec’ing a vehicle. Spend a little more upfront, to save more over the life of the vehicle. Vehicle condition is the most significant factor in an older vehicles resale value. Proper predictive and preventive maintenance is critical to maximizing a vehicles longevity. This longevity is where you can see additional savings and lower you TCO. Major components such as the engine and transmission will tend to fail on light duty vehicles between the 150,000 to 200,000 mile windows. One tip that is useful, is to spec vehicles that are historically dependable as they will historically last longer which will return a better ROI. Maintenance and repair costs will have a wide variance between different makes and models.
Other Consideration
- Technological and Safety advancements are two key points to consider when considering fleet replacement cycles. Technology improvements, can reduce fuel economy, improve emissions and reduce maintenance requirements. Safety advancements can help better protect drivers, avoid collisions and possibly lower insurance premiums.
- With increased maintenance, comes increased down time. This must factor into your replacement cycle. If vehicles are not producing, it’s costing business income. Productivity can be lost waiting for breakdown repairs, dropping off and picking up vehicles for service, administrative time for arranging repairs and replacement vehicles, rental fees and towing charges.
- Technician availability is another factor. As vehicles age, they will require more man hours in repairs, which can put pressure on already stretched repair facilities.
- Market rates for fleet vehicles change based on the season, and supply and demand. Also manufacturer and government incentives should be considered into the fleet replacement decisions.
- Vanity factor and the impact on company image.
- Employee morale in a tight labor market can also be a deciding factor.
In closing
The Total Cost of Ownership curve of your fleet will gradually flatten as the fleet ages. Once depreciation flat lines, the longer you can keep maintenance and repairs in check, the lower your TCO will be. If plausible, purchasing fleet vehicles at two years old would go a long way in reducing a small fleets TCO making it more cost competitive with major fleets. One disadvantage, is this can negate savings from properly spec’ing vehicles for long term cost savings and longevity. We’ve found for some models, we’ve reached our lowest TCO at 17 years. Although, there’s been little change for those units over the last 7 or 8 years. For our light duty fleets, 9 to 11 years is generally the lowest TCO, but there are very minimal declines after year 9. Re-manufacturing a vehicle can also help to lower your TCO to limits that weren’t even thought possible extending the life of your vehicle, almost doubling it in some cases. But all of this has to be factored against the benefits of new updated vehicles.
Try to factor into your decisions historical unit reliability, and develop a fleet replacement cycle. Once vehicles hit that target, annual physical assessment reports should be completed and reviewed. Proper predictive and preventive maintenance should be followed, and analysed. Older and/or high mileage vehicles should be re-assigned to less intensive uses if possible. And underutilized fleet units should have an assessment done to see if rentals or outsourcing would be a more cost effective way to perform the tasks.
There’s no one size fits all in managing a fleet, it’s complex and requires proper life cycle cost analyzing of accurate data to achieve the lowest TCO. During the procurement process, it must be understood, that the vehicle with the lowest purchase price may not provide the lowest TCO.
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.