Fleet Takes Vehicles to the Limit With Replacement Policy
Replacement policies have been the subject of much discussion and study in the fleet industry. The problem of when to end the fleet life of a vehicle has been dissected by Ph.D's and computer experts, fleet administrators and leasing companies for years. The general trend today seems to be somewhere between two and a half to three years and 50,000 and 60,000 miles.
Using that cycle as a benchmark, there are factions that believe cycling the vehicle sooner enhances resale value while those pushing past the limit it contend that overall operating costs do not increase dramatically and on a per mile basis actually decrease as the odometer turns toward the 100,000 mark.
One of the proponents of the latter theory is John Peterson, fleet manager for Weyerhaeuser Corporation. He traces the beginning of his conversion to the high mileage theory back to the 1974 recession which followed on the heels of the Arab Oil Embargo of '73.
"It was 1974 when business was so bad that upper management came to me and asked if we could cut down on our capital expenditures," he explained. Management was asking if Peterson could find some way to save about $1 million over the next year. Peterson's response was that they could save that much money if they would hang on to their fleet cars longer. "I said if it is a temporary thing, I don't have any objection and I felt it would work out all right. At that time, we were replacing at the 55,000 mile interval. That's what I had learned when I was in the leasing business and that's what we told our clients - you couldn't go past that interval.
"Well, after we got in this thing (extending the cycle), we raised the limit from 55,000 to 75,000 miles," he said. "It turned out that we saved about $2 million that particular year." Peterson said he thought that management wasn't really saving money, just postponing the day when the company would have to spend the money "saved" for the new vehicles.
"It then entered my mind that I was going to have to go to senior management and prove to them that they were wrong." Peterson said. "So I sat down with my computer programmer and we programmed a special cost analysis which broke down the total operating cost and depreciation in intervals of 25,000 to 50,000, 50,000 to 60,000, 60 to 70, 70 to 80, 80 to 100 and over 100,000 miles so I could have these categories charted out. Then I would go to senior management and say 'see, you made a mistake.' Well, when I got all through with it, I found out that I was wrong and they were right. At 75,000 miles our operating cost was not what I thought it would be, and it actually began to flatten out at 70,000 miles. From 70,000 to 100,000, my cost per mile is practically flat."
The accompanying charts show what Peterson found. The comparison shows 1978 figures (broken line) charted against 1979 costs (solid line). "One year (1979) is higher than the year before, but it still flattens out between 70,000 and 1000,000 miles" in the mechanical costs. At first, he wasn't inclined to believe his own figures. "I thought I had made a mistake in my figures," he said, "and then I got some figures from General Motors." Those figures, as mapped in the second chart, were obtained from the operation of 3,613 vehicles over 109,406,946 miles.
"If you look at it," Peterson said of GM's figures, "it shows that between 70,000 and 100,000 miles things begin to flatten out. It isn't identical to mine, but similar. A representative from General Motors flew out and sat in my office and we compared notes - he looked at my chart and I looked at his chart. Between the two of us, we couldn't figure out why, but we had to admit that this (the flattening of maintenance costs) was what was happening.
"As a result, we have been on a 75,000 to 100,000 mile replacement policy ever since 1974-75," he said. "We've never left that policy."
Peterson feels tire technology and the fact that Detroit is building a better car may have something to do with this trend. "Between the General Motors Engineering Department and myself, what we think the reason for the flattening point between 70,000 and 100,000 miles is the advent of radial tire technology. You're probably buying tires at about the 70,000-mile mark, so from there on you don't have any tire costs. You've already hit it. I tell you they build these cars well, they're just better cars."
At first some drivers were not too receptive of the new policy. "They objected in the first year, which could be expected," Peterson explained. "But then, of course, I could handle that because I just said 'hey, top management says we don't have the money, we've got to slow down. If you don't like it, get another job.' And that took care of that. Now, the drivers are adjusted to the policy. They know it is company policy and that's the way it is. I have at the present time about 50 cars that have over 100,000 miles and I can't get the drivers out of them. The reason for that is these cars are a little larger than the car that is going to be used as a replacement."
As a result, some of the drivers are hanging on to their larger cars past the 100,000-mile mark. "I've got some drivers coming out of their cars after four years," Peterson said, and even some vehicles in use for a shorter period of time have accumulated mileage well over the 100,000 miles. 'I just recently sold an Oldsmobile station wagon, diesel-equipped, with 172,000 miles on it and it was two years old. That was a courier car and I was able to sell it. I had another one with 160,000 on it which I ran as an experiment to see how far it could go. I thought I could get 200,000 out of it, but it began to look marginal so I decided to sell it. That high mileage application of 7,000 to 10,000 miles per month is ideal for a diesel."
The success of the program to date means that Peterson is planning no changes in policy. "We're not changing," he said, "we've been on this thing longer than a lot of people." He added that the additional depreciation isn't a factor and that they've managed to sell these high mileage units when they've come out of service.
"The information indicates our dollar cost per month, our total depreciation cost and our cost per month depreciation is less on 100,000 miles than it is on 50,000 miles because there's more months" to divide the total cost into. "We have also found that we can sell those cars. We didn't think we could. My first reaction was, back in ΄74 when we had to do this, was that I was going to be in trouble when I had to sell the cars. How was I going to get rid of anything with over 50,000 miles on it? Everybody told me you couldn't sell a car with over 50,000 miles but that's not true.
"I think that thought is getting less and less implanted today," he continued. "It is still probably a fact of life that in the state of California we find more difficulty in selling high mileage cars than any other state. But in the other states, it doesn't bother them too much. Obviously I can't get as much (on resale) but the per month cost (per vehicle) is less. So if my operating cost is less and my monthly cost is less, that's the whole game.
Your initial capitalized cost is always the same, basically, and your high depreciation is always on the front end so you have to take advantage of this thing all the way, and run the car as far as you can."
Peterson said his initial reaction would be that operating costs were always going to be rising throughout the life of the vehicle and that the constant upward rate of operating costs would defeat any savings from spreading out the depreciation over a longer service life. "But it doesn't do it, the costs flatten out."
When asked if in that 50,000 to 100,000 mile range he had problems with major components such as transmissions, Peterson replied, "We haven't had an excessive amount of transmission problems. I think that you hear people tell you that they don't build cars like they used to. They don't. They're building them better - they really are. They will go 100,000 miles." But fleets are not driving them 1000,000 miles, he added. "People will buy a 50,000-mile (fleet) car and are putting another 50 on it."
Maintenance has a large part in preventing failure of major components, Peterson said. "We get our drivers to change the transmission fluid at 50,000 miles. We tell the driver to bring the car around and we service it. We lose some, but not many of the units we go through. We've got 3,500 units, both cars and trucks and we don't lose many.
"I am at the present time totally sold on what we are doing," Peterson said. "I set out to prove the policy was wrong and the computer proved that I was wrong. Think about it."