Typically, assets with higher capitalized costs will be kept in service for longer lifecycles, especially if those units are upfitted with expensive auxiliary equipment. In a difficult economy, senior management will demand expense reductions and limit capital expenditures, especially when expensive replacements are required. Since fleet operations is usually among the top 10 contributors to corporate capital expenditures, there is often pressure to defer asset replacements.
However, arbitrarily extending fleet vehicle replacement parameters is often counterproductive to the intended goal. For instance, nearly all fleet-related expenses, both fixed and operating, are influenced by when a vehicle is replaced. Also, extending vehicle service lives increase the percentage of the fleet operating outside of its warranty period.
On other occasions, deferred cycling is driven by economic pressures to realize short-term cost savings. For example, longer replacement cycles are more common for companies that self-fund assets, since deferring vehicle replacement is an easy way to stretch dollars in a constrained capital budget. Also, in struggling business segments, companies sometimes extend replacement cycles so cash flow can be diverted to other expenditures.
More Unbudgeted Expenditures
If your fleet is currently operating under a cycling policy that was originally established because it created optimum cost-efficiency, to change that policy, by default, means you are switching to a less optimal replacement strategy. Extending vehicle service lives has a cumulative impact on fleet operating expenses and total lifecycle costs due to higher miles, more engine hours, and an across-the-board increase in maintenance costs.
Budgeting for maintenance costs not under warranty is unpredictable. Approximately, 35% of an asset’s total lifecycle cost occurs in the last 15% of life – you want to decrease this period, not extend it. When not adhering to a scheduled cycling policy, catastrophic component failures are more prone to happen as unbudgeted costs. In addition, the unpredictability of component failures results in increased downtime manifested in lost driver productivity.
Downtime, specifically the number of hours an asset and driver are out of service, directly correlates with the severity of the maintenance issue. Critical component failures, which tend to occur more often with older assets, result in higher downtime costs per incident invariably due to complexity of the repair and longer turnaround time.
Maintenance costs also increase because the additional months in service necessitates additional PMs and sometimes an extra set of replacement tires.
One fact no one disputes is that maintenance expenses will go up. If they didn’t, the OEMs would not limit new-vehicle warranties to years and/or miles. The stakes are even higher for vocational fleets that require reliable vehicles to complete revenue-generating jobs.
When downtime occurs due to unplanned engine or equipment repairs, it jeopardizes a company’s ability to effectively serve its customers and generate revenue. Long-in-the-tooth vehicles typically need repairs requiring longer turnaround times, longer driver downtime, and cost more to return to service. Direct costs include lost revenue, penalties/fees on missed contractual deadlines, towing charges, temporary rentals, overtime, and indirect costs due to lower employee morale, all of which need to be factored into a risk analysis when deliberating to extend service lives.
One truism is the older the vehicle, the more the problems. On-the-road breakdowns occur with greater frequency with older vehicles. One soft cost to extending fleet lifecycles is its impact on driver morale. If employees aren’t feeling good about their equipment, or if the vehicle is unreliable, it will have a negative effect on productivity and morale, which may mean drivers will let down their guard in caring for their vehicles.
As the frequency of repairs increases, many employees may begin to perceive the vehicle as a nuisance and not care for its internal and external condition the same as they would a newer model. The end result is a diminished resale value due to below-average vehicle condition.
The real cost to extended cycling isn’t so much the repair, but rather the downtime, especially when there is no replacement or backup unit available because of budget constraints that created the extended cycle in the first place. In some cases, older trucks can be substituted with long-term rentals until the next budget cycle allows replacement. Since depreciation is a fleet’s largest expense, many fleet managers believe extending the replacement cycle by a short period of time can lower a fleet’s fixed costs.
This is true, but if the extension is for a longer-term, such as more than six months, uncertainty in resale values, unscheduled maintenance, and resulting downtime can more than offset any depreciation savings. Sometimes a company will spend more money repairing an older vehicle than it is worth; essentially substituting operating funds for capital expenditure funds.
Counterproductive to Goal
As budgets for replacement vocational vehicles are cut, any capital savings achieved is generally shifted to the expense column of the operating budget. This is due to the increased total cost of ownership for an aging fleet. As vehicles age, maintenance costs can increase significantly. In the case of upfit vehicles, these costs also include the maintenance of ancillary equipment as well.
Extended replacement cycles for short-term capital expenditure savings often have the unintended consequence of resulting in greater long-term expenses, such as decreased worker productivity, reduced resale values, increased downtime for both the driver and vehicle, an increased probability of safety-related issues, potential impact on OEM volume incentives, a negative impact on company image by driving worn-out assets, and higher operating costs due to the degradation of fuel economy.
Moving to Flexible Replacement Schedules
Over the years, automotive OEMs have dramatically improved vehicle quality and lengthened powertrain warranties, allowing companies to more confidently extend the service life of less risky fleet assets, such as fleets operating light-duty trucks.
Industry data reveal that light-duty truck and cargo van fleets have steadily pushed out their months-in-service parameters; with sedan fleets likewise extending asset use but at a slower average rate. Many fleets, especially mid-size fleets, are now moving to an 80,000-mile replacement parameter as fleet operations are pressured by senior management to rein in capital expenditures. Often, replacement cycling is only seen by management through a financial prism and viewed as a dollars-and-cents lifecycle cost decision. It is very common for companies to cut fleet costs by extending vehicle replacement cycles so the deferred cash flow can be diverted to other corporate expenditures.
Traditionally, fleet replacement policy is expressed as a combination of time and mileage, such as months-in-service and mileage bands. The policy is based on the converse trending of fixed and variable expenses during the life of the vehicle. Fixed costs tend to decelerate as a vehicle ages, while variable/operating costs tend to increase. When these two costs are charted over the life of a vehicle, the conventional wisdom is to replace a vehicle when the descending fixed cost line intersects the rising variable cost line.
A flexible replacement guideline can take diametrically opposite directions. One direction could be to extend a replacement cycle as a short-term solution to compensate for a reduction in a capital expenditure budget. For example, service fleets, which have higher cap costs due to additional upfit equipment, will keep vehicles in service longer than light-duty fleets to control capital expenditures.
The other direction in a flexible replacement guideline is to shorten service life to shortcycle vehicles to take advantage of an exceptionally strong resale market, as was the case several years ago. Some fleets have decided they don’t want to be locked into a specified vehicle replacement cycle and prefer to remain nimble with a market-driven flexible replacement strategy.
This mindset believes it is financially prudent to have greater flexibility in replacement cycling since extenuating market circumstances may make it more advantageous to either keep vehicles in service longer or shorter, depending on market conditions.