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Part two in a two-part series on vehicle replacement examines the impact of extended cycling on fleet maintenance, fuel economy, safety/ergonomics, resale values, company image, and driver morale. Also included are the effects of extended cycling on vocational fleets.
Impact on Maintenance Budget
There are few benefits to the maintenance budget by extending replacement cycles unless an organization makes moderate adjustments to maintenance policy and manages the program very tightly. Small shifts in replacement policy may be acceptable; preventive maintenance expenditures may not increase, and the probability of catastrophic failure is not significantly increased. However, it is critical to establish and adhere to a policy that avoids additional sets of tires and brakes.
In most passenger vehicles, brakes generally are replaced every 30,000-45,000 miles, depending on the manufacturer and driving habits. Tires are typically replaced every 45,000-60,000 miles. Light-duty trucks, SUVs, and commercial vans follow similar schedules, but may follow a significantly shorter cycle dependent upon payload, application, driving conditions, and driving habits.
Increased preventive maintenance expense for items such as timing belts, spark plugs, etc., ensues if cycles are not carefully planned and executed. Unscheduled first-time maintenance repairs such as alternators, starters, suspension, and air conditioning become more probable and lead to thousands of dollars in unforeseen maintenance expense if vehicle replacement cycles are extended beyond manufacturer warranty periods. With increased mileage, the frequency and probability of catastrophic failures, i.e., repairs in excess of $2,000, sharply increase.
Prior to 2008, the number of maintenance transactions, and dollars associated with those repairs, was flat or in a decline. Since 2008, i.e., the period in which fleets began to extend replacement cycles due to the downturned economy, industry maintenance transactions and dollars spent have increased by 20-30 percent on average. As fleets continue the extended replacement cycle, these numbers are expected to grow exponentially. In fact, the trend suggests that maintenance transactions and associated dollars will grow to 28-38 percent on average in 2010.
Thus, if cycling parameters are extended to slightly below the next tire/brake/preventive maintenance interval, increased maintenance expense may be minimized and overall cost of ownership may be reduced. When fleets extend replacement cycles, consideration should be given to the impact on residual resale values; the potential costs and impacts of vehicle downtime and loss of productivity; the increased probability of safety-related issues; the impact deteriorated vehicles have on company image and driver morale; and the degradation of fuel economy. It is also significant to recognize if replacement order delivery is slow, the potential savings previously gained on paper may be mitigated by unforeseen circumstances and may not be recovered in the resale of the vehicles.
Additional Consequences to the Maintenance Budget
As vehicles age, more expensive and potentially catastrophic repairs will occur. Without proper routine maintenance, the timing of the unscheduled repairs becomes even more unpredictable. More expensive brake repairs and repairs to heating, cooling, engine, transmission, and cab/sheet metal will increase disproportionately as vehicles age.
For example, a less-than-500-unit fleet has extended the current vehicle cycle by about five months. (See Chart 2.) Total maintenance spend increased by 26 percent with most major increases due to brakes, tires, cab/sheet metal, and preventive maintenance. The average repair cost was $10 less per repair; however, maintenance spend still increased due to the number of repairs (329 more in 2009) and the type of repair (more expensive repairs). Furthermore, the number of maintenance rentals increased from 37 in 2008 to 201 in 2009, or an increase of approximately $10,000.
This is a result of an increase in more expensive repairs and repairs requiring more than one-day service, such as cab/sheet metal, engine, and heating and cooling systems. In a fleet of 1,000 vehicles, this expense would equal an increase in maintenance spend of more than $120,000 per year.
In short, budgeting for maintenance not under warranty is unpredictable, especially if routine maintenance does not follow recommendations. If the ultimate decision is to extend vehicle cycling, implementing a fleet maintenance management program is recommended to handle the repair negotiations, post-warranty recovery, and above all else, managing all the calls that will significantly increase. In the case previously cited, the number of repairs rose by 329 in 2009, or more than one call per business day (assuming a 260-day business calendar and a call required for every repair). The total number of repairs in 2009 for this fleet was 3,375 in 2009, or if using a 260-day cycle, almost 13 calls per day.
Impact on Fuel Efficiency
There are a multitude of reasons why an optimal replacement strategy is beneficial. Factors such as reduced fuel, maintenance, and downtime spend, plus improved safety features are just a few factors. Ancillary benefits include improved corporate image and driver morale. Deeper volume pricing discounts may be negotiated with the OEM of choice as vehicle order volume will increase.
The impact on fuel efficiency created by extended vehicle replacement cycles is two-fold:
- New model-year vehicles are continuously achieving better fuel economy.
- As an existing vehicle ages, the fuel economy deteriorates due to the increased inefficiency of the aging vehicle. New model-year vehicles get better fuel efficiency.
According to the Environmental Protection Agency (EPA) Web site (www.epa.gov), large sedans such as the Taurus, Impala, etc., have been realizing better average fuel economy year-over-year for the past five years due to a variety of factors, including lighter-weight vehicles and vehicles designed to run more efficiently. (See Chart 3.) In addition, car manufacturers are continuously developing and introducing new configurations, including more hybrid vehicles, to add to their vehicle lineups. Compliance with the changing CAFE standards will continue this trend.
As a vehicle ages, the performance of the vehicle deteriorates, affecting fuel economy. Declining performance, such as with spark plugs, injectors, and more importantly fuel systems and engines may reduce fuel economy, in some cases, markedly so when the vehicle gets very poor or no routine maintenance. Some industry data suggests vehicles can lose up to 1 percent or more fuel economy per year. Future fuel price increases will exacerbate the cost of the additional fuel expense.
For example, Chart 4 illustrates declining fuel economy at 1 percent per year for four years for a large sedan, while fuel prices increase by an inflation rate of 10 percent annually. Or, if starting at $2.90 per gallon today, a gallon of gas will cost $3.86 four years from now. Starting in the second year, the additional fuel cost per vehicle per year would increase $73 per vehicle and by the fourth year, $90 per vehicle per year. (See Chart 5.) For a fleet of 1,000 vehicles, this increase would result in $90,000 of additional fuel costs per year versus replacing the unit with a new model-year vehicle.
When a fleet manager extends replacement cycles, he or she gives up cost savings associated with a more fuel efficient-vehicle, whether for another make and model or with a similar replacement model as shown in Chart 6.
Safety and Ergonomics
As computer technology has increased exponentially, innovations regarding vehicle safety have come along with it. Pioneering features (such as traction and stability control, side air bags, etc.) on the most high-end vehicles just five or 10 years ago are now standard on even the most basic vehicles and across all vehicle classes from executive sedans to compact SUVs. Certainly, vehicle safety is paramount, so these enhancements make today's vehicles better, and far safer for the driver and occupants, than ever before.
The list of benefits from increased vehicle safety in newer vehicles is a long one: side air bags, anti-lock brakes, stability control, tire pressure monitoring systems, etc. These safety features are directly beneficial to the consumer market, as highway fatalities per mile driven are at the lowest rates since the 1950s. But are there any disadvantages to today's technological wizardry in terms of improving safety?
For one, as technology applies to used vehicles, older vehicles can be seen as less safe. Keeping fleet vehicles for longer cycles means drivers operate vehicles without the advanced safety features of current model-year counterparts. However, as in-vehicle technology increases, the cost to repair (such as in a collision) also rises dramatically.
Ergonomically, today's cars and trucks also have come a long way from just five years ago. Ancillary items, such as iPods, can now be used in most any vehicle. In addition, manufacturers have done much to make the driving experience more ergonomically sound with the advent of systems that integrate cell phones, navigation systems, and radio.
Even in vehicles without a system integrating all the entertainment functions, significant improvements have been made to features such as navigation systems. These include capabilities such as real-time traffic alerts and touch-screen monitors, all designed with the intent of keeping the drivers' eyes on the road ahead.
One major drawback of keeping older vehicles in service is missing out on the productivity features of today's vehicles.
Leveraging New Technology
The benefits of newer vehicle engine technology are often overlooked in the decision to extend or delay vehicle replacement. With fuel one of the largest fleet operating costs, advanced engine technologies offer opportunities to reduce fuel spend through improvements in mpg.
Utilizing EPA data, combined fuel economy ratings for popular fleet vehicles shows an mpg improvement from a 2005-MY to 2010-MY vehicle of 8 percent. For a typical 500-unit fleet driving 20,000 miles per year, this improvement translates to a significant annual savings of about $100,000 based on a fuel price of $2.75 per gallon. As fuel prices increase, the impact becomes greater. With CAFE standards rising by 30 percent over the next six years, the effect of vehicle replacements on operating costs will continue to increase.
CAFE data is the sales-weighted average fuel economy, expressed in miles per gallon, of a manufacturer's fleet of passenger cars or light trucks with a gross vehicle weight rating (GVWR) of 8,500 lbs. or less, manufactured for sale in the United States, for any given model-year.
To combat rising fuel prices, combining a right-sizing model with an increased focus on mpg can aid with selector list evaluation. Fleets taking advantage of new engine technologies by replacement and moving to a smaller class of vehicle have on average realized a 10-percent reduction in both fuel spend and carbon emissions resulting from mpg improvements.
Impact on Company Image & Driver Morale
Starting with the assumption a given fleet is currently operating under a cycling policy established as "optimum" based upon the company's culture and goals and the fleet is now considering extending the lifecycle of its vehicles, it is further assumed, for these purposes, the fleet is knowingly, by choice, considering moving from "optimum" to something less. Such a decision is basically a "roll of the dice." Any short-term gain in reducing costs will ultimately not be offset by higher costs. For some, taking this chance may be worth the gamble for the potential quick win, but typically will not serve the fleet well in the long run.
Before the decision is ultimately made, many issues must be considered beyond "hard" costs. The "soft," but very real, costs of extending a fleet's lifecycle could include the potential negative impacts on the company image and driver morale. The degree of impact depends upon the severity of the change, the expected duration of the new policy, and the driving force behind the change.
If the driving force is unique to the company (i.e., drop in sales causing need to reduce expenses) and the change is not severe and expected to be temporary, most drivers likely will appreciate the situation and be happy to do their part to contribute. If the cause is more widespread (i.e., industry-wide), again, drivers will tend to accept the change and for a longer duration.
The more severe the change and the greater the expected length of the policy change, the greater the likelihood of negative impacts. As we all know, vehicles can be very personal, and for some industries, an important influence on recruitment and employee retention. The cost can be significant if it causes losing a top sales performer to competition that offers a driver-perceived better fleet vehicle/policy.
The cost will not hit the fleet's budget, but could have a dramatic impact on the company. Likewise, should the vehicle (or lack thereof due to breakdowns) impact the driver's ability to earn commissions or other compensation (i.e., route sales, services), clearly the situation would cause morale issues and again, the potential loss of valued employees - not to mention the cost of hiring and training replacements.
A company's image could also suffer as vehicles age, wear out, break down, and at the extreme, appear unsafe. Such an appearance can be interpreted as the outward signs of a less-than-successful company. The impact, of course, is greater when clients, customers, partners, vendors, etc., are exposed to the fleet as passengers or when the vehicle is on the road or parked in their facilities. Oftentimes, the driver and company vehicle may be the only tangible exposure someone has to the company, and as such, can have a significant impact on how the company is viewed by the outside world. It is important the vehicle's general perception is aligned with the desired perception of the company.
Further, regarding safety, should the extension of the cycle go to the point where vehicles are unreliable and proven unsafe, the liability exposure to the company is immeasurable.
Each company and fleet is different, so there can be no one answer to the question of the optimum cycle policy, and the impact of extending a policy will vary. As consideration is given to making a change, it is prudent to solicit input from all those who might be affected, directly or indirectly. It should not be solely done on the basis of bottom-line impact on the cost of the fleet. Sales, service, HR, risk management, and any other stake-holding departments should participate in the evaluation.
Alternatives When Extending Vehicle Lifecycle
When facing a limited budget for vehicle replacements, alternatives are available to simply extending the lifecycle of the vehicle. Dollars can be stretched further by:
- Leveraging remarketing opportunities. Despite the challenges of today's financial conditions, there are opportunities for leveraging the current recession as part of the cycling plan. With many fleet managers extending vehicle replacement cycle, the result is a short-fall of lower-mileage used vehicles. This decreased supply - coupled with a lack of new product inventory - presents a rare opportunity for fleet managers to take advantage of a stronger-than-expected used-vehicle market
- Body transfers and refurbs. Some fleets perform refurbs on specific types of chassis to improve overall lifecycle expenses. Body swaps are more common and necessary when the upfit is more customized than the chassis. This strategy can decrease capital expenditures.
- Route optimization. When applicable, fleets may reduce miles driven through route optimization. This strategy frees up vehicles with remaining life for reassignment as replacements for aged units.
- Long-term rentals. Vehicles without extensive upfitting can be substituted with long-term rentals - at least until the next year's budget allows replacement. This tactic reduces major maintenance expenses on vehicles that have reached the end of their lifecycle.
- Proper financial analysis. This identifies when these options make fiscal sense in specific circumstances is necessary.
Managing Costs at Fleet & Vehicle Levels for Optimal Operations
Changing factors, including business, drivers, the automotive industry, and the economy, create the need to manage costs both at the fleet as well as the vehicle level to realize the optimal point of operation.
Extending vehicle cycles can be a short-term solution in tough economic times. Fleets taking a macro look at all costs and leveraging analytical tools can model and execute strategies that reduce costs with current or even reduced cycles.
These tools include:
Scorecarding. The ability to consolidate and trend all the historic costs factors into a single view to leverage with management is critical to understanding and communicating how fleet age impacts each cost category.
Benchmarks. Peer and industry benchmarks provide insight into overall performance and help uncover potential changes to long-term strategy.
Lifecycle Optimization Modeling. Understanding the "what-if" of vehicle replacement must be leveraged with the overall projection of holding a vehicle.
By leveraging these tools, additional strategies emerge to help pinpoint the optimal replacement points, given the current demands.
Incentive Leverage. A fleet that orders more often can be in the position to leverage larger-volume incentives with manufacturers, generating lower capitalized costs.
Carbon Reduction. Many organizations focus on reduced emission levels, taking advantage of new technology sooner to achieve meaningful fuel efficiency and carbon reduction goals.
Vehicle Right-Sizing. Influenced by economic and environmental factors, many fleets select smaller vehicles with more efficient engines and lower capitalized costs.
Equity Position. The difference between a vehicle's fair market value and the remaining depreciated book value is equity, which can be leveraged in the future fleet operations. Currently, used-vehicle inventories are at favorable lows, with fleet sales now the largest supplier of vehicles to the used-vehicle marketplace.