Fleet Recycling: Genway Plan Lowers Fleet Operating Costs with Optimal Used Car Prices

Depreciation, or the holding cost of a vehicle, represents 30-percent of the total cost of operating a vehicle within a fleet and stands as the second largest fleet cost; only slight­ly less than fuel costs, which are 35-percent. Controlling depreciation is a major activity of effective fleet administra­tion which, when properly done, can provide a substantial reduction in the cost of operating a fleet.

Depreciation is usually controlled by the selection of vehicles which are likely to enjoy low levels of deprecia­tion cost over their period of service and the use of appropriate methods of vehicle disposal to raise the return on used vehicles and thereby reduce holding costs or depre­ciation. The timing of vehicle replacement is often over­looked and in many cases timing is more important than vehicle selection or disposal techniques. Since the used vehicle market is seasonal and the price of a used vehicle is affected by its age and the amount of use the vehicle has experienced, there is an optimum replacement point for a given vehicle.

Unfortunately, the typical company car program calls for retirement or replacement of vehicles according to mileage intervals or length of time in service; 50,000 miles or 24 months, for example. Since driving patterns vary within a fleet, such programs invariably require the replace­ment of a significant number of vehicles at the wrong time, which is usually during weak market periods. Replacement in optimum months can reduce the depreciation or holding cost of a vehicle due to be retired in a weak market by $200 to $400 as demonstrated by Genway's Fleet Cycling Program. In a typical 300-car fleet approximately 50-per­cent of the vehicles can be moved, or "cycled," from poor months to optimum months yielding savings of $30,000 to $40,000.

The Genway Program has been used internally for three years and was made available to Genway leasing and fleet management customers in early 1976 to assist them in reducing fleet costs. In normal circumstances the optimum replacement of vehicles involves retirement of vehicles in a specific month in the fall or spring with only slight changes in a typical company car program. Average mileage is usual­ly reduced by less than five percent and length of service is affected by less than one month.

To understand the concept of optimum fleet replace­ment it is necessary to consider the annual trends in the used vehicle market, the impact of mileage on those market trends, and the interaction of the market, mileage levels and depreciation or holding costs. This can best be demon­strated by considering two examples: a high-mileage and a low-mileage vehicle. But first a look at the historical used vehicle market.

Historical Market Values

The historical trends in the used vehicle market are shown in Figure 1. This is a graph of the used vehicle mar­ket for twp-year-old vehicles since 1972 excluding mileage adjustments. The vertical scale is dollars and the horizontal scale represents the four market seasons - the fall market in October, the winter market in January, the spring market in April, and the summer market in July.

The values shown come from an index which Genway provides its customers on a monthly basis and represent a weighted average of adjusted Automotive Market Report (or AMR) prices for two-year-old vehicles. The index is composed of approxi­mately 50-percent full size vehicles, 25-percent interme­diates, 10-percent compacts, and 15-percent other cate­gories of vehicles.

In model year 1972 the market followed a normal trend - strong in October, weak in January, a recovery in April and a decline in July. In every year since 1972 this trend has been repeated, although it was somewhat distorted by the energy crisis, which occurred in the winter months of model year 1974, and substantial price increases on new vehicles which resulted in significant increases in the price of used vehicles in the 1975 and 1976 markets. Regardless of the year, the market was always weak in the winter and strongest in the fall or spring. In model year 1977 the market again followed a typical seasonal trend.

Mileage Considerations

Seasonal trends in the used vehicle market play an im­portant role in fleet replacement, but the impact of mileage is equally important. Figure 2 demonstrates the effect that both high and low mileage have on a vehicle. The upper­most line on the graph represents an average year, similar to the 1977 model year with no mileage adjustments. The middle line shows the impact of low mileage, while the lowest line demonstrates the reduction in vehicle value caused by high mileage. The low-mileage vehicle will travel less than 45,000 miles in 24 months while the high-mileage vehicle will exceed 55,000 miles in the same period.

Two Examples

By analyzing the low and high-mileage vehicles in rela­tion to depreciation costs during three different months, examples of optimum replacement timing can be demon­strated. Figure 3 shows a low-mileage vehicle, in this case a Pontiac Catalina. The clashed line is the depreciated or book value. The depreciated or book value of the vehicle is the cost of the new vehicle less a fixed amount which is set aside each month, say two percent or $100 each month, on a $5,000 car.

As an example, a $5,000 vehicle which has been in service for 20 months would have a depreciated or book value of $3,000 ($5,000 less $2,000 or 20 months times $100 per month). For companies leasing automobiles, the book or depreciated value is a common measure. Com­panies which own automobiles typically refer to the hold­ing cost or the difference between the price of the new car and the ultimate value of the used car. Regardless of whether the vehicle is owned or leased, the savings from proper replacement cycling will be the same. For purposes of discussion, comparisons to the book or depreciated value will be made.

The graph in Figure 3 shows that in October the market value of the Catalina exceeds the depreciated value of the vehicle, thereby resulting in a low depreciation or holding cost for the vehicle. In January the market value is lower than the depreciated value, resulting in a higher deprecia­tion cost. In April the market value has recovered and again exceeds the depreciated value.

These three alternatives are summarized on the chart in Figure 3. The cost-per-month and cost-per-mile of operating the vehicle for either 20 or 26 months of service are identical at $153 per month, or 8.7 cents per mile. Retirement of the vehicle in the winter will result in an average cost of $162 per month, or 9.2 cents per mile for the 23 months of service. The actual cost in January is $153 per month for the first 20 months and $277 per month for the last three months.

From the alternatives shown in Figure 3, it would be most advan­tageous to replace the vehicle in April after it has been in service for 26 months and has been driven 45,600 miles. In this example it is possible to reduce the depreciation or holding cost of the vehicle by nine dollars per month, or $207 over 23 months.

Figure 4 shows the same information for a high-mileage vehicle, a Chevrolet Malibu. In this case the market is above depreciated value in October and significantly below de­preciated value in January. Because of high mileage, the April market is still below depreciated value.

The chart in Figure 4 shows the alternatives for this vehicle. Replace­ment in October will result in a cost per month of $135 while replacement in January will result in a cost of $149 per month. Carrying the vehicle into the spring will result in a cost of $140. Given these alternatives, the best time to re­place this vehicle is in October. The selection of October will result in a cost reduction of $14 per month over Janu­ary replacement, or $294 for 21 months of service.

The two examples shown above demonstrate the import­ance of selecting the optimum time for replacement. The factors which must be considered are the anticipated used vehicle market value and mileage.

In addition, the in-service date of a vehicle, the model and type of vehicle, mainte­nance, and investment costs also play an important role in determining optimum replacement points. Considering all of these factors for each month of a vehicle's service life is a substantial task; for a 300-vehicle fleet it is almost impos­sible. Fortunately this problem lends itself to the applica­tion of such analytical techniques as computer simulation and the use of market models.

Genway Fleet Cycling

Genway has developed a computer-based model of the used vehicle market which projects specific used vehicle values for over 300 different makes and models. The used vehicle market model takes into consideration such factors as price of new vehicles, supply and demand for various types of vehicles, and the age of the vehicle. Mileage fac­tors are also included to permit a realistic projection of a used vehicle value for a fleet vehicle for each month of its service life.

The computer-based used car market model supplies used vehicle values to the Genway Fleet Cycling Program which simulates the replacement of a vehicle for each month for up to 18 months in the future. By simulation of replacement options, it is possible to select the optimum time to replace a vehicle much as replacement options were analyzed in Figures 3 and 4.

The program consists of two computer reports - a de­tailed replacement analysis and a summary fleet cycling plan. The replacement analysis report presents pertinent in­formation concerning each vehicle including, among other things, the original cost, in-service date, depreciation rate and amount, fixed costs, maintenance costs, mileage, and depreciation refund.

Figure 5 shows a portion of an analysis prepared in July 1976, for a 1975 vehicle which reached 24 months and 60,000 miles in February 1977, under a 24-month, 60,000-mile company car program. The vehicle was depreciated at two-percent per month to approximate the actual depreciation which resulted when the vehicle was sold.

The normal expiration of the vehicle would have occur­red in February 1977, and is identified by the symbol 'EXP.' In February the total cost (shown as Column 9) is $4,532, or $189 per month for 24 months and 7.4 cent per mile for 60,900 miles. In October, 1976, the monthly cost is $167. This represents a savings of $440 ($22 per month for 20 months) as shown in Column 12. After con­sidering the various replacement alternatives for the vehicle between August 1976 and March 1978, the program select­ed October 1976, when the cost per month is lowest as the recommended replacement month.

Figure 6 shows the plan for the vehicle shown in Figure 5 (vehicle 521), and five other vehicles. For the second vehicle, 562, the program has not recommended any change. For the third and fourth vehicles the program has recom­mended recplacement in April 1977; for the fifth, October. The last vehicle, 599, is a high-mileage vehicle which would have reached 58,500 miles in January 1977.

The cycling program identified this vehicle in July when it had been in service 12 months and recommended replacement in Oc­tober 1976, at a savings of $400. As the totals and averages show, there is a small change in the overall company car program brought about by computer fleet cycling. How_: ever, even with small changes in overall mileage and months in service, the opportunity for savings is substantial. For the fleet shown in Figure 6 the total cost per month for a fleet of 300 vehicles was reduced by seven dollars, yielding a savings of $38,204.

In July 1976, by using the fleet cycling plan, the fleet administrator could have planned his activities for the fall and winter. He could have decided which vehicles to retire in the fall and placed orders for those vehicles to insure fall delivery. He could have informed the driver of vehicle 521 that his vehicle would be replaced in October, 1976, and defended his decision with a savings to the company of $440. He could also have informed the driver of vehicle 583 that his vehicle would be replaced in April 1977, after 27 months, to realize a savings of $297.

Without the cycling plan the fleet administrator would most likely received notice in the winter that vehicles 521, 583, 597 and 599 are due to be replaced. Not having anticipated the replace­ment would result in a lost savings opportunity and possib­ly higher new vehicle costs caused by purchasing a vehicle from dealer stock with retail equipment rather than equip­ment specified by the company car policy.

The fleet cycling plan and replacement analysis are prepared in early summer and winter. The summer plan concerns itself with replacements in the fall, the winter plan with replacement in the spring. The analysis presents cost calculations for up to 18 months in the future to allow the fleet administrator to choose alternate replacement dates if appropriate. In this way considerations beyond cost and market conditions can be included in the program.

If, for example, the recommended replacement date is missed, other options can be considered to select the second-best time to replace a vehicle. For a typical fleet, 40-percent to 50-percent of the vehicles will be cycled to favorable re­placement months resulting in a savings of about $200 per vehicle cycled. For a fleet of 300 vehicles the total savings is usually $30,000 to $40,000.

Summary

The proper replacement of fleet vehicles is a complex problem. It can be oversimplified by merely adding two years to the in-service date or replacing in the fall or spring. Because vehicles are used for different purposes, and the used vehicle market is seasonal, such elementary techniques result in high costs over the life of the vehicle. More sophis­ticated techniques require detailed analysis which lends itself to a computer. The ideal combination is one in which one complex analytical tasks are performed for the fleet administrator, leaving only the judgmental decisions to be made when contemplating the retirement of a vehicle.

It was in this spirit that the Genway Computerized Fleet Cycling Program was developed. The sophisticated compu­tations necessary to determine the optimum replacement cycle are performed by a computer and the various options are presented on the replacement analysis report. Recom­mendations are preapred and shown on a summary cycling plan for the entire fleet. Beyond merely aiding the fleet ad­ministrator by presenting various options, the information is presented approximately six months before the normal replacement date to facilitate planning and ordering of vehi­cles in anticipation of recommended replacement dates.

Of equal importance is the computation of the savings which results from proper cycling. The fleet administrator can state the dollar benefit accruing to his company from proper cycling of a vehicle when recommending replace­ment dates to drivers and their managers. This enables fleet managers to be more effective in reducing fleet costs by en­listing the cooperation and support of those individuals within the company who actually utilize the vehicles.

The combination of advanced planning and the application of sophisticated management techniques to cycle specific vehicles according to the seasonal trends of the used vehicle market has enabled Genway to reduce the cost of its own fleet. The same techniques can provide sizable savings to other companies which operate fleets of leased or owned vehicles.