Three years? Two? Five? Thirty-six-thousand miles? Twenty-four? Fifty?

Length of vehicle ownership is normally one of the most important aspects for a manager to consider. While many fleets have found a number of workable formulas, a general rule of thumb for the average fleet might be to buy or lease new cars, keep them for about three years or 60,000 miles, then dispose of them by the most advantageous method.

But there are other methods and patterns of acquiring, keeping, and retiring vehicles that, while they perhaps seem outrageous to some fleet managers, are just as workable. Take, for example, a fleet of over 1,000 vehicles, 900 of them cars with a turn-around-time of only one year and no regard for accrued mileage. An average fleet manager might shake his head in wonder at such a policy, anticipating financial disaster by use of it. But it is just such a short-term ownership-and-replacement policy that is used by Gerber Products of Freemont, MI. And according to Gerber Corporate Fleet Manager Don Allen, it has worked successfully for nearly two decades.

His is more-or-less a gambler's policy; it is dependent on what value a new car will retain after a year's use. If the company does well in choosing cars that will draw a high price in the used-car market after a year, the cost of replacing them with new cars comes into fiscal focus, and secondary fleet costs such as maintenance become negligible.

Gerber's is a totally company-owned fleet. Vehicles are bought and sold on a net-trade-difference agreement through a dealer. "We go into each model year trying to replace every car in the fleet," Allen says. "But this is a flexible policy, since decisions are gauged entirely on the used-car market and not on mileage or age. If I run into local conditions that might tend to depress resale conditions, I have the flexibility to hold on to the cars if I think it best. I don't know of any other company that gives its fleet manager the flexibility that I have."

This year, for example, Allen says 100 percent of his fleet was replaced with 1984 GM A-body cars and Ford LTD's. "But the year before had been a bad one for us. Coming into the 1983 model year, we had a lot of 1982 X-bodies and found there was next to no demand for them on the used-car market. So because of that market condition, we were able to dispose of only about 50 percent of the fleet." He adds that replacement of 75 to 100 percent of vehicles is the normal amount.

"We've been doing this for 20 years, although our marketing approach has changed somewhat," Allen says. "Back when we started, we tried trading a certain number of cars at selected locations on a yearly basis. Based on the success of doing so, we've since expanded that policy to our operations across the country. I get regular cost figures on fleet operations from both the National Association of Fleet Administrators and from certain leasing companies. Based on those figures, I estimate our costs are moderately to substantially lower than average."

Allen says typical acquisition and disposal terms might work well for what he calls a "garage-centralized" fleet. But it does not for this, which is dispersed over the entire country including Hawaii. Gerber's vehicles, the majority of which are cars, are used at planned locations and for the on-the-road sales force. He says the advantage in keeping cars longer for a more centralized operation stems from being able to maintain them either in-house or on a centralized, outside maintenance contract. The Gerber fleet, however, has to rely on local maintenance in literally dozens of locations, a situation that could become not only costly, but largely uncontrollable as well. By replacing cars yearly, "we avoid a lot of maintenance expense altogether," Allen says. "Large maintenance problems would be handled under new-car warranty, so about the only maintenance we handle is basic preventative maintenance. We instruct our drivers that we want our cars well maintained, and we follow the manufacturer's instructions as far as regular oil changes and that kind of thing goes. But that's about all we do."

Aside from the savings in maintenance that yearly replacement of vehicles provides, Allen says the big cost benefits of his company's unique policy come from taking advantage of minimal depreciation of cars at resale time. "At the heart of our thinking on turn-around is what factor new-car depreciation will play - basically, what price we will get for the car when we sell it. You have to figure that the normal fleet car is going to lose a certain percentage of its value the first year and even more the second. We normally anticipate trading a one-year-old car at 18 percent depreciation on the original cost; in most cases the actual depreciation allowance is even less. Even though it is our consistent experience that we won't wind up with less depreciation owning the car one year than we would owning it two, there are the tax advantages and second-year maintenance cost saving to be considered. So if you can draw an acceptable after one year, there really is no point of keeping it a second year."

Trading early for maximum dollars results in another cost benefit, that of reduced sales-tax expenditures. "There is some pretty strong sales tax involved in the purchase of so many new cars," Allen says. "With the system we have there are tax advantages in some respects." By trading with a dealer, the price of the used-car is credited to the cost of the new car, and sales tax is therefore only charged for the cash difference. For example, if a one-year-old car originally purchased for $10,000 incurs the maximum 18 percent depreciation Allen forecasts, its resale value would be $8,200. If another car is purchased for $10,000, the taxable difference after the used-car allowance is deducted from the new-car purchase price would then only be $1,800. This, of course, represents a considerable savings to the buyer.

Another side benefit of replacing cars every year is that of fuel economy. Allen said that the company has been able to take advantage of savings stemming from reduced fuel expenditures since about 1975 when Detroit began turning toward more fuel-efficient cars. Provided with a new car every year, Gerber drivers not only have the latest fuel-efficient models, but they don't normally drive them long enough to begin incurring the types of engine difficulties that result in reduced fuel economy. Mileage accrued on Gerber cars averages at about 22,000 miles, with a high range of 40,000 and a low of only 10,000, before they are sold. Fuel efficiency, therefore, is one thing Allen looks for when shopping for new cars.

"Resale, however, is still our biggest item of concern," he says. "But another benefit of all this is in employee morale; this is something that has worked very well for us. Since employees virtually always have a new car to drive, there is a lot of incentive for them to take care of their cars, which, of course, adds to their value at resale time."

Allen says drivers are allowed full use of their cars for personal transportation, although "our people do not get a choice of makes. That's our decision, and it depends on where we can get the best trade-in. But when we decide on cars, we do look for those that are going to have utility, fuel-economy, and at the same time make a reasonable family vehicle. A lot of my decisions on what new cars to buy depend on the feelings I get handling the various cars on the market and from talking to the various manufacturers about them. I also talk a great deal with other fleet managers, and I rely on their reactions and what their feelings and predictions are, particularly in the case of new cars."

Despite the fact that Gerber's replacement policy may seem a little radical to some fleet managers, Allen says his system is the most effective he knows of. "Comparing our cost figures with those of a fleet which retains its vehicles for at least three years, I think ours might be better after three years time. Using this system, I feel we are in a good position."

 

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