Chapter 2 -
Prioritizing replacement

Although some fleet managers might operate with few budget constraints, most live with financial limitations that may prevent them from replacing vehicles at the most economical time. At least twice a year, assess your fleet in light of any changes in the business, resale values, manufacturer incentives, and principal and interest costs.

When you make this assessment, establish a priority ranking that will guide you through the replacement cycle. Any vehicle targeted for replacement should receive a physical inspection by operating, maintenance and specification professionals to determine whether it is feasible to extend the vehicle’s life with some added investment in maintenance and repair. On the following page is a vehicle assessment report that will help you develop a ranking system to determine which vehicles should be replaced first.

Set priorities to determine which vehicles to replace with the available funds. The following method is one possible approach.
If a vehicle is due for replacement, project the total cost of the unit for the following year and compare it with the proposed replacement price. The price difference indicates whether the vehicle is beyond its economic point of replacement.

This priority ranking approach can be developed for an entire fleet by class of vehicle. If funding is available for equipment replacement, develop a replacement priority rating list to guide replacement decisions. Priority ranking is intended to serve as a guide or a tool for decision-making; it should not be used as a substitute for your knowledge and decision-making ability.
To maintain the lowest vehicle cost and greatest vehicle availability, consider replacing older vehicles when the cost of operating and maintaining them is higher than the price of a new vehicle.

Identifying such costs requires meticulous data entry. But once you do that you have a wealth of information in various formats that you can analyze and use to make the most-informed equipment decisions. This is a basic concept of life-cycle costing and good business sense.

Broadly speaking, life-cycle costing helps you measure and compare ownership costs with operating costs. The object is to replace an old vehicle just before incurring significant maintenance costs and after amortizing a large investment.

Ownership costs represent the principal and interest costs incurred on a monthly basis until the vehicle is paid off. Ownership costs can be depreciated (reduced on a fixed period, such as five years) until full value is reached.

Operating and maintenance costs are familiar expenses. Operating costs include fuel, taxes and registration fees. Maintenance costs include labor and parts.

You can track vehicle costs either manually or on a computer to accumulate life-cycle costs. Ownership and operating costs are the most predictable. Maintenance is less predictable, showing peaks and valleys. As the vehicle ages, additional costs are incurred. Measuring these additional costs allows you to predict future performance from historical information.

Vehicle costs can be scheduled or unscheduled. Scheduled component costs are preferable, because they usually are lower than their unscheduled counterparts. Brake replacement, for example, is scheduled; brake repair is unscheduled.

As you record and analyze vehicle costs, you can use historical data to predict costs for a new model in the same class. By modifying vehicle specifications, you can limit or minimize unnecessary future expenses. You might require higher-capacity alternators to lengthen the service life of electrical starting and charging systems. If one brand is more successful than another, incorporate the most cost-effective brand into the specifications.

Although identifying such costs requires lots of data entry, you can then extract the statistical data in various forms and evaluate it.

	VEHICLE ASSESSMENT REPORT
	VEHICLE #   37                      MAKE:   Brand X                    MODEL & YEAR:   1997 Model 123                 RATING LEGEND:   5 = EXCELLENT  4 = VERY GOOD  3 = GOOD  2 = AVERAGE  1 = POOR
	DESCRIPTION AWARDED RATE MULTIPLIER ACTUAL RATE MAX RATE FACTOR - SCORE SECTION - 01 CHASSIS TOTAL MAX POINTS = 15 10.8 RUST & CORROSION 3 20 60 100   CONDITION 3 20 60 100 ACCIDENT DAMAGE 4 40 160 200 GLASS 5 10 50 50 INTERIOR 3 10 30 50 360 72%       360 500 500         SECTION - 02 TIRES TOTAL MAX POINTS = 15 9.0 TREADWEAR 3 60 180 300 SIDEWALL CONDITION 3 40 120 200 300 70% 300 500 500         SECTION - 03 INTERIOR & SLEEPER TOTAL MAX POINTS = 15 9.0 SLEEPER EXTERIOR 3 20 60 100   SLEEPER INTERIOR 3 20 60 100 INTERIOR ACCESSORIES 3 20 60 100 INTERIOR SEATS 3 20 60 100 VENTILATION A/C & HEAT 3 20 60 100 300 60%       300 500 500         SECTION - 04 BRAKE SYSTEM TOTAL MAX POINTS = 15 12.0 SERVICE BRAKES 4 60 240 300 EMERGENCY BRAKES 4 40 160 200 400 80% 400 500 500         SECTION - 05 STEERING/SUSPENSION TOTAL MAX POINTS = 15 12.0 LOOSENESS 4 20 80 100   VIBRATION 4 20 80 100 PULLING 4 20 80 100 PARALLEL TO GROUND 4 40 160 200 400 80%       400 500 500         SECTION - 06 ENGINE & DRIVELINE TOTAL MAX POINTS = 25 16 LEAKS 2 20 40 100 VIBRATION 2 20 40 100 NOISE 3 20 60 100 SHIFTING 4 20 80 100 ROUGH RUNNING 5 20 100 100 320 64% 320 500 500         GRAND TOTAL TOTAL RATE AWARDED 2080 TOTAL SCORE 68.8 Awarded Rate Legend 2400-3000 Excellent 1800-2400 Very Good 1200-1800 Good 600-1200 Average 0-600 Poor Awarded Score Legend 80-100 Excellent 60-80 Very Good 40-60 Good 20-40 Average 0-20 Poor

Grouping similar vehicles allows you to calculate a class average and compare individual units with this average. If a vehicle is below average, its historical cost trends, compared with the average for the class, will help determine an economical replacement time.

Total unit costs are affected by each of the following costs and the rates at which they rise, alone and together:

• Depreciation. This is the cost you incur due to the declining value of a vehicle as it ages. Equipment depreciates fastest early in its life. A new vehicle has higher principal and interest payments based on its higher purchase price. When the cost of borrowing money is high, when vehicle trade-in incentives or resale prices are low, and when a difficult economic climate affects business growth and profitability, a strong case can be made for extended vehicle trade cycles. Resale values, due to supply of and demand for new vehicles, affect depreciation rates. Depreciation rates must be calculated and included in the annual analysis.
  
  Federal law allows taxpayers to use an accelerated depreciation method to recover the cost of acquiring and operating an asset. The method is called the modified accelerated cost recovery system (MACRS). It allows an asset to be depreciated on a double-declining-balance method over the asset’s depreciable life. Tractors are three-year property in terms of depreciable life, for example, and trucks and trailers are five-year property.
  
• Operations. These costs tend to increase gradually due to rising fuel prices, lower miles per gallon and related costs.
  
• Maintenance. As vehicles age, the cost of servicing and maintaining rolling stock tends to increase. Controlling these costs through effective scheduled maintenance — including preventive maintenance inspections, driver support and timely component replacement — can help you keep these vehicles longer, provided they don’t become obsolete.
  
• Downtime. When a truck sits idle due to a scheduled or unscheduled repair, it costs you money. These costs should be recorded and any unacceptable variations highlighted. Servicing a vehicle during nonuse periods eliminates downtime.
  
• Obsolescence. When the vehicle can no longer perform its job, it is obsolete. Remove it from the fleet and replace it with a usable vehicle. Use the resale revenue to offset the purchase price of the new vehicle.
  
• Inventory. Because inventory represents a small, and relatively constant, part of life-cycle costs, it requires the least amount of time and attention. The key is to have the necessary consumables and components available to maximize vehicle availability with minimal inventory.
  
• Life costs. This is the sum of fixed and variable expenses over time and mileage.

Economic Analysis
After you establish fleet age targets by vehicle category, briefly compare new vehicle costs with old vehicle costs. List each cost in preparation for an economic analysis. Also consider corporate strategy, cash availability and the company’s financial structure. Because tax rules change quite often, make sure that you have the latest information to determine the cost analysis.

Several factors can skew this analysis. Consider these variables before you decide to purchase new vehicles:

• Maintenance facilities. If your shop space is limited, you may need to implement a more rigorous replacement policy in the short run, because an older fleet will require more maintenance. Short trade cycles allow you to use the warranty for maintenance and trade the vehicle before it requires a major maintenance investment.
• Driver recruiting and retention efforts. Research indicates that drivers prefer modern equipment with all the amenities.
• Technological advances. Many fleets upgrade equipment to reflect the latest and most productive options.
• Environmental impact. Newer equipment with cleaner emissions can reduce your fleet’s impact on the environment. Environmental considerations also may require outfitting portions of the existing fleet with special fuel systems or power plants.
• Image. Management’s desire to project a good image may dictate shorter replacement cycles.
• Financial pressures. Evaluate purchases in light of ever-changing profitability standards and tax laws.
• Accidents. If repair will cost 50 percent or more of the vehicle’s current market value, consider replacing the vehicle.
• Customer-service issues. Customer demands may require more vehicles because of expanding business opportunities or a desire for new technology.
• Fleet size and use. There’s no formula for determining an appropriate fleet size. No standard can be applied to all industries or all companies. Commodities, equipment and geographical coverage all vary by company.
• Surplus equipment. Some trucking companies keep extra vehicles on hand for emergencies, such as breakdowns. Extra vehicles, even if fully depreciated, are an expensive luxury few companies can afford. The costs associated with surplus power units include annual licensing fees, carrying costs, federal highway use taxes, insurance, permits and potential higher repair costs due to age.
• Use patterns. Some companies’ operating characteristics allow them to move vehicles to lower-use applications. Newer vehicles go on the longer routes, for example; the vehicles that previously served the longer routes move to intermediate routes, and those that were performing intermediate work move to short hauls. Then the short-haul vehicles are sold. This scenario works well as long as short-haul units are not kept as spares, and as long as the vehicle’s operational characteristics are reasonable and economical for each application. Trucking companies that serve more than one market, however, may find that they can improve overall efficiency by identifying a specification, maintenance schedule and replacement cycle for each application.

These considerations (and others) influence decision-making and dictate which vehicles should be traded, and when. The deciding factor is whether a new unit will cost less to own and operate than the old. If so, buy a new one; if not, keep the old.

In Summary
Prioritize your fleet’s replacement cycle by identifying and recording the operating and maintenance costs of each vehicle. This is the best way to determine which vehicles to replace on a limited budget. Such records also provide historical data to help you predict costs for a new model in the same class. You must also take into account other factors — your maintenance capabilities, driver recruiting and retention efforts, desired technological advances, environmental impact, image, financial pressures and customer-service issues — when determining which vehicles to replace.