Determining optimum replacement criteria is a matter of arithmetic. At some point, the combination o
Replacement cycling is one of the most critical tasks dealers will face when managing fleet vehicles. Every fleet policy or procedure in some way or another tracks back to replacement policy. Rather than depending upon “common wisdom,” or even benchmarking, the savvy dealer will carefully track fixed costs (primarily lease or ownership costs) and variable costs (fuel, maintenance/repair, tires and oil) both by vehicle and for the fleet as a whole. At some point, the combination of the two will be lower than at other points; this will be the best time to replace the vehicle.
There are two types of costs that provide the necessary data to help you determine the optimum replacement criteria. They include the following:
2. Interest or lease costs
4. Personal-use charge (deduced from fixed costs)
5. Accident costs (net of subrogation recoveries)
In addition, there are other vehicle-related costs, such as washing, tolls, parking and registration costs. However, they are relatively nominal and are unrelated to replacement. These costs should be accumulated regularly (usually monthly), along with odometer readings and/or mileage accumulation.
It’s important to remember that the replacement equation cannot be completed until the vehicles are sold. Keep in mind that the goal is to determine at what point in the life of a vehicle the combination of fixed and variable costs are at their lowest. While it is still in service, dealers who manager their fleet vehicles can watch how these expenses are trending. Yet, it isn’t until the vehicle is finally sold that the low point can be determined.
Watch the Expense Curves
It will help to know what kind of trends to look for. The depreciation used for book purposes will most likely be a straight line, with an equal dollar amount booked each month. Since monthly mileage will tend not to vary greatly month to month, the monthly and cumulative depreciation cost/use ratio (cents per mile) will be a relatively level number as well, and thus not very useful in determining replacement. Actual depreciation (the difference between the original cost and the market value) is the number dealers should be tracking. Actual depreciation will usually follow a predictable curve. The largest and quickest drop in market value will occur immediately after the new vehicle is brought into service; thus the cost per mile will be very high in the first months, then drop dramatically. This drop occurs because market values decline much more slowly after the first month or two, so that as mileage accumulates, the cost per mile will decline.
Variable costs will move in the opposite direction. For the first year to 18 months, depending upon how many miles are driven, variable costs will be relatively steady, since some 60 percent are fuel costs, and maintenance costs consisting primarily of oil changes and other preventative maintenance, will be low. When the vehicle reaches 35,000 miles to 45,000 miles, both tires and brakes will likely be replaced; these are the two highest cost predictable services a vehicle will need during its normal service life. The word predictable is emphasized because one cannot assume a major component (such as the engine or transmission/transaxle) will fail, but tire and brake replacement are a certainty.
Look Closely at the Trends
It becomes clear in some instances during the life of the vehicle, there is a large difference between fixed and variable costs. In the first months, variable costs are low, and depreciation costs are very high; actual resale values have plummeted as soon as the vehicle leaves the car dealer’s lot.
How to Calculate Optimum Replacement
It is useful, until the replacement policy has been set, to sell vehicles at varying times with different mileage. This way, you can see how the combination of fixed and variable costs differ, and choose the policy best backed by the numbers. The numbers are calculated as follows:
Original cost minus resale proceeds = total depreciation dollars. Depreciation X 100/mileage = cost per mile. Example: 20,000 – 8,000 = 12,000 total depreciation. 12,000 X 100 = 1,200,000. 1,200,000 divided by 80,000 = 15 cents per mile depreciation.
Obtaining the Right Information Is Key
As with most fleet-related tasks, determining proper replacement policy begins with information. All pertinent vehicle costs must be captured, as well as accurate mileage. A simple spreadsheet can perform the necessary calculations, and an experienced fleet manager can provide the analysis. Too often, companies make replacement decisions based upon incomplete data, or simply using criteria recommended by others. If no policy exists, this can be done; you’ve got to start somewhere. But lifecycle cost/use ratios must be tracked to determine when to properly replace your fleet vehicles.
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