Hard & Soft Cost Impacts of Extended Vehicle Cycling
Lengthening vehicle replacement cycles significantly affects
such bottom-line
important issues as fleet maintenance budgets, fuel economy, resale
values, safety and ergonomics issues, company image, and driver morale.
June 2010, Automotive Fleet - Feature
By Mike Antich
Click here for a PDF of the full article, including charts.
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
down turned 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.
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