Fleet professionals definitely understand optimum replacement. It is intuitive that capital costs (depreciation) decrease over time and operating costs go up as a vehicle gets older.
Clearly, vehicles should be replaced when the Total Cost of Ownership (TCO) is the lowest, and this point is usually just before there is a spike in operating (maintenance) costs. Of course, this can only happen if an organization properly plans and allocates budgets for fleet replacement.
The best-laid replacement plans fail the first year that funding is not forthcoming. In a perfect world, we would adhere to optimum lifecycles and minimize TCO over our 15+ year replacement plans.
COVID has meant that this is far from a perfect world. Organizational budgets have been depleted to accommodate increased cleaning, workplace modifications, enhanced technology to allow work from home and many more COVID-induced changes.
These funds have to come from somewhere and the fleet replacement budget is often an attractive target. Diverting funds to a higher operational priority may be inevitable for an organization.
I recently spoke with a fleet manager who is living this reality. After a devastating fire, followed by floods, his replacement funding was $0 in two of the past five years. Enter COVID and he was facing another year of zero funding. The organization was digging a very deep hole by delaying fleet replacement without a workable plan in place for longer-term fleet renewal.
In this and other cases where delayed replacement is inevitable, fleet managers should take the following steps to ensure that informed delayed replacement takes place.
- Understand the budget reduction
- Evaluate the short-term costs and impact
- Explain the long-term costs and impact
- Explore less costly alternatives
- Implement wisely
Understand the budget reduction
In large organizations, it can take time for information to be communicated. Rumours of budget cuts may hit the fleet office before the official announcement. The fleet manager needs to understand the formal decision and reduction to capital and/or operating funds. They should be ready to perform “what if” analysis and offer alternatives that are best for the organization.
Evaluate the short-term costs and impacts
A decision to cut replacement planning has immediate consequences. The Fleet Manager should evaluate the impact on operating costs and service delivery. Keeping vehicles longer means that fuel and maintenance costs will go up. Maintenance needs may exceed the capacity of the existing shop and outsourcing may therefore increase.
Where funds are not available for these increased maintenance requirements, downtime will increase. Increased downtime can in turn compromise delivery of key services—it may take longer to plough roads, collect garbage or repair bridges.
Explain the long-term costs and impacts
These short-term issues expand exponentially over time. Every year that replacement funding is insufficient, the hole gets deeper and more difficult to make up. Decision-makers need to be reminded that withholding $2,000,000 in funding today may result in an increase to total fleet spend of twice that over 15 years. Fleet Managers should use models to clearly demonstrate these longer-term impacts.
Explore less costly alternatives
Knowing that delays to fleet replacement only postpone these expenditures, organizations should ask the tough question about whether a program or service can be discontinued to achieve permanent savings. Can garbage service change to every two weeks, instead of weekly, or can recreational facility hours be reduced?
Even after explaining the economics of fleet and exploring alternatives, some organizations are going to proceed with replacement funding reductions. Once that decision is made, fleet managers need to carefully plan and execute, making the best decisions under the circumstances.
The use of a sophisticated points system that takes into account vehicle age, mileage or hours, maintenance spend and condition can ensure the best decision to minimize long-term impact.
It is inevitable that fleet managers are going to be asked to delay fleet replacement when times are tough. Those fleet managers need to ensure decision-makers fully understand the short and long-term impacts of these delays and have viable alternatives to delayed replacement.
However, once the final decision is made to reduce fleet budgets, fleet managers must be ready with plans to minimize the long-term impact.
Kate Vigneau serves as Director (Fleet and Canada) for Matrix Consulting Group, a consulting firm concentrating on finding solutions to client’s management, staffing and operational concerns. She is responsible for Matrix’s fleet solutions division as well as the lead for expansion in all functional areas related to business in Canada.