One of the most important aspects of professional fleet management is working out the optimal replacement cycle for any specific vehicle.
Numerous factors influence the ideal time for vehicle replacement, and these fluctuate, so every vehicle replacement plan needs to be regularly reviewed and updated. But when is the best time to replace my fleet vehicles?
“Applying the same replacement cycle or plan to an entire fleet is not ideal”, says Hein du Plessis, former Head of Fleet Solutions. “Many companies adopt a linear approach to their replacement policy. They’ll replace vehicles every three years or six months before the maintenance plan expires or according to their depreciation calculations. These are all valid points, but there are so many other factors to consider. Fleet managers who don’t pay attention to changes in the industry risk getting stuck in a replacement cycle that ends up costing the company a lot more than necessary”, says Hein.
The type of vehicles in your fleet largely dictates the optimal replacement cycle. A fleet of heavy-duty mining vehicles will have a very different replacement cycle to a fleet of small utility or passenger vehicles. With many years’ experience under the belt, we have the following five tips for fleet managers when it comes to optimising your fleet replacement cycle:
1.Consider the impact of inflation on the replacement price
Any vehicle, in any capacity, is a depreciating asset, and it will continue depreciating for the entirety of its life within a fleet. In the same breath, it is important to make note of the value of new vehicles which are influenced by inflation. Depreciation depends on many factors such as type of vehicle used, what the vehicle is used for and mileage of the vehicle. Inflation depends on the global and local economy as well as completely unpredictable elements such as environmental factors, for example, the availability of resources.
As these factors all play a role, working out the exact replacement cycle for your fleet will never be an exact science. The good news is that it’s possible to get very close – but you’ll need all the relevant information and know how to interpret it.
EQSTRA did a case study on a fleet of light commercial vehicles (LCV) over a period of six years. In 2011 the LCV cost R200 000 and by 2017 the same vehicle cost R300 000. This has huge implications in cash flow as in 2017 the company needed to lay out an additional R100 000 for every vehicle replaced. It’s crucial for fleet managers to remain on top of any inflations changes or predictions as it directly affects the fleet replacement cycle. To get this wrong could be devastating to business finance as time progresses.
2.How the vehicle’s age impacts vehicle resale / residual value
Age and mileage have a direct impact on the resale value of a vehicle. Most South African companies apply a straight-line depreciation model when lowering the value of their vehicles. This means that the longer the replacement cycle, the less aggressively a company will be depreciating their asset – therefore, on paper, the vehicle’s value remains overstated for a longer period.
According to Hein, “This results in more risk if the vehicles are replaced earlier than anticipated. Companies must realise that the lower cost comes with the risk of losses if vehicles have to be sold during the first half of the contract.”
The shorter the replacement cycle, the more aggressively businesses will depreciate the asset, which means the vehicle will be worth more than asset value from the second year, which allows the company to sell or replace vehicles at any stage of their lifecycle.
3.Consider the impact of fuel efficiency on newer models
As we’ve mentioned before, fleet managers regularly need to optimise and update their fleet replacement cycles. One of the biggest reasons is the price of fuel. “Fuel related expenses now equate to between 40% and 45% of the overall fleet expenditure. Any improvements a company can make regarding this cost will have a substantial impact”, says Hein.
Fleet managers need to be up-to-date with relevant changes in the vehicle manufacturing industry. Manufacturers are consistently producing more fuel-efficient engines and fleet managers need to factor this into their planning. Fleet managers also need to implement some form of regulation to maximize the distance covered by fleet vehicles. This may include incentive programs that reward positive driving habits.
Research done by EQSTRA indicates that manufacturers introduce new vehicle derivatives on average every three years, but they only introduce more efficient engines about every six years. Therefore, if your replacement cycle dictates replacing your fleet one year before the manufacturer is due to introduce a more efficient engine, you may want to relook at it. The last thing fleet managers want to do miss out on is the opportunity to reduce fuel costs and if you replace vehicles at the wrong time you could end up with a fleet running on outdated engine technology. Fleet managers need to know when new vehicles and engines are due to be introduced so they can time their replacement cycles accordingly wherever possible.
“Over the years, we have built excellent relationships with all the relevant vehicle manufacturers”, says Hein, “We can help our clients plan effective replacement cycles based not only on experience, but also advanced knowledge of when certain vehicles and engines are due to be replaced. Fleet managers need to build solid relationships with manufacturers in order to gain access to this type of information long before it becomes public knowledge. It’s the only way to effectively plan years in advance.”
4.Inflation on the cost of parts and maintenance
Fleet managers need to account for inflation on all aspects of vehicle ownership. During the lifecycle of a vehicle, inflation will likely increase the cost of vehicle parts as well as the cost of maintenance (labour). This is where expert knowledge can save businesses a lot of money.
Knowing your vehicles, and which parts generally need to be replaced at certain points in the vehicle’s lifecycle help fleet managers estimate the amount of inflation they need to budget for. EQSTRA does regular case studies and compares data collected over the years to build an ‘inflation model’ for specific vehicles. This gives fleet managers a framework – based on solid data – to use when calculating inflation on parts and maintenance over their planned replacement cycle.
5.The potential for major repairs
Every fleet manager always tries to avoid the cost of major repairs. Safety regulations, driver training, and regular maintenance are all play a role in avoiding unexpected and expensive repairs. And an optimised replacement cycle plan plays the biggest role of all in avoiding such costs. It is important to remember that due to the nature of any vehicle there is a possibility for your vehicles to become damaged at any time.
Once again, it all comes down to detailed vehicle and manufacturer knowledge. “Some companies stick to the same brand of vehicle without checking their reputation for quality. A brand that delivered top-notch quality ten years ago might be one of the worst performers today. Fleet managers need to do constant research on new and existing vehicles so that they’re always aware of any potential concerns. You want to make sure you’re putting vehicles on your fleet that are the best fit for your business” says Hein.
Fleet managers need to know at what age their vehicles are likely to require more expensive repairs and extended downtime. Depending on your fleet needs, some vehicles may need to run into this ‘red’ zone if the plan is to stretch the replacement cycle to replace them with derivatives that have more efficient engines, for example. In such cases, it’s even more important to know exactly what you’re in for: parts pricing, level of service offered by the manufacturer, and expected downtime. All these factors will aid in creating a fluid and seamless transfer of fleet vehicles as they age and need replacement.
If the plan is to replace the vehicles before they reach the age where major repairs become a concern, all the above information comes into play as you need to know in advance which vehicles will be put on fleet instead.
Configuring the optimum vehicle replacement cycle for your fleet requires extensive knowledge of the economy, global vehicle manufacturing, as well as the local service landscape. It’s by no means an easy task, but fleet managers who know how to use all the information at their disposal will be able to implement an efficient replacement cycle that perfectly slots in with their fleet and business needs.