The Million Dollar Decision: Timing Asset Replacement for Cost Efficiency

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Timing asset replacement for cost efficiency

As managers who must oversee fleets of vehicles and heavy equipment (assets), comes the tremendous responsibility of determining the costs associated with each asset.

Determining the optimal time to replace an asset, prior to it becoming an expense to your organization, could potentially save millions of dollars. While many fleets base replacement decisions purely on miles and age, other important factors should be considered.

The total cost of ownership is based on several factors: what is the overall condition; what was the original purchase price, including upfitting; what are the maintenance costs for both planned and unplanned repairs; what is the age of the asset; and how mission critical is the asset to your operation? By evaluating all six factors, many times an operation will find that assets they determined should be replaced solely by considering age and miles, is not the most cost-effective decision. Other factors may include utilization and depreciation.

An example would be two like vehicles, both having reached the age and miles limit set for replacement, yet vehicle one is still in great condition and the maintenance costs are low. Most likely, the monies designated for this year’s replacement budget could be better utilized by replacing an asset that has hit its miles and age threshold, is in poor condition, and has exceeded the average maintenance cost associated with that class.

1. “Organize your fleet assets into categories of like assets, also known as class codes.” These are groups of assets that are the same make and model, share similar acquisition costs, operating use, weight, power source, wheel configuration, transmission, and fuel type.

A basic mid-size sedan could be outfitted as a marked police car or set up as an administrative vehicle. How these two vehicles are used will result in different annual operating costs. These differences are so significant that a police vehicle may have a life cycle of four to six years, whereas an administrative sedan may have seven to ten years.

2. “Set parameter guidelines for each class lifecycle.” Police patrol vehicle at 6 years or 80,000 miles. Sedan, passenger vans, and SUVs at 10 years or 80,000 miles.

3. “Determine a score for how mission critical a class code is to your operation.” One (1) being the least important to five (5) being the most important.

4. “Condition is a key component to calculating replacement.” Score each of your assets by the condition it is in: Very Good, Good, Fair, Poor, or Bad.

Below is the baseline to determine lifecycle years and miles/hours per class:

Baseline to determine lifecycle years and miles/hours per class

5. “Determine optimal replacement criteria using a series of values.” The series of values contribute to the overall score. This determines the optimal time to replace an asset. Some agencies select to use a bell curve or a point system.

Below is an example of the point scorer using the aforementioned criteria. In addition to the point score, some agencies may look at the utilization of the asset in order to determine if the asset should be kept in the fleet, redeployed to another department, or removed from the fleet entirely.

Before making a final decision, it is imperative to determine the projected replacement cost in comparison to life-to-date maintenance cost. One can determine the projected replacement cost by calculating a compounded inflationary cost each year from the date of the original purchase price. Most agencies use an inflationary compounded percentage between 4% to 6%.

By knowing the projected replacement cost, this knowledge will provide a better method to evaluate the ratio of maintenance expenses to the new acquisition cost.

Another factor that needs to be taken into consideration is the depreciation of the asset, meaning what will the resale value be when the asset reaches its useful lifecycle. By knowing this information, it will assist in determining the “sweet spot” of when a vehicle should be replaced. This is done by comparing the projected replacement cost, compared to the escalating maintenance cost versus the resale value, better known as the bell curve in the example below.

In addition to determining the equipment replacement criteria, knowing the total cost of ownership in comparison to the total cost of a new vehicle helps to determine the optimal time to replace an asset. This can be done by comparing the cost to like classes of assets.

In many cases, this is used as a means of triage. If an agency does not have enough money to replace all the assets in need of replacement within the fleet, this information will help to determine which vehicle has the highest cost of ownership.

Below is an example to determine the total cost of ownership.

Tracking lifecycle costs is the very basis for effective business vehicle management, and if done properly and regularly, can help avoid vehicle downtime, improve risk to drivers, and contain costs. Lifecycle costing isn’t an overly complex process. It does, however, require a solid database to capture fixed and variable costs, a reporting mechanism to express the data in cost per mile form and, most importantly, the business acumen to interpret the information and establish sound policy as a result:

  • Accumulate all fixed and variable costs.
  • Express the costs in a cost/use ratio of cents per mile/hour.
  • Filter the results for unusual expenses that might skew results.
  • The resulting data will reveal true vehicle productivity.

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