REPLACEMENT – WHEN IS THE BEST TIME
Tell me what you think

Replacement timing has always been a problem for the fleet owner. The constant question asked is - what is the economic life cycle for a fleet vehicle?

How would you accept the idea that kilometres driven has the highest effect on resale values and that the number of years used takes second place!! Well 33% of people recently surveyed felt that this was the case.

Some fleet owners take the view that the vehicle is used until the maintenance costs are “too high”. The problem here is the quantification of maintenance costs in terms of some standard.

Other fleet owners use the tax depreciation – on the basis that the vehicle will be written off over five years – and that is the time to change. Some base the time of use on internal driver pressures and personnel considerations. And sometimes the fleet owner will simply change at the end of the financial agreement.

It is an ongoing saga that has almost as many variations as there are fleet owners.

The continuing economic problems have had effect on fleets. The lack of capital is inhibited replacement cycles, forcing the fleet owner into a no win situation as operating costs continue to escalate. On the other hand, the need to keep a productive sales force on the road has also created pressures on company replacement policies.

Perhaps a few thoughts you can use for 2010. Some are of the opinion that it will be a low growth economic period until 2010. Others think that there will be an improvement of sorts early in 2011. Assuming a reasonable degree of growth, companies will inevitably need additional capital for growth. That could have an effect on the fleet unless financial resources are allocated for vehicle replacement. The temptation to keep old vehicles and simply absorb the maintenance costs under the operating budget is always very tempting.
This however, will create problems related to increased maintenance costs, lower resale values and poor utilisation.

The other point is that the manufacturer is being extremely cautious about extending production ahead of any economic recovery. Production has lagged behind and this will continue to impact on planned vehicle replacements. Market shortages, just when you’ve planned to change a number of vehicles, only adds to the problems of cost control.

SOUTH AFRICAN TRENDS

Over the last couple of years, replacement timing has moved out, on average by about six months. According to statistics the replacement timings most used are as follows: -

Essential Users
Period: 4 years
% of Fleets: 20%
Average KMS: 150 500

Period: 3 years
% of Fleets: 20%
Average KMS: 120 000

Middle Management
Period: 4 years
% of Fleets: 39%
Average KMS: 130 500

Executives
Period: 3 years
% of Fleets: 36%
Average KMS: 100 000

Obviously there are a number of fleet management aspects that affect these decisions. There also are the pure technical, cost, image, personnel and the operational factors.

FLEET OPERATING FACTORS

The question is, what to do and what factors need to be considered when reviewing fleet replacement policies? Here are some thoughts for your consideration:

• Know what is happening in the used car market and carefully select the most appropriate method of disposal.
• Use your own cost trends and industry trends to calculate your optimum replacement timing.
• Evaluate your decision using all the financial facts.
• Use the discounted cash flow technique to evaluate the financial implications.
• Remember the impact of “the model year”. Keeping a vehicle for another year will impact on your costs of depreciation.
• Obtain early commitments for capital expenditure.
• Look at all the financing alternatives if capital is not available. For example, leasing; rental; FML and instalment sale.
• Review fleet selection policies in view of new models on the market and the suitability of the present list.
• Try to get back to normal replacement policies as soon as possible. The incremental costs for even smaller extensions can impact heavily on maintenance costs and resale values.
• Play the end game carefully. It calls for a stop to non essential repairs and maintenance once the replacement decisions have been made.
• Review the fleet and change the high cost vehicles first.
• Don’t be tempted to keep vehicles because they look alright, or move them into the vehicle pool. Unexpected repair costs will always leave one with the thought that “I should have changed the vehicle sooner.”
• Place your orders well ahead of replacement time. Two months ahead is not too soon. It just takes a little more planning.

THE TECHNICAL APPROACH

Many theories have been developed on replacement timing. Fleetcube uses a fairly simple but very effective replacement modelling software package. It has been proved to be highly effective in assisting fleet owners to make the replacement decision. Click here to get to the replacement calculator……….

A CONCLUSION

Would you choose –
1. Use the vehicle until the maintenance costs equal the purchase price
2. Stick blindly to your set replacement policy
3. Set a maximum kilometre usage
4. Work on ‘model years’
5. Use a correct replacement software model
6. Run the vehicle until ‘the front wheels go flat’
7. Carefully watch and evaluate the used market and resale values
8. Only think about your corporate image and replace automatically