By Maria Neve, Manager, Mercury Associates
Everyone is saying it, and it’s true: we are living in unprecedented times. COVID-19 has upended how we do business and has shown that the existing playbooks are insufficient. The virus has also affirmed some long-held basics of fleet management. First and foremost, a lifecycle management policy is a must. Every fleet—whether it be commercial or government—should have a plan in place to replace vehicles in a measured and timely fashion.
State and municipal governments find themselves in the unenviable position of being essential to the health and welfare of the population, and also at the mercy of incredible budgetary pressure that is only going to worsen over the short term. All government entities will be looking for ways to cover the shortfall caused by reduced tax revenue. Then there is the responsibility to be good stewards of taxpayer dollars. One can argue that a well-thought-out and data-driven fleet replacement policy does exactly that. Let’s take a look how:
• Reduces lifecycle costs – Multiple studies have shown that many organizations retain and operate assets long past their optimum lifecycle. What is saved in capital acquisition costs is squandered on increased operational costs: higher maintenance costs, higher fuel costs due to decreased fuel economy, and lower utilization because of increased downtime for repairs. Data has proven this over and over.
• Increases driver and occupant safety – Newer vehicles have better safety features. What were once expensive options are now standard. In 1997, the occupant fatality rate per 100,000 registered vehicles was 17.81 for passenger cars, according to the National Highway Traffic Safety Administration (NHTSA). In 2017, the rate dropped to 10.05.
• Increases resale value – Cycling vehicles at the right time maximizes the resale value of those units. For organizations that have to fight for every capital expenditure, a higher return on sale is a good way to seed a dedicated replacement fund that doesn’t rely on lengthy budgetary battles.
• Increases reliability – Fleets with a lower average age experience less downtime than older fleets. A more reliable fleet also needs fewer loaner vehicles to pick up the slack, which is an easy way to begin the fleet rightsizing process.
A solid fleet replacement policy ensures that the vehicles necessary to save lives and preserve the public health will be ready and operational. Even with a solid policy in place, the New York City Fire Department (FDNY) is seeing a 137% increase in work orders for its ambulance fleet, due to increased usage. It would be hard to imagine how an organization running older units at the end of their usable lives could properly respond to the dramatic increase in utilization.
Why fleets keep vehicles too long
The obvious question is why do organizations continue to have old fleets, if a replacement policy is considered an integral part of basic fleet management? The reasons are varied, but the most common are:
• Lack of understanding of lifecycle management principles
• Lack of visibility of individual vehicle and total fleet costs (no data or bad data)
• Use of capital financing methods that stall or actually discourage the timely replacement of vehicles based upon flaws in the “keep versus replace” decisions
• Unwillingness to spend money on vehicle replacements (capital expenditures = bad; operational expenditures = good)
There is no secret recipe or “magic fix” to lowering vehicle lifecycle costs. Best practice is to utilize economic-based replacement planning and utilization tools. That empirical data then helps determine the proper lifecycle. The next step is to convince the decision-makers that a younger fleet is a cheaper fleet, which requires knowing how to quantify current and future fleet costs. Then the decision-makers must be persuaded that making the fleet younger is affordable, which requires knowing how to quantify future fleet expenditures.
A good fleet replacement policy is also a living document that doesn’t exist in a vacuum. The amount of disruption throughout all levels of the supply chain will have lingering effects that last long after the stay-at-home orders are lifted. Replacement cycling intervals will temporarily change. OEMs have shut down production entirely, and many auto auctions and other remarketing venues are also not operating.
Plan now for near-term opportunities
Predictions are that resale values will temporarily drop 15 to 20 percent once remarketing channels reopen. This, along with the prolonged OEM shutdowns, will greatly affect the decision of when is the right time for vehicles to come out of service. While these are challenges that will have to be overcome, opportunities also exist.
Auto manufacturers may increase fleet incentives to move metal, which will bring down the cost of new vehicles. The interest rate landscape is incredibly favorable for fleet financing. It’s a good time to examine what alternative financing models look like in comparison to outright purchases.
Guaranteeing essential services is vital, now more than ever. State and local governments don’t have the luxury of riding out a global pandemic or economic downturn. Proactive fleet managers are already taking a hard look at their fleet operations and identifying areas for improvement. This is a chance to re-emphasize how vital fleet is to all aspects of government. Now is the time to rewrite the playbook.