Fleet Replacement, Fixed and Variable Costs, Maintenance Costs, Vehicle Replacement Cycle
In his blog, Businessfleet.com contributor Mike Antich talks about “the history and evolution of fleet replacement vehicle cycling parameters.”
Antich addresses the frequently asked question: “How long should I keep my vehicles in service?” and discusses a brief history of how replacement cycles were dealt with from the 1950s to the 1980s.
“The average replacement cycle then was 55,000 miles — a maximum of 36 months for passenger cars and 42 months and 75,000 miles for trucks. The reasons for this cycle timing were quite simple — vehicle quality was average, at best, and a 55,000-mile replacement made sense because of maintenance costs, driver downtime, and resale deducts for vehicles with higher odometer readings,” Antich writes.
Antich analyzes the principle behind fleet replacement policy — “most commonly expressed in a combination of time and mileage.”
“The logic behind this policy lies in the progression of fixed and variable expenses during the life of the vehicle. Fixed costs tend to decelerate the older the vehicle, while variable costs tend to increase. When you chart these two costs over the life of a vehicle, the time to replace it is when the descending fixed cost line intersects with the rising variable cost line,” Antich further explains.
According to Antich, the mid-1980s saw the onset of a paradigm shift for fleet vehicle replacement parameters due to a number of reasons:
- Increasing number of passenger minivans
- Arrival of the Sport Utility Vehicle (SUV)
- A revolution in vehicle quality
- Rising cost of new vehicles
- Buying higher mileage used vehicles became more acceptable
The 1990’s brought about the concept of a finely-detailed database — “replacement analytics became more sophisticated, as databases were now available to analyze maintenance and resale histories so economic value could be modeled to help guide the replacement decision,” says Antich.
Antich elaborates further on the “primary economic drivers” for replacement decisions:
- Acquisition-cost sensitivity (the higher the acquisition cost, the longer it paid to keep the asset)
- Resale market performance
- Warranty coverage period
- Maintenance cost history and forecast
- Increasing sensitivity to the cost of driver downtime
- Seasonal influences on the resale market and depreciation factors
These factors have reached such a granular level that it has “enabled the industry to increase the granularity of replacement recommendation down to the individual nameplate and even individual vehicle,” Antich notes.
However, Antich also notes that this “increased granularity” in the system has also brought about “increased complexity” when it came to resale market values and the introduction of new models.
“Another factor is changes in consumer buying behaviors for new and used vehicles. Changes in competitive fleet allowances and consumer rebates have influenced acquisition costs and buying behavior. External forces, such as business boom-and-recession cycles, interest rate fluctuations, and credit availability for retail buyers of new and used vehicles have all contributed to the complexity,” says Antich.
In determining replacement cycling, the following principles apply, according to Antich:
- Asset cost
- Cost of driver downtime
- Remarking seasonality
- Company image
- Retail demand for used vehicle
In closing, Antich predicts that this increasing granularity will result in an even more complex system of data analytics in the future. Read more from the original article here.
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