Managing the Financial Side of Commercial Fleets

‘Breaking’ the Rules to Optimize Performance

Some call it thinking out of the box, pushing the envelope, or just plain breaking the rules. “Common wisdom” isn’t always the best way to keep a fleet running cost efficiently.

May 2011, by Staff



Common adages fleet managers should reconsider include: 

■ Vehicles must be replaced in three years/65,000 miles (or thereabouts) - otherwise, there is risk of major component failure.

■ Leased vehicles should be amortized at 2 percent per month to most closely proximate actual depreciation.

■ Fleet needs certified technicians to authorize vehicle repairs beyond preventive maintenance.

■ Large fleets need more than one supplier to keep them honest and compete for business.

There has never been a better time to break the rules than today. Resources are being slashed, staff eliminated, and fleet managers are scrambling like never before to meet the never-ending demands to reduce costs. 

If you've tried everything - if you've data mined and scolded and cajoled until your keyboard catches fire - maybe it's time to forget traditional fleet management and take a step out of the box. The payoff can be substantial.

'The Way It's Always Been Done'

Let's first take a look at some of the more common adages that have guided fleet managers for decades. 

■ You must replace your vehicles in three years/65,000 miles (or thereabouts) - otherwise, you run the risk of major component failure.

■ Amortize your lease vehicles at 2 percent per month; this will most closely proximate the actual depreciation.

■ You're not a mechanic; you need certified technicians to authorize vehicle repairs beyond preventive maintenance.

■ Your fleet is a big one; you need more than one supplier to keep them honest, and they can compete for your business.

There are more, but you get the picture. Try to buck that common wisdom and you'll be laughed out of the room - and possibly out of your job. Then again, perhaps not. Let's take a look at each of these adages, and how stepping out of that comfort zone can help fleet realize savings previously thought impossible.

Replacement Cycling 'Rules'

It is one of the oldest adages in the fleet industry. Fleet automobiles should be replaced on a cycle of time and mileage, 36 months or somewhere between 65,000-75,000 miles, whichever comes first (light trucks and vans, a bit longer). Why? For a number of reasons. Exceeding this mileage range will significantly reduce resale value. Replacing at that point will avoid the additional expense of the next round of tire and brake replacements. Keeping vehicles longer increases the possibility of major component failure. These and other reasons are given when the question of when to replace vehicles arises. 

Like similar common wisdom, it has its origins decades ago when vehicles were not nearly as well built as they are today - warranties were nowhere near as long or comprehensive, and model years were clearly defined. Today, vehicles routinely last well over 100,000 miles, provide many years of cost-efficient, reliable service, and retain significant value on the used-vehicle market. 

That said, before considering stepping out of the replacement cycle box, a fleet manager needs to ensure that it's done carefully. Ensure that:

■ A vigorously enforced preventive maintenance regimen is in place.

■ Vehicle condition reports are completed, endorsed by a supervisor, and submitted several times each year. Conditions requiring attention must be addressed.

■ The change is phased in slowly, stretching out the time and mileage on selected vehicles, and lifecycle costs are calculated and tracked.

Provided vehicles are cared for, there is little reason to believe that either performance or resale value will fall off a cliff if replacement is stretched out to four years, or 100,000 miles or more.   

Amortization is Not 'One Size Fits All'

For fleet vehicles leased under an open-end TRAC lease (the most common lease transaction among mid-size and larger fleets), a key part of the lease rate factor is the rate at which the original cost of the vehicle is amortized. This rate will determine not only the size of the lease payment, but the "book" value of the vehicle at lease term, against which the resale proceeds are applied. 

Again, decades ago, it was generally accepted that for a "typical" fleet auto, in service for the aforementioned 36 months or 65,000 miles and replaced with that mileage in approximately 2.5 years, the proper amortization rate was 50 months, or 2 percent per month. After 30 months in service, for example, this would result in an unamortized value equal to 40 percent of the original cost.

Few fleets, however, are so homogenous that a "one-size-fits-all" amortization rate properly fills the role the process requires. The purpose of amortization is to reduce the original cost to the point when, at anticipated replacement, the unamortized value will approximate the market value when the vehicle is sold. 

For a national fleet, with vehicles in several different roles carried out in many different venues, amortizing at one rate is counterproductive. Urban vehicles generally run lower mileage than do rural vehicles. Jobsite trucks accumulate harder, tougher miles than do delivery trucks, etc. Smart fleet managers should use amortization rates appropriate to the usage: lower-mileage vehicles amortized over a longer period, and higher or harder mileage vehicles, a shorter period. This will more accurately reflect the actual depreciation, and smooth out cash flow. Remember, there is not real "gain" or "loss" from the sale of a vehicle lease under a TRAC lease. It is merely an adjustment required as a result of amortization that doesn't properly match the actual depreciation. It's not unlike a tax return; you aren't really getting money from the government when you get a refund. You're getting your own money back that was taken from you during the year. The ideal withholding, like the ideal amortization rate, will result in an adjustment as close to zero as possible.

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