Conducting a lifecycle cost analysis of a particular vehicle type frequently reveals its total cost of ownership curve is, as in this particular example, somewhat shallow or flat at the bottom. This means there is not a single point in time at which an asset should be replaced to minimize its total cost, but a period of time, often lasting as much as two or three years in duration, during which it can be replaced with only a small variation in this cost.
Thus, deferring fleet replacement purchases to accommodate short-term budget constraints does not necessarily increase total fleet costs immediately. However, if an organization traditionally has not replaced vehicles in a timely manner, even a temporary reduction in replacement spending can result in immediate increases in fleet operating costs – principally in maintenance and repair expense.
Decision makers who assume cutting replacement purchases is a good way to help balance the budget must understand such cuts usually transfer a portion of the fleet costs from the capital to the operating side of the general ledger. Regardless of its net effect on current fleet capital and operating costs, the deferral of replacement purchases today unquestionably increases future replacement spending needs, and continually putting off or underfunding vehicle replacements unquestionably creates replacement spending backlogs that can become quite large and difficult to overcome.
Replacement Funding Requests Vulnerable
Even during good economic times, securing sufficient funds for timely vehicle replacement is a challenge for many organizations. This challenge stems in part from a lack of understanding of the trade-off between a vehicle’s capital and operating costs, as illustrated in Charts 1 and 2 (see pdf).
Many decision makers also do not fully appreciate the role fleet plays in supporting an organization’s primary mission. Intellectually, they may understand vehicles are a necessary tool for directly or indirectly supporting the delivery of goods and services. When push comes to shove, however, decision makers may be quick to cut fleet funding in the belief vehicle purchases are, at least to some degree, a discretionary expense deferrable during times of fiscal constraint.
However, the vulnerability of fleet replacement funding in most organizations stems less from a lack of appreciation of the importance of vehicles or the need to replace them on a regular basis, than from an inability to deal with year-to-year fleet replacement spending needs, inherently lumpy in most organizations.
Chart 3 (see pdf) illustrates the long-term replacement costs of a small government fleet of about 160 vehicles. The fleet comprises 56 different types of vehicles and pieces of equipment. The replacement cost (i.e., purchase price) in today’s dollars of each of these assets ranges from $5,200 to $353,000. Their replacement intervals range from four to 20 years. The weighted average replacement cycle for all the fleet assets is 10 years, and the weighted average replacement cost is $62,000.
As demonstrated, projected annual replacement costs for this fleet are quite uneven, ranging from a low of about $250,000 in 2011 to a high of almost $3 million in 2016. This lumpiness is common in virtually all government fleets.
The biggest impediment many organizations face to replacing vehicles in a timely manner (and thus minimizing vehicle total cost of ownership) is the lack of a replacement program to deal with such volatile spending needs. Specifically, organizations do not know how to accommodate year-to-year changes in spending requirements when the source of funds for such expenditures is relatively static.
The solution to this problem lies in pursuing one of two courses of action:
- Eliminating the volatility in fleet replacement spending requirements.
- Eliminating the volatility in replacement funding requirements.
What’s the difference?
