how to get a newer, better fleet gary hatfield mercury associates

How to Get a Newer, Better Fleet

Gary HatfieldMercury Associates

Why do fleets get too old?– Lack of replacement funding– Inadequate replacement planning– Lack of structured approach – Poor data– Failure or inability of fleet

manager to communicate the problem to upper management and CFO

© 2014 Mercury Associates

Why is the timely replacement of vehicles important?

– Getting a newer, better fleet– Projecting a positive image– Managing total costs of vehicle

ownership– Minimizing fleet maintenance costs– Improving safety and technology– Improving employee productivity– Reducing fuel consumption and

emissions– Improving utilization of vehicles– Reducing the need for spare vehicles


Why aren’t vehicles replaced in a timely manner?

– Choice of financing approach affects decisions:

• Pay before you go versus pay as you go (purchase vs. lease)

• Sunk cost versus ongoing depreciation– Focus on marginal M&R cost versus total

cost– Lack of understanding of vehicle life-

cycle costs and how to compute the ideal cycle

– Lack of understanding of the magnitude and volatility of fleet replacement costs

– Lack of understanding of the impact of vehicle age on vehicle performance


How do we fix the problem?1. Right-size and Right-type the

fleet (VAM)2. Optimize replacement cycles for

each type of vehicle3. Compute the cost difference

between current and optimal replacement cycles

4. Use the cost savings to make the business case for sufficient capital funding

5. Develop a long-range capital-funding plan

6. Alternatively, lease instead of buy


1. Right-size and Right-Type the Fleet (VAM for Federal fleets)• GSA provides VAM guidance for eliminating

unnecessary or non-essential vehicles from an agency's fleet inventory – FMR Bulletin B-30

• Ensure lifecycle cost-effectiveness (lease vs. own; optimized replacement cycles for owned)

• VAM must address composition of light duty fleets (i.e., vehicle types and sizes)

• Agencies must determine their optimal fleet inventory (including alternatively fueled vehicles) using the VAM and post on agency websites

• Agencies must develop and submit fleet management plans annually for achieving their inventory targets © 2014 Mercury Associates

Total Cost of Ownership – TCO:

– Essential for determining optimum replacement cycle

– Used for comparing buying vs. leasing

– Aggregated total of all costs of owning and operating a vehicle over a given life span (lifecycle)

– Includes all fixed and variable costs


Source: ConsumerReports.org

Depreciation

Fuel

Interest

Insurance

Maintenance

License & Tax

• Fixed Costs:– Depreciation = purchase

price + upfitting cost – resale value

– Taxes, insurance, license

• Variable Costs– Fuel– Maintenance & repair –

never include accident costs

• TCO must include ALL costs!


2. Optimizing Vehicle Replacement Cycles

– Reduces fleet cost– Makes business case for

replacement funding– Usually results in a newer,

safer, more fuel-efficient fleet

– Establishes the lifecycle that minimizes Equivalent Annual Cost (EAC)

– Specifies the year (age) vehicle should be sold


Lifecycle Cost Analysis

11

$-

$5

$10

$15

$20

$25

1 2 3 4 5 6 7 8 9 10 11 12

Co

sts

(000

)

Replacement Cycle (years)

(Single-Axle Dump Truck)

Total Cost of Ownership

M&O Cost

Depreciation

Ideal Replacement


Determining Cost Savings– Develop your Lifecycle Cost

Analysis model (LCA - get help from your CFO office or fleet expert if needed)

– Choose a class of vehicles with large population – the more the better

– Gather all required data elements– Run the LCA model to determine

optimal replacement age– Compare existing cycle EAC with

optimum cycle EAC and compute annual cost savings

– Multiply annual cost savings per vehicle x number of vehicles© 2014 Mercury Associates

13

ORCA™ = Optimized Replacement Cycle Analysis

Optimizing a Replacement Cycle

Single-Axle Dump TruckReplacement Cycle 1 2 3 4 5 6 7 8 9

Meter at replacement 6,209 12,418 18,627 24,836 31,045 37,254 43,463 49,672 55,881 CAPITAL COST

Total Residual Value 114,750$ 104,288$ 93,094$ 84,085$ 75,972$ 70,426$ 66,091$ 63,093$ 59,855$ Annual Depreciation 20,250$ 10,463$ 11,194$ 9,009$ 8,113$ 5,546$ 4,335$ 2,998$ 3,238$

Cumulative Depreciation 20,250$ 30,713$ 41,906$ 50,915$ 59,028$ 64,574$ 68,909$ 71,907$ 75,145$ OPERATING COSTS

Annual M&R Cost 2,963$ 4,164$ 5,145$ 6,028$ 6,863$ 7,671$ 8,466$ 9,258$ 10,053$ Annual Fuel Cost 2,755$ 2,867$ 2,982$ 3,102$ 3,227$ 3,357$ 3,493$ 3,633$ 3,780$

Total Annual Operating Cost 5,718$ 7,031$ 8,127$ 9,131$ 10,090$ 11,028$ 11,959$ 12,892$ 13,833$ Cumulative Operating Cost 5,718$ 12,749$ 20,876$ 30,007$ 40,097$ 51,125$ 63,084$ 75,975$ 89,809$

TOTAL COSTAnnual Total Cost 25,968$ 17,493$ 19,320$ 18,139$ 18,203$ 16,574$ 16,294$ 15,890$ 17,071$

Cumulative Total Cost 25,968$ 43,462$ 62,782$ 80,921$ 99,125$ 115,699$ 131,993$ 147,883$ 164,954$ NPV of Cumulative Total Cost 24,499$ 41,002$ 59,228$ 76,341$ 93,514$ 109,150$ 124,522$ 139,512$ 155,617$

Equivalent Annual Cost 25,234$ 21,428$ 20,939$ 20,538$ 20,419$ 20,149$ 19,987$ 19,874$ 19,986$

What data elements are required?


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VehicleType

Current Cycle

(years)Recommended

Cycle (years)

EAC Under Current

Cycle

EAC Under Recommended

Cycle

Annual Per-Unit Savings

Annual Fleet-Wide Savings

Hybrid-Electric Sedan 4 4 $ 4,053 $ 4,053 $ $ 7 to 9-Passenger Van 15 8 $ 7,050 $ 5,379 $ 1,671 $ 138,684 Patrol Car 8 6 $ 9,701 $ 9,405 $ 296 $ 510,648Investigative Sedan 11 7 $ 4,777 $ 4,214 $ 421 $ 414,298 ½-Ton Pickup Truck 12 5 $ 6,821 $ 4,761 $ 2,060 $ 688, 102 ¾-Ton Pickup Truck 16 6 $ 8,823 $ 5,989 $ 2,834 $ 2,324,056Utility Truck 20 10 $ 16,265 $ 14,098 $ 2,167 $ 318.567 Bucket Truck 17 9 $ 23,401 $ 17,947 $ 5,454 $ 414,530 Dump Truck (165) 20 8 $ 26,731 $ 19,874 $ 6,857 $ 1,131,405Refuse Truck 9 4 $ 124,945 $ 79,672 $ 45,273 $ 5,794,962

Ambulance 4 2 $ 27,944 $ 23,246 $ 4,698 $ 483,873Fire Pumper Truck 16 9 $ 77,195 $ 48,344 $ 28,851 $ 3,289,031

Total Savings > $14.5 Million per Year!

3. Compute Cost Difference Between Current & Optimal Cycles


4. Use $ Savings for Your Capital Funding Business Case


Don’t be intimidated by the business case…

Just show them the savings!

5. Develop Long Range Capital Funding Plan

1. Identify purchase prices (with inflation) for each type of asset

2. Project future replacement dates and costs for each asset

3. Calculate total fleet replacement costs for each future year

4. “Smooth” the plan by delaying or advancing the replacement of specific vehicles to reduce near-term peaks and valleys in fleet replacement costs


Baseline Plan – Existing Fleet

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029$0

$50

$100

$150

$200

$250

$300

Gross Replacement Costs - Existing Fleet Size

Fiscal Year

(Mill

ion

s)

$260 Million Backlog


Baseline Plan – Right Sized Fleet

20102011201220132014201520162017201820192020202120222023202420252026202720282029$0

$50

$100

$150

$200

$250

$300Gross Replacement Costs

Fiscal Year

(Mill

ion

s)



Smoothed Plan

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029$0

$50

$100

$150

$200

$250

$300

Gross Replacement Costs – Smoothed

Fiscal Year

(Mill

ion

s)


Approximately $50M per year needed to sustain the fleet


Comparison – Baseline vs. Smoothed

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019$0

$50

$100

$150

$200

$250

$300

Baseline v Smoothed Costs

Baseline Smoothed

Fiscal Year

(Mill

ion

s)

18© 2014 Mercury Associates

How do we get more capital $ for fleet replacement?1. Empirically identify optimal vehicle

replacement cycles2. Develop a plan that quantifies long-

term fleet replacement costs3. Identify total fleet costs under

different levels of replacement spending

4. Work with the CFO to show potential savings with proper investment

Every excess dollar spent on a fleet due to suboptimal replacement practices is a dollar that cannot be devoted to an agency’s primary mission!


Summary– An old, costly fleet did not

happen overnight and cannot be fixed quickly

– Optimize replacement cycles– Develop long-term capital plan– Establish a 5-year plan for fleet

renewal


MERCURY ASSOCIATES, INC.

“Specializing in the science of fleet management.”

For more information, contact:

Gary HatfieldVice President, Federal Fleet Consulting

[email protected]

(941-685-6907)

24

mailto:[email protected]

how to get a newer, better fleet gary hatfield mercury associates

Documents

fleet cost

fleet vam

fleet maintenance costs

vehicle replacement

fuelefficient fleet

fixed costs

vehicle lifecycle costs

type of vehicle