Jun 28, 2013
Acquiring new units to upgrade your fleet is a convoluted process that often leaves many scratching their heads and settling for the first available opportunity that seems like a good deal. While settling shows a lapse in judgment, avoiding the decision altogether is a tremendous mistake for fleet managers. Before getting into the details about when to upgrade, it is important to know what the associated costs are that come with maintaining a profitable fleet.
Maintaining a fleet to be utilized for a business' primary source of revenue has quite a few areas that detract from the bottom line. These expenses range from "hard" costs that are clearly visible in the books to "soft" costs: those which have an indirect impact on profit.
"Hard" costs are accounted for in the budget and predictably vary based on number of orders and foreseen expenses. In regards to fleet management, these costs include but are not limited to fuel, insurance, scheduled repairs, and depreciation of the value of fleet vehicles.
When developing a business model that involves fleet based logistics or other vehicle intensive services, many plans tend to omit the other side of Fleet expenses; the "soft" costs that cannot be accounted for in a budget but can end up breaking a company if stacked up at an inopportune moment. These "soft" costs, which fall under Murphy's Law, include but not limited to lost business, lost sales, corporate image, diminished productivity, and employee retention.
Each of these cost groupings need to be taken into consideration when trying to establish the appropriate time to upgrade your fleet.
When to upgrade the Fleet
Like all business decisions, upgrading your fleet needs to begin on a cost-analysis basis. At the most simple level there is one, two-part question that needs to be answered: "How much is being spent to maintain this fleet in its current state, and how much will it cost to replace these vehicles?" By approaching this with the aforementioned cost groupings in mind, this becomes much easier to deduce.
The overall "hard" costs of a fleet include the previous list in addition to resale value of the vehicles, title & license fees, acquisition price, and sales fees. With a sizable fleet this number can escalate at an alarming rate, making replacement seem like a daunting task. However, you need to keep in mind that "soft" costs can either offset these expenses or greatly increase them.
Due to the inevitability of labor intensive repairs that come with aging vehicles, "soft" costs become exceedingly important to acknowledge as vehicles approach the 100K mark. The questions that need to be asked during this risky period of a fleet's lifecycle are:
1. What are the incurred rental expenses when a vehicle is inoperable?
2. What are the repair costs?
3. Will clients leave because of delays?
4. Will employees leave because of undesirability of working with an aging, finicky fleet?
5. Will potential new business be lost due to the corporate image that is presented by a run-down fleet?
Then, most importantly, will fleet replacement remove these potential lofty expenses? If the answer to these last four questions is "yes," then without a doubt fleet replacement needs to occur during the ideal new-model year or mid-model year selling periods.
Additional deciding factors that provide definitive affirmative responses when considering a fleet upgrade:
1. Repair costs exceed value of vehicle
2. Fuel efficiency of new vehicles greatly reduces fuel costs [AB1] currently incurred
3. Employees are frustrated with state of current vehicles
4. Potential employees are put-off by the state of current vehicles
5. Every vehicle is over the 100K mile mark
This latter issue can present the biggest problems because if all fleet vehicles are in a dilapidated state then it can mean that all vehicles will have to be replaced in one fell swoop; a tough proposition to present to accountants. Spacing apart big purchases diminishes the pecuniary impact and also provides the opportunity to build a profitable relationship with a dealer.
As a vehicle advances in mileage, depreciation presents a compounding decrease in resale value while the average maintenance cost per mile steadily increases. Take care of the bottom line by replacing fleet vehicles before preventative maintenance and repairs become unjustified expenses.
Overall, things to keep in mind during the replacement process:
1. Replace a vehicle before it is absolutely necessary to do so
2. Leasing is financially more responsible than purchasing
3. Having newer business tools is appealing to both employees and potential clients
4. Be sure to get the best fleet vehicle insurance coverage