Market Trends

Policy Versus Guideline: The Trend Toward Flexible Replacement Cycles

October 4, 2012

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A growing number of fleets are shifting to more flexible vehicle replacement cycles. In fact, some fleets no longer call their replacement cycle a “policy” and are now referring to it as a “guideline.” The rationale is that they want to reserve the right to determine when to take a vehicle out of service based on prevailing market conditions, rather than predetermined mileage and/or months-in-service parameters. Enabling this shift is the growing sophistication of lifecycle optimization modeling; in particular, the development of analytics to calculate the various “what if” scenarios to identify the optimal vehicle replacement parameters.

A flexible replacement guideline can take several directions. One is to extend vehicle cycles, which can be a short-term solution to compensate for reduced capital expenditures. One early example of replacement flexibility occurred during the height of the Great Recession, when massive layoffs were occurring and fleet managers were hesitant to acquire vehicles for employees who potentially might be let go and wanted the option to switch a higher-mileage vehicle with a low-mileage vehicle taken from a laid-off employee.

The other direction in a flexible replacement guideline is to shorten service life as was done by many fleets that shortcycled to take advantage of the strong resale market. When used-vehicle inventories reached record lows, fleet resale values sharply strengthened in the wholesale market. Many fleets shortcycled vehicles to take advantage of the strong resale market, especially from 2010 to 2012. Flexible cycling allowed many fleet managers a once-in-a-career opportunity to take advantage of a record used-vehicle market and dramatically lower depreciation expenses.

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Answering the Age-Old Question
The perennial question in fleet management is: “How long should vehicles be kept in service?” The answer to this question changed very little from the 1950s to the 1980s, with the average replacement cycle for passenger cars of 55,000 miles or 36 months. The reason for this cycle timing was because of the vehicle quality standards of the time, and a 55,000-mile replacement period avoided additional maintenance costs by not entering a new PM interval to replace wear items such as brakes and tires. During this period, the average replacement cycle for light-duty trucks was approximately 42 months or 75,000 miles.

However, in the mid-1980s, the standard replacement parameters began to shift for the following reasons:
● Steadily improving vehicle quality.
● Emergence of SUVs in fleets.
● Year-over-year increases in vehicle acquisition costs.
● Increased prevalence of minivans.

By the 1990s, the recommended vehicle replacement cycle began to extend and the parameters, based on vehicle class, became more complex. Companies started differentiating replacement cycles between vehicle applications (e.g. sales, service, and work trucks), as well as by vehicle class (e.g. sedan, light truck, minivan, SUV, and executive vehicle). Industry-wide, fleet vehicle cycling and replacement analytics became more sophisticated with the introduction of massive data warehouses by fleet management companies allowing fleets to analyze maintenance and resale histories to determine the optimal vehicle replacement period. The five primary factors determining these vehicle replacement decisions are:
● Acquisition cost. The higher the acquisition cost, the more
cost-effective it is to keep an asset in service longer.
● Historical resale market performance by seasonality.
● Maintenance cost history and forecast of future expenses.
● Incident of downtime extrapolated from increased repairs.
● Increased warranty coverage periods, especially after the major
OEMs introduced extended powertrain warranties.

Guidelines Versus Policy
Nearly all fleet-related expenses, both fixed and operating, are influenced by when a vehicle is taken out of service. The conventional wisdom says the best fleet replacement cycle is when vehicles are replaced at a point in time when the combination of holding and operating costs per mile are at their lowest.

However, there is a new mindset emerging, which believes extenuating market circumstances may dictate otherwise and require greater flexibility in vehicle replacement cycling.

Vehicle replacement parameters need to be flexible, recognizing that it may be more advantageous to keep vehicles in service longer or shorter, depending on market conditions. A growing number of fleets have decided they don’t want to be locked into a specified vehicle replacement cycle and prefer to remain nimble with a flexible replacement policy that is market driven.

Let me know what you think.

mike.antich@bobit.com

Comments

  1. 1. Patrick Cronin [ October 19, 2012 @ 08:30AM ]

    I just had a chance to read your article on “Policy Versus Guideline: The Trend Toward Flexible Replacement Cycles”, and I thought it was a great article. For someone who is still relatively new to the fleet industry, I thought it was very well written and informative. Very nice!

  2. 2. Rachel Johnson [ October 19, 2012 @ 11:03AM ]

    We've always been "flexible" and just used parameters as a guideline. In the service industry and the types of vehicles we use mostly with some upfiting, I think you need to be flexible and look at each vehicle separately. It does offer it's challenges however, with continuous ordering throughout the year and we do sometimes get caught during manufacturer model changes.

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Author Bio

Mike Antich

Editor and Associate Publisher

Mike Antich has been covering the fleet management and vehicle remarketing markets for more than 20 years. During this period, Mike has written or edited more than 4,600 articles on the subjects of fleet management, manufacturer fleet activities, the fleet leasing industry, and vehicle remarketing. He was inducted in the Fleet Hall of Fame in 2010.

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