Contact FleetCUBE

Join the FleetCUBE Fleet Managers association now!!!!

Replacement timing
The biggest problem facing fleet owners is the need to look at the average age of the fleet and ensure that it is within acceptable limits.

The second major problem will be planning for the new vehicles that will be needed as the economy grows. Planning for replacement vehicles should be at least two months in advance. Selection criteria and maintenance controls and costs must be bought into the process to ensure a cost efficient fleet operation.

It is essential at this stage to be planning for the necessary financial resources needed for replacement vehicles. It is also essential to realise that manufacturers are being very cautious about extending production ahead of any perceived economic recovery. Planned replacement could well be adversely affected if vehicles are not available when needed.

There are many different strategies that can be applied. However, they must be based on the sound application of replacement theory. This is explained later. The important point to remember is that there is usually more than one correct solution. It must also be remembered that purchasing and replacement go hand in hand. The principles of both fleet management disciplines must be integrated and mutually beneficial.

Listed below are some of the principles to be applied when making replacement decisions: -

a) Use your own statistics and industry trends and calculate your optimum replacement timing. Use it as a guide.
b) Study the used car market and get facts as to where the best prices are being obtained in South Africa for used vehicles.
c) Remember the model year concept. A vehicle purchased early in the calendar year gives you more opportunity to amortise depreciation costs. If possible plan for your major purchases in the early part of the calendar year.
d) Obtain early commitments for capital allocations for vehicle purchases.
e) Consider the various financial alternatives if capital is not available. For example, leasing, rentals, full maintenance leasing and installment sale.
f) Select cars that will give good resale values.
g) Try to get back to normal economic replacement cycles as soon as possible. The incremental costs for even small extensions are usually high in terms of extra c/km maintenance costs. Play the end game carefully. It calls for a stop to nonessential repairs and maintenance once the replacement decision has been made.
h) Review your fleet and try to move the cars in the worst condition first. .
i) Do not be tempted to keep cars because "they look all right". Unexpected repair bills will always leave the thought "I should have replaced earlier"
j) Ensure that the car to be replaced is available when you need to sell it and not on a week long trip in the country.
k) Plan the new vehicle delivery well in advance. Do not rush into the dealer at the last moment and expect immediate delivery. If at all possible, plan to order new vehicles at least one month in advance.
l) Do not spend hours and hundreds of rands negotiating that extra half percent discount while throwing away anything up to R 2 000.00 on your second hand unit simply because of a lack of attention to replacement policies.

THE PROPER THEORETICAL APPROACH TO REPLACEMENT TIMING DECISIONS

The following approach and method was researched and scientifically proved by the UK Royal Institute of Operations Research. It is applicable to passenger vehicles and commercial vehicles. Assume a car is 3 years old and the fourth year is under review.

STEP 1

Calculate the car's average cost of actual market depreciation for each year in rands e.g.: -

Purchase Price = R 40 000.00
Year 1 depreciation = R 10 000.00 (25 %)
Year 2 depreciation = R 4 000.00 (10 %)
Year 3 depreciation = R 3 000.00 (7.5%)

Year 1 average 10 000 divide by 1 = 10 000
Year 2 average 10 000 + 4 000 = 14 000 divide by 2 = 7 000
Year 3 average 14 000 + S 000 = 17 000 divide by 3 = 5 666

STEP 2

Calculate the car's average cost of repairs and maintenance for each year e.g.: -

Year1 costs R1 920.00
Year 2 costs R2 280.00
Year 3 costs R2 670.00

Year1 average 1920 divide by 1 + 1920
Year 2 average 1920 + 2280 = 4200 divide by 2 = 2100
Year 3 average 4200 + 2670 = 6870 divide by 3 = 2290

STEP 3

CONCLUSION:
Costs have bottomed out and will probably increase in the next year.

IT IS TIME TO MAKE A REPLACEMENT DECISION NOW.

t is recommended that this approach also be used for the Repair or Replacement decisions. It is usually a poor financial decision to spend money on major repairs near to replacement time. Trying to amortise the costs over a reduced period throws the operating costs way out of line. Replacement Timing is an essential fleet management technique and must be correctly utilised to ensure correct and cost efficient fleet operations.

© 1998 - 2009 © FleetCUBE. All rights reserved. Disclaimer
Found a fault on the web site, click here and tell us about it.