How to Get a Newer,
Better Fleet
Gary Hatfield
Mercury Associates
Why do fleets get too old?
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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
© 2014 Mercury Associates
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
© 2014 Mercury Associates
How do we fix the problem?
1. Right-size and Right-type the fleet
(VAM)
2. Optimize replacement cycles for each
type of vehicle
3. 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
© 2014 Mercury Associates
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
© 2014 Mercury Associates
Depreciation
Fuel
Interest
Insurance
Maintenance
License & Tax
Source: ConsumerReports.org
• 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!
© 2014 Mercury Associates
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
© 2014 Mercury Associates
Lifecycle Cost Analysis
(Single-Axle Dump Truck)
$25
Total Cost of Ownership
Costs (000)
$20
$15
Ideal
Replacement
$10
M&O Cost
$5
Depreciation
$1
2
3
4
5
6
7
8
9
10
11
12
Replacement Cycle (years)
11
© 2014 Mercury Associates
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
Optimizing a Replacement Cycle
ORCA™ = Optimized Replacement Cycle Analysis
Single-Axle Dump Truck
Replacement Cycle
Meter at replacement
CAPITAL COST
Total Residual Value
Annual Depreciation
Cumulative Depreciation
OPERATING COSTS
Annual M&R Cost
Annual Fuel Cost
Total Annual Operating Cost
Cumulative Operating Cost
TOTAL COST
Annual Total Cost
Cumulative Total Cost
NPV of Cumulative Total Cost
Equivalent Annual Cost
1
6,209
2
12,418
3
18,627
4
24,836
5
31,045
6
37,254
7
43,463
8
49,672
9
55,881
$ 114,750
$ 20,250
$ 20,250
$104,288
$ 10,463
$ 30,713
$93,094
$11,194
$41,906
$84,085
$ 9,009
$50,915
$75,972
$ 8,113
$59,028
$ 70,426
$ 5,546
$ 64,574
$ 66,091
$ 4,335
$ 68,909
$ 63,093
$ 2,998
$ 71,907
$ 59,855
$ 3,238
$ 75,145
$
$
$
$
2,963
2,755
5,718
5,718
$ 4,164
$ 2,867
$ 7,031
$ 12,749
$ 5,145
$ 2,982
$ 8,127
$20,876
$ 6,028
$ 3,102
$ 9,131
$30,007
$ 6,863
$ 3,227
$10,090
$40,097
$ 7,671
$ 3,357
$ 11,028
$ 51,125
$ 8,466
$ 3,493
$ 11,959
$ 63,084
$ 9,258
$ 3,633
$ 12,892
$ 75,975
$ 10,053
$ 3,780
$ 13,833
$ 89,809
$
$
$
$
25,968
25,968
24,499
25,234
$
$
$
$
$19,320
$62,782
$59,228
$20,939
$18,139
$80,921
$76,341
$20,538
$18,203
$99,125
$93,514
$20,419
$ 16,574
$115,699
$109,150
$ 20,149
$ 16,294
$131,993
$124,522
$ 19,987
$ 15,890
$147,883
$139,512
$ 19,874
$ 17,071
$164,954
$155,617
$ 19,986
17,493
43,462
41,002
21,428
What data elements are required?
© 2014 Mercury Associates
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3. Compute Cost Difference
Between Current & Optimal Cycles
Vehicle
Type
Hybrid-Electric Sedan
7 to 9-Passenger Van
Patrol Car
Investigative Sedan
½-Ton Pickup Truck
¾-Ton Pickup Truck
Utility Truck
Bucket Truck
Dump Truck (165)
Refuse Truck
Ambulance
Fire Pumper Truck
Current
Cycle
(years)
4
15
8
11
12
16
20
17
20
9
Recommended
Cycle (years)
4
8
6
7
5
6
10
9
8
4
4
16
2
9
EAC Under
Current
Cycle
$ 4,053
$ 7,050
$ 9,701
$ 4,777
$ 6,821
$ 8,823
$ 16,265
$ 23,401
$ 26,731
$ 124,945
$ 27,944
$ 77,195
EAC Under
Recommended
Cycle
$ 4,053
$ 5,379
$ 9,405
$ 4,214
$ 4,761
$ 5,989
$ 14,098
$ 17,947
$ 19,874
$ 79,672
$ 23,246
$ 48,344
Annual
Per-Unit
Savings
$
$ 1,671
$ 296
$ 421
$ 2,060
$ 2,834
$ 2,167
$ 5,454
$ 6,857
$ 45,273
Annual FleetWide Savings
$
$ 138,684
$ 510,648
$ 414,298
$ 688, 102
$ 2,324,056
$ 318.567
$ 414,530
$ 1,131,405
$ 5,794,962
$ 4,698
$ 28,851
$ 483,873
$ 3,289,031
Total Savings > $14.5 Million per Year!
© 2014 Mercury Associates
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4. Use $ Savings for Your Capital
Funding Business Case
© 2014 Mercury Associates
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
© 2014 Mercury Associates
Baseline Plan – Existing Fleet
Gross Replacement Costs - Existing Fleet Size
$300
$260 Million Backlog
$250
(Millions)
$200
$150
$100
$50
$0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Fiscal Year
© 2014 Mercury Associates
Baseline Plan – Right Sized
Fleet
Gross Replacement Costs
$300
$250
$210 Million Backlog
(Millions)
$200
$150
$100
$50
$0
20102011201220132014201520162017201820192020202120222023202420252026202720282029
Fiscal Year
© 2014 Mercury Associates
Smoothed Plan
Gross Replacement Costs – Smoothed
$300
$250
(Millions)
$200
$150
$125 Million Backlog
$100
$50
$0
20102011201220132014201520162017201820192020202120222023202420252026202720282029
Fiscal Year
Approximately $50M per year needed to sustain the fleet
© 2014 Mercury Associates
Comparison – Baseline vs.
Smoothed
Baseline v Smoothed Costs
$300
$250
(Millions)
$200
$150
$100
$50
$0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Fiscal Year
Baseline
Smoothed
© 2014 Mercury Associates
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How do we get more capital $
for fleet replacement?
1. Empirically identify optimal vehicle
replacement cycles
2. Develop a plan that quantifies long-term
fleet replacement costs
3. 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!
© 2014 Mercury Associates
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
© 2014 Mercury Associates
MERCURY ASSOCIATES, INC.
“Specializing in the science of fleet management.”
For more information, contact:
Gary Hatfield
Vice President, Federal Fleet Consulting
ghatfield@mercury-assoc.com
(941-685-6907)
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