Aging Fleet Costs

Jun 21, 2018 | Industry News

We're helping to debunk a myth. Fact: The older your fleet, the more money and maintenance will have to be invested. Fleet owners can severely limit the success of their fleets if they don't spend the time, money, and resources as needed.

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There’s a misperception among fleets that fleet costs decline as equipment ages. Fleet managers who abide by this misperception can severely limit the success of their fleets. The goal of this article will be to expose this misperception and provide a better understanding of the hidden costs and factors involved with aging fleet equipment.

While aimed at helping avoid this pitfall, equally important are the opportunities to improve fleet success.

Despite existing knowledge that fleet costs do not decline as equipment ages, the misperception of the contrary still persists, and it can impact fleets of all sizes. Similarly, leaders regardless of their experience or education can fall victim to believing this as well. It can also happen despite having an extensive fleet information database.

It plays no favorites, with no attribute making a fleet invulnerable. And it can severely undermine a fleet’s success in multiple respects.

First-Hand Experience 

My fleet career began as a result of our fleet being a severe victim of this misperception. As the first fleet engineer in our utility, I was initially tasked with three overall objectives. Although I didn’t know it at the time, these would lead to unprecedented success.

The first two dealt with equipment procurement requirements; specifically creating specifications and a bid selection process.

The third was establishing an optimal fleet equipment replacement program; which is the focus here.

The three were all aimed at ensuring a modern efficient fleet. The first two were fairly straightforward. Although the third initially appeared somewhat more challenging, I had no clue of how important it was, how difficult it would be, or how long it would take to accomplish.

The most obvious obstacle at the outset was the need to determine replacement schedules for each of the multitude of differing vehicles and equipment types.

There were two real challenges. One obstacle was the budget process. Being based solely on capital dollar availability; fleet competed with the rest of the corporation for funding. And the other was overcoming an executive culture where extending equipment lives was viewed as “saving money.”

This resulted in replacements typically occurring at, or beyond, the end of what would normally be considered their ultimate service lives.

As a result, the older fleet units experienced substantially reduced effectiveness, higher overall costs, and fell short of meeting customers’ needs. This, along with other issues, resulted in poor — at best — overall services and support.

Worse yet, this resulted in devastating eight- to 10-year fleet procurement cycles.

The age of the fleet would reach a point where utility operations were jeopardized. It then became evident to all that new equipment was needed. With this, funds would be allocated; resulting in disproportionate procurements for a year or two.

A general sense of well-being would follow — with ever declining replacements. And, this would continue until the cycle repeated itself.

The consequences, although unrecognized at the time, were ruinous to fleet effectiveness, costs, customer service, as well as being self-perpetuating.This was basically a lesson in how not-to-run a fleet. After a couple of years experience with the annual budget process, I realized an analytical approach wasn’t the solution. The culture was just too ingrained.

At the same time, with our fleet’s extreme age, the hidden operating costs with this flawed approach became readily apparent. And, this wasn’t the result of cost data, but from firsthand experience and customer feedback.

So, in a sense, I had an advantage. Often the most effective way to learn is by experiencing how not to do it first. And yet, even with this basic understanding, I eventually found there was a lot more to learn.

Causes for Extending Usage

One contributing factor came from our executives’ experience with their personal vehicles and how extending ownership can appear to result in savings.

First, if they do their own maintenance, they experience no labor expense.

Second, typically these vehicles are spares, so often there’s no breakdown or downtime costs either. Added to this, as the vehicles grow older, they aren’t used much which further reduces these expenses.

Voila, savings! It’s easy to understand how this could lead some to mistakenly think this applies similarly to a fleet.

The reality is that direct and indirect labor costs are substantial with fleet maintenance. This is also true with downtime and breakdowns costs.

But, there are a multitude of other hidden factors impacting fleets that can be missed. These include customer issues involving crews, tools, delays, re-scheduling, and required replacements.

How many fleets track all of these costs effectively?

This question leads to another obstacle we faced. Our CFO at the time had a belief “if it can’t be quantified, it doesn’t exist.”

This essentially precluded addressing these hidden issues and addressing the concerns with our dysfunctional budget process.

Theory of the Lowest Lifecycle Cost 

Having an engineering background led me early on to identifying the lowest lifecycle cost (LLC) approach to minimize costs. After all, the objective of any organization is to lower costs and optimize efficiency.

One of the byproducts of this was identifying existing flaws in typical equipment specification and bid evaluation processes — as mentioned earlier.

But, in this context, where it offered the most benefit was with fleet vehicle and equipment replacement process.

An LLC approach is based on the knowledge that initially, equipment costs decline, and at some point, begin to increase. This is slower at first, but at an ever increasing rate over subsequent years.

Thus, to achieve lowest overall costs, the optimum point to replace equipment is at — or close to — its LLC.

While this is fairly simple in theory, in practice it’s not — for a number of reasons.

In the case of our fleet, these often-hidden costs were readily apparent. They were obvious if you looked at our overall fleet’s performance and listened to customers.

I say hidden because that may not be true for most fleets. First, these costs aren’t readily apparent or identifiable since they aren’t so pronounced.

Typically fleets don’t keep equipment as long as we did. As a result, despite the equipment lives being extended, the added costs can go unnoticed. Generally they’re viewed as normal expenses. They aren’t identified because that’s what they are familiar with and expect. It’s basically all they know — since that’s the way it’s always been done.

A prime example of this includes cooling system maintenance such as heater core and radiator repairs or replacements. In other cases it might include major component rebuilds and replacements like engines, transmission, etc.

For light vehicles, LLC replacement schedules completely eliminate these types of maintenance costs.

However, if these have always been a part of your maintenance requirements, they often escape attention. In these cases, usually the focus is on reducing these costs — not eliminating them.

As you’ll learn, this is an inherent trait with adopting an LLC approach.

Can Data Identify Issues?

Today, data is often a primary source of information and it guides the management directions of many fleets. While this is certainly a valuable resource — particularly for larger fleets — it’s useful to recognize its inherent limitations.

There are two principal aspects with this. First, as you’ve learned, many critical fleet costs inherent with deferring replacements are difficult, if not virtually impossible, to identify or capture.

And second, the real focus shouldn’t be on fleet costs, but on the impact to customers. These are even more challenging to identify.

As any fleet manager knows, beyond a certain age, equipment costs increase. An obvious source of this is escalating maintenance requirements. As parts wear out, they need to either be serviced or replaced.

This process begins with preventive maintenance requirements such as oil/filter changes. It progresses to added services along with tire, brake system, and other increasing requirements such as those previously mentioned.

This is where data limitations with downtime and breakdowns impacts begin to become apparent.

But, these are only some of the hidden costs with older equipment.

The Impact on Customers

Fleet success is not based upon costs alone, but quality as well. It’s easy to lose sight of this with the overriding focus on costs.

As equipment ages, is the customer impact measured relative to increased maintenance demands? How about the impacts on equipment availability; or the expectations of the drivers and operators on age and effectiveness?

These criteria lead to another increasing hidden cost as equipment ages: equipment utilization.

As equipment becomes older and less reliable, it’s both less capable and desirable in terms of available alternatives.

Put simply, drivers, operators, and their supervisors will increasingly choose these alternatives to meet their needs and wants as the fleet ages.

As a result, older equipment is utilized less. In extreme cases, it may not be utilized at all — being replaced with expensive alternatives such as rental equipment or contracting.

While these costs are typically captured; are they associated with their source — an aging fleet? Here are some pertinent questions:

Is equipment utilization and quality included in the replacement analysis process?

Are associated rentals or contracting costs identified and a part of this analysis?

If the answer to the second question is no, you may unknowingly be paying for two units to do the same job.

If equipment isn’t used, the maintenance requirements are deferred and greatly reduced. Thus, if a fleet manager is focused solely on maintenance costs, these units can appear to be bargains.

The fact customers avoid older units, and in worst cases, are forced to acquire alternative solutions at any cost isn’t seen. Many fleet managers are blind to these concerns, since it’s outside their immediate purview; it’s not in the data.

The hidden costs with aging equipment should now be more apparent at this point. And, the realization that accurately identifying and including all of these may be virtually impossible.

Here are some associated pitfalls. One, because there is no data, the costs are overlooked. And second, the accompanying risk of thinking a lack of data suggests they aren’t important, or even that they aren’t real.

They lead to aging equipment appearing to have lower costs, when in fact the opposite is true.

This is not a strategy for success and these errors should be avoided.

Solutions with Lowest Lifecycle Costs

So, now we’ve come full circle back to utilizing the LLC approach to determine when to replace fleet vehicles and equipment.

Determining fleet equipment LLC schedules can appear to be a formidable task at best. However, there are several “work around” solutions. One is to look at rental and leasing equipment lives, since these are based on customer preferences and lowest life cost criteria.

The secret here isn’t in determining the exact costs; the cost curve at the lowest point is virtually flat.

Close is good enough. It will virtually ensure optimal fleet effectiveness, costs and quality for customers. It automatically voids all of the hidden concerns with extending equipment replacement schedules.

Changing the culture is another solution, however, this is typically the most challenging task associated with adopting an LLC approach. It begins with information and understanding, but ultimately it involves change and the required time.

Additonal Anecdotes

The way this has been presented might suggest our fleet eventually developed a plan and implemented it over several years.

Nothing could be farther from the case. We overcame all of these obstacles by circumstance and necessity.

It’s beyond the scope of this article to detail how this all occurred, but I can highlight the major milestones involved.

The first was recognizing that the LLC methodology was the optimum solution to our severe aging fleet issues. Associated with this was also understanding what was preventing us from this approach — the budget process and our executive culture.

It took decades for the “stars to align” to correct this situation. To overcome the capital budget limitations, we partnered with our finance group. A changing financial climate, combined with extreme growth pressures on the overall utility’s capital budget requirements, along with new executive leadership all facilitated this direction.

Coincidently, working with a nationwide vehicle rental firm provided a comparison of lease vehicle costs to what we were experiencing with our aged units. This resulted in unexpected and surprising fleet savings. The hidden savings weren’t the deciding factor.

Prior to our achieving this milestone, our focus was the same as most fleets with improving the management and efficiency of existing processes and requirements.

What we didn’t realize was the real opportunities were in eliminating these, not improving them.

The adoption of LLC equipment scheduled replacements through leasing greatly increased the scope and extent of these opportunities. A few examples illustrate this.

First, by replacing equipment at its optimum life, the maintenance requirements were substantially reduced.

Most of the normal maintenance mentioned earlier was subsequently eliminated with our light vehicles. And when issues arose, they were typically covered on warranty. As a result, staffing requirements were substantially reduced — with both direct and indirect labor costs.

Similarly, the normal focus of improved parts management was replaced with eliminating unnecessary parts stock.

With these, the required facility requirements are reduced as well. This introduced a number of other opportunities for the fleet, its customers, and the parent organization.

Rather than focusing on improved efficiencies with labor, parts, shop space, and associated requirements; the result was substantially reducing these with eliminating many of these pre-existing requirements; along with their expenses.

Staying Focused

Fleet managers face enormous challenges with increasing competitive demands, and escalating customer expectations.

With the daily pressures, resource limitations, and increasing technologies; it’s quite difficult to step back from the required day-to-day detail and look at the big picture.

Add limited experience — based upon the way it’s always been done — combined with common industry-accepted misconceptions and practices, and it guarantees that opportunities will be overlooked.

I’ve experienced this firsthand. Our fleet was threatened with being privatized early on. Survival wasn’t an abstract concept for us, it was reality. While this was an underlying motivation early in my career, as we improved, we sought further opportunities as they presented themselves.

The third initial objective I was assigned — to optimally replace fleet equipment — remained as the last holdout. It also represented one of the most profound improvements, since it’s a primary foundation of fleet success.

When the combination of events occurred to facilitate an LLC approach, we didn’t waste any time. As we began to replace our aged equipment, we realized there were substantial added hidden savings that had still been overlooked.

Experience can be a valuable source of strength for any career. But, this comes with risks. For fleet leaders, thinking fleet equipment costs decline with age is only one example.

Probably the largest risk is with accepting and failing to question the way things have always been done.

There are substantial opportunities for many fleets to redefine their success. However, this is not the result of continuing change (which is required). These opportunities are the result of insights into how things can be done entirely differently.

If you can recognize the inherent value of utilizing LLC-based equipment replacements and find a way to implement this process, you’ll realize success that would not have been previously thought possible. 

 

Source: Fleet Financials

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