{"id":4741,"date":"2020-03-20T17:05:45","date_gmt":"2020-03-20T16:05:45","guid":{"rendered":"https:\/\/advancedfleetmanagementconsulting.com\/eng\/?p=4741"},"modified":"2020-03-20T17:05:45","modified_gmt":"2020-03-20T16:05:45","slug":"understanding-economic-service-life-for-better-fleet-cost-forecasting","status":"publish","type":"post","link":"https:\/\/advancedfleetmanagementconsulting.com\/eng\/2020\/03\/20\/understanding-economic-service-life-for-better-fleet-cost-forecasting\/","title":{"rendered":"Understanding Economic Service Life for Better Fleet Cost Forecasting"},"content":{"rendered":"

Introducing\u00a0elements such as utilization\u00a0into fleet lifecycle costing\u00a0produces a more accurate\u00a0accounting of a fleet\u2019s productivity,\u00a0therefore allowing for\u00a0adjustments to the replacement cycle that would save overall fleet expense.\u00a0\u00a0<\/b><\/span><\/p>\n

Fleet management success requires an understanding of the lifecycle costs of fleet vehicles.\u202fManagers typically factor in elements such as depreciation, financing, opportunity costs, fees and taxes, fuel, insurance,\u00a0and\u00a0maintenance into the total cost of a fleet vehicle\u2019s service life.\u202f\u00a0<\/span><\/p>\n

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But in this new era of leveraging analytics and crunching data, do managers leave out other factors that could lead to a more accurate assessment of the lifecycle cost picture?\u202f\u00a0<\/span><\/p>\n

Analysts at\u00a0Mount Laurel, New Jersey-based\u00a0fleet management provider\u00a0ARI say the answer is yes. They believe\u00a0more accurate\u00a0cost\u00a0assessments require a more\u00a0holistic approach. \u201cWe\u2019re\u00a0incorporating\u00a0elements that we believe haven’t been addressed historically\u00a0to help\u00a0paint a clearer picture of the actual economic performance of an asset over time,\u201d says Mike Bryan, department head of\u00a0business intelligence and analytics with ARI.\u00a0<\/span><\/p>\n

The idea is to understand the overall economic service life\u00a0(ESL)\u00a0of a vehicle, Bryan says, which includes concepts such as cost per unit of utilization and capacity of work\u00a0or productivity. With these in mind, ARI has created its vehicle economic service life (VESL) model\u00a0to help fleet operators optimize their cycling strategy. While VESL is specific to ARI, these new elements can be brought into other types of homegrown analyses.\u00a0<\/span><\/p>\n

With a greater focus\u00a0on\u00a0the vehicle\u2019s productivity, fleets may not only find it advantageous to adjust their replacement schedule, but also realize higher equipment\u00a0utilization.\u00a0ARI analysts\u00a0incorporate a\u00a0\u00a0\u00a0vehicle\u2019s\u00a0productivity as\u00a0a key component in\u00a0its\u00a0overall economic service life.\u00a0\u00a0<\/span><\/p>\n

For example,\u00a0fleet vehicle\u00a0A might cost $5,000\u00a0per\u00a0year to operate while\u00a0vehicle\u00a0B might cost $7,500\u00a0per\u00a0year.\u00a0Simply analyzing expenses,\u00a0vehicle\u00a0B is clearly more costly. However,\u00a0vehicle\u00a0B may be utilized more and generate twice as much revenue as unit A.\u00a0\u00a0<\/span><\/p>\n

\u201cWhat a simple cost analysis typically doesn\u2019t show you is that\u00a0vehicle\u00a0A experiences significant downtime and isn\u2019t nearly as productive\u00a0and\u00a0efficient as\u00a0vehicle\u00a0B,\u201d\u00a0says Ed Powell, assistant manager of business intelligence and analytics for ARI.\u00a0\u00a0<\/span><\/p>\n

By focusing\u00a0on vehicle\u00a0economic service life, and not just lifecycle costs,\u00a0Powell\u00a0says fleets\u00a0may\u00a0identify an opportunity to reduce the number of vehicles in their fleets, which would reduce overall fleet expenditures.\u00a0<\/span><\/p>\n

Two\u00a0Use Cases\u00a0<\/span><\/strong><\/h5>\n

Bryan\u00a0offers an example of\u00a0a midsize fleet in the lawn\u00a0care\u00a0industry\u00a0which\u00a0streamlined its fleet by\u00a0eliminating\u00a0the need\u00a0to\u00a0purchase\u00a015 replacement vehicles, resulting in a reduction of nearly $450,000 in capital expenses over the next three years.\u00a0\u00a0<\/span><\/p>\n

The lawn care service\u00a0achieved this by\u00a0identifying opportunities to increase productivity with newer, more efficient vehicles, which in turn, improved revenue generation on a per stop basis. This allowed\u00a0the company to reduce\u00a0its fleet\u00a0size from 150\u00a0vehicles\u00a0to 135\u00a0without sacrificing its revenue-generating capabilities.\u00a0<\/span><\/p>\n

Bryan also provides another example\u00a0using\u00a0the same\u00a0productivity-based\u00a0methodology.\u00a0A\u00a0local delivery\u00a0company\u00a0had been\u00a0keeping its fleet of vans for longer than 48 months\u00a0in service, informed by a traditional\u00a0analysis of maintenance expense.\u00a0\u00a0<\/span><\/p>\n

Using the new methodology,\u00a0the company discovered that\u00a0by\u00a0keeping the vans longer than 48 months in service, the\u00a0average\u00a0maintenance cost per gallon of fuel burned\u00a0\u2014 a better measure of productivity \u2014\u00a0increased by 138%.\u00a0<\/span><\/p>\n

Based on this analysis,\u00a0the delivery fleet\u00a0began replacing vans\u00a0at the\u00a048 months\u00a0threshold.\u00a0Through one replacement cycle, the fleet\u2019s average maintenance cost per unit dropped $668 from $3,879 to $3,211.\u00a0<\/span><\/p>\n

ARI\u2019s analysts say most fleets\u00a0regardless of size\u00a0can achieve similar results using\u00a0this more holistic\u00a0methodology for vehicle asset acquisition.\u00a0\u00a0<\/span><\/p>\n

Factoring Productivity\u00a0<\/span><\/strong><\/h5>\n

This approach\u00a0offers a distinct alternative to a\u00a0traditional\u00a0replacement\u00a0strategy, which often uses\u00a0year and\/or mileage thresholds to establish replacement parameters but\u00a0typically\u00a0does not account for a key element of the equation\u00a0\u2014\u00a0utilization. The methodology ARI is championing delivers a\u00a0more holistic view, helping\u00a0fleets\u00a0establish replacement thresholds based the data and facts of\u00a0their\u00a0specific operating conditions.\u00a0\u00a0<\/span><\/p>\n

Bryan says\u00a0an\u00a0ESL\u00a0method\u00a0uses a cost per unit of utilization such as per-mile driven, gallon of fuel consumed,\u00a0or\u00a0hour of engine operation. The method\u00a0\u2014\u00a0which\u00a0also takes\u00a0into consideration other factors such as\u00a0productivity, generated revenue,\u00a0and\u00a0the company\u2019s need to optimize its capital expense budget\u00a0\u2014\u00a0can be applied to equipment such as forklifts and bulldozers as well as passenger cars and light- to heavy-duty trucks.\u00a0<\/span><\/p>\n

Bryan\u00a0says\u00a0ARI\u2019s method\u00a0builds upon\u00a0a widely accepted financial model\u00a0employed\u00a0in many capital-intensive industries such as the construction and airline sectors. It\u00a0works best when fleets\u00a0incorporate\u00a0telematics data\u00a0as part of the analysis. Why is that?\u00a0As\u00a0fleet managers examine miles driven, fuel consumed,\u00a0or engine hours operated, the numbers can be\u00a0more easily\u00a0associated with each vehicle\u2019s\u00a0actual\u00a0productivity\u00a0or the revenue it generates.\u00a0<\/span><\/p>\n

\u201cA lot of fleets\u00a0think that as their assets age, they got cheaper to operate,\u201d Bryan says.\u00a0\u00a0<\/span><\/p>\n

However, as\u00a0an ESL\u00a0model looks more closely at the actual\u00a0revenue generated or\u00a0amount of work being done by each\u00a0asset\u00a0per gallon of fuel burned, for example, it\u00a0reveals\u00a0that older models are actually doing less work than newer ones, costing more to achieve similar levels of\u00a0productivity.\u00a0It\u2019s\u00a0not uncommon to find older vehicles\u00a0used\u00a0as reserve units because of their unreliability, Bryan adds.\u00a0\u00a0<\/span><\/p>\n

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ESL\u00a0Glossary of Terms\u00a0<\/span><\/strong><\/h5>\n