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Managing Vehicle Depreciation and Fleet Life Cycles

Depreciation is the single largest cost of managing a fleet, with maintenance coming in second. Learning to manage asset depreciation is key because even small changes in performance can reap huge savings or incur significant costs.

Understanding Depreciation

The formula for depreciation is deceptively simple: vehicle acquisition cost minus resale value, plus any fees involved with the sale. But the factors that influence resale value, and the utility derived from your fleet vehicles in the meantime are various and complex.

Vehicle depreciation consists of two main factors: Utility and Prestige Value. Utility is essentially a function of mileage; every mile you drive depreciates the vehicle, though not all miles incur equal depreciation throughout the lifecycle. Prestige Value is the perceived value of a vehicle, which is obviously highest for vehicles right before they’re driven off the lot, and drops precipitously in those first few months of ownership.

Prestige also has hidden implications for other parts of your operation besides simply replacement lifecycles. The effect of driving a vehicle that hasn’t seen the wear and tear of an older, feature-light one is hard to calculate, but it definitely has an impact on employee morale and retention. The costs of lowered morale and prestige value are harder to include in rigorous depreciation formulas, and such hidden variables make clear the importance of a flexible management system that allows you to optimize acquisition and resale of fleet assets while keeping related factors in mind.

Determining the Optimum Replacement Cycle

Consider all of your costs: There has to be a balance between the fleet manager and the other relevant stakeholders to ensure a positive overall savings throughout multiple departments. And some things simply cannot be predicted accurately; uncertainty needs to be built into cost models. Managers can rely on industry fuel cost trends to estimate average fuel costs, and tracking fuel-consumption for each vehicle and driver can help add more dimension to your cost projections. You can also use past data on corrective repairs to project a budget range that anticipates catastrophic repairs and downtime.

Looking at your projected maintenance costs should also help you craft an informed maintenance schedule that minimizes unscheduled repairs and limits those costly events over the life cycle of individual vehicles.

Track the data that matters: Monitor and track your real-world costs over several lifecycles using a comprehensive fleet management system that provides a granular view of your entire operation, from tracking the maintenance history and failure rates of individual assets to monitoring and optimizing your ratio of preventive to corrective maintenance costs. After three or so cycles, you will likely have enough data to start recognizing a baseline trend, infer likely connections between that data and your vehicle depreciation, and make changes to your replacement plan and maintenance schedules accordingly.

Organize your replacement timelines: Set up multiple replacement cycles based on when it’s best for your organization to replace portions of the fleet. Usually, it’s impractical to do it all at once. Fall and spring are typically the best times to take advantage of the best market values, so you’ll want to order your replacements for those seasons. Schedule half for both the fall and the spring, adjusting percentages based on what your operations will allow and your current economic condition.

Be ready for unexpected replacements: Predict and plan for off-season replacements, typically due to major component failure. If your tracking is adequate, you may be able to spot the lemons before those major failures (and their accompanying repair costs) occur.

Stay current on external factors: Monitor the used-vehicle market and other economic conditions to optimize a flexible replacement plan. The real world is never static, and you need to be flexible enough to base decisions on sound professional judgment, not just strict fleet policies.

Monitor lost productivity: Calculate the impact of downtime on depreciation and productivity measures. Significant downtime and extension of individual lifecycles can lead to situations where your loss of resale value is not worth the productivity gains of extending the life of an asset. Properly managing your preventive maintenance to minimize unscheduled downtime is crucial.

Unseen, Non-Qualitative Factors

There are always other considerations that can affect your depreciation management policies, and not all of them have to do with direct vehicle costs. Company image, employee morale and retention and safety all play a role in deciding whether or not to shorten replacement lifecycles. These secondary factors are becoming more important with time as driver retention moves to the forefront of many managers’ minds. Incorporating such concerns into your management strategy requires getting input from various stakeholders, possibly even in other departments, including HR and marketing.

Understanding depreciation in a more detailed, strategic fashion can help you develop a better plan for managing fleet asset lifecycles. And with a more informed view of everything from driver retention to maintenance management, you can connect depreciation to other factors even if you can only use things like retention rates and maintenance costs as trailing indicators of your success.

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