DISPOSAL/REPLACEMENT OF THE VEHICLE´S FLEET

 DISPOSAL/REPLACEMENT OF THE VEHICLE´S FLEET

The organization has to design and implement policies for disposal and renovation of the vehicles, when to renew them, choose the sales channel, choose the sales suppliers, or establish the maximum time to sell the vehicles.

The maximum time a vehicle is used is established by its renovation period, for which the vehicle can be used during this maximum time period and renewed for another vehicle, or be disposed from service, and sold before the maximum time is due because it’d no longer be needed for the service performance.

The goal for disposal and renewing the fleet’s vehicles is to sell them as fast as possible with the highest price possible, and use this income to acquire new vehicles or in any other fleet’s necessities.

It has to be considered that once the vehicle is retired of service and until the vehicle is sold, the organization has to pay for transportation and storage costs, which have to be minimized.

The vehicle has to be sold in perfect use and safety conditions, and for this reason, it’d have to be repaired if needed, and in some cases the vehicle’s condition has to be certified by an third company.

If the vehicle was acquired through renting/leasing, the vehicle would be taken back to the renting/leasing company during or after the end of the contract, and because of this, the vehicle wouldn’t have to be sold by our organization.

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Vehicles renewal policies

The organization has to establish policies for the vehicles’ renewal, which could be when the vehicles reach certain kilometrage/mileage, a certain age, or whichever comes first. The main aspects to consider are the following:

  • Brand image

New vehicles models in the automotive market represent a better brand image for the organization than older vehicles

  • Vehicles technology

New vehicles models in the automotive market incorporate the latest technology for active and passive safety measures, fuel consumption, and contaminating emissions. For this reason they’re key aspects for the reduction of traffic accidents, fuel consumption, contaminating emissions and breakdowns; they’re also a good opportunity to incorporate in the fleet, vehicles that use new technologies regarding alternative fuels instead of fossil fuels.

  • Traffic accidents

After the 6th-7th year of the vehicle’s life, traffic accidents increase, and because of this, the vehicle’s availability for service performance decreases, and the variable operational costs increase

  • Fuel consumption

After the 6th-7th year of the vehicle’s life, the vehicle’s fuel consumption increases, and for this reason, the contaminating emissions and variable operational costs do too.

  • Breakdowns

After the 6th-7th year of the vehicle’s life, the number of breakdowns increase, and for this reason, the vehicles availability to perform the service decreases, and the variable operational costs increase

  • The organization’s market

In determined occasions, the vehicles renovation is dictated by the competition within the market in which the organization operates, and represents a competitive advantage. Car rentals have to offer their clients the newest vehicles in the automotive market to perform their services and be competitive

  • Financial restrictions

The budget destined to the vehicles renovation, limits the number of vehicles to renew each period, and for this reason the average age of the fleet.

  • Information organization system

The more information about the vehicle’s direct costs and residual value there is the more precise and trustworthy are the results about the renovation period.

  Total cost of ownership (TCO)

There is a vast field of scientific literature on fleet vehicle renovation; the most used models are the basic model of Life Cycle Cost Analysis (LCCA), the decreasing use rate with age model, or the parallel fleet replacement problem model. (Simms, Lamarre and Jardine, 1984) (Buddhakulsomsiri, Parthanadee y Charnsethikul, 2012).

Other methods based on the LCCA are the equivalent annual cost, annual cost comparison, asset repositioning, or the ones developed by Eilon, King and Hutchinson (1966), and Redmet (2009). Most of these methods use the vehicle’s life cycle costs to determine the renovation cost.

The model to use in the organization would be the one that meets more adequately the fleet’s specifications, characteristics, operative and goals, and the data availability.

We explain the basic model because it is the most simple and widespread, the model considers that the vehicle has a constant use rate through its life.

The following ownership costs must be considering, as shows the graph 1 (vehicle fleet´s costs)

  • The cost of capital, like depreciation and financing, decrease with time independently of the financing choice
  • The unavoidable variable operational costs of a vehicle, like the fuel consumption, tires, maintenance, breakdowns, and accidents increase with the vehicle’s age and kilometrage/mileage

The fixed operational costs, like insurance, taxes, and rates remain practically constant through the vehicle’s life; there’s no need to consider the driver’s salary.

Considering all these costs, the results graph a curve for the total costs of ownership in a “U” shape.

To calculate some of the vehicle’s costs of ownership, it could be included the organization’s historical data, also the vehicles manufacturer, other vehicle fleets, third-party companies, or to directly estimate them.

If the vehicle was acquired through renting/leasing, the cost of capital is the annual vehicle’s fee.

Once the total ownership costs are calculated and/or estimated, the Total Discounted Cost of Ownership (TDCO) is used to evaluate an investment project, which would allow the organization to calculate the current cash flow value, using a discount rate.

formula 2

Equation 1: Total Discounted Cost of Ownership.

  • TDCO: Total Discounted Cost of Ownership
  • CTt : Total costs of ownership
  • t: period of time
  • r: discount rate or cost of capital
  • n: reposition period

The vehicle’s renewal period is when the total cost of ownership is minimum, using the basic model shown in the graph 1 (vehicle fleet´s costs).

20102015 RenovaciónGraph 1: vehicle’s renewal period.

The renewal period must be established according to the type of vehicles, they must share similar characteristics, have to have the same costs structures through their life cycle, and perform the same type of service. The renewal management is more complex the more differences are between the vehicles ages and types.

When the number of vehicles is over the optimal number, the drivers/users prefer using vehicles with lower kilometrage/mileage, causing an excess in their use, and underusing the older vehicles. This makes that the unavoidable variable operational costs in the vehicles with less mileage/kilometrage or age to be higher than the older ones. So the basic model’s hypothesis that these costs increase don’t apply, which added to the fact that the costs of capital always decreases, causes the graphed curved for the total costs of ownership to not have an “U” shape, and for this reason the renewal period calculation is more complex.

If the budget for the vehicle’s renewal is limited, the organization has to determine the order of the vehicles to renew. In order to do this, it has to be establish a criteria, like the vehicles with higher mileage/kilometrage, the higher residual value, that have higher contaminating emissions, that have priority in the fleet, or have the highest accumulated total costs.

Sales channels of the fleet’s vehicles

The organization has to establish the sales channels for selling the disposal vehicles, such as selling them to the employees of the organization where they’ve been used, selling them directing to the second-hand market, create a sales central in the organization, use personally or electric biddings, or exporting them to other countries. The sales channels can be established depending on the vehicle’s characteristics and type.

  • The organization’s employees

An interesting option is to sell the vehicles to the organization’s employees where they’re being used, since they have direct concepts on the conditions and use of the vehicles.

  • Direct sales

Selling the vehicles directly is recommendable when the organization doesn’t want to deal with major sales costs, and there’s only a few vehicles to sell. This sale could be done to a regular person, or to another company.

  • Sales central

Creating sales central within the organization is advisable when there’s a major number of vehicles and rotation of the fleet, and need to be sold in a short period of time. This sales central requires an initial investment and the salary costs that have to be evaluated, and not all organization are capable of it. Big car rental companies often use this channel to sell their vehicles.

  • Bidding

Personally or electronic bids are more complicated to do, clear and advisable when there’s a whole lot of vehicles to sell.

There are three main factors to maximize the total sales value, like establishing the number of vehicles in the lot, the vehicle bidding order, and the type of bid (ascending, descending, sold over the first price, sold over the second price, etc.).

Doing the bidding requires an initial investments (software and a license), and salary costs that have to be evaluated.

The game theory field has developed a vast scientific literature about bidding.

  • Exporting to other countries

Exporting vehicles is an interesting option in countries where the second-hand market is strong, and can be sold for a higher price than in the countries where the vehicles have been used.

The exportation costs have to be considered, like transportation, storage, insurance, taxes and importation rates for vehicles in the destination country.

The organization can use an online website for selling the vehicles, but the organization has to consider there’ll be an initial investment, mainly for the software that can be acquired from another company, and salary costs that have to be evaluated. In this way, the organization has total control over the selling process of their vehicles.

Outsourced suppliers for selling the fleet’s vehicles

In the market exists several remarketing companies that specialize in vehicles sales through any of the type of channels previously mentioned.

Using one of these companies will depend on several aspects like honorariums and commissions, saving all the administrative costs, and knowing the best market and channel where the vehicles could be sold.

Maximum time for selling the withdrawn vehicles

The organization has to establish the maximum time to sell the vehicles, which depend mainly on financial aspects, since it’s advisable that the income from selling the vehicles is used to acquire new vehicles, investments, or fleets expenses. Besides, the organization may have limited space to store a determined number of vehicles.

References 

Adam Redmer. 2009. Optimisation of the exploitation period of individual vehicles in freight transportation companies. Transportation Research Part E: Logistics and Transportation Review. Volume 45, Issue 6, 978–987.

B.W. Simms, B.G. Lamarre, A.K.S. Jardine. 1984. Optimal buy, operate and sell policies for fleets of vehicles. European Journal of Operational Research. Volume 15, Issue 2, 183–195.

Parthana Parthanadeea, Jirachai Buddhakulsomsirib, Peerayuth Charnsethikulc. 2012. A study of replacement rules for a parallel fleet replacement problem based on user preference utilization pattern and alternative fuel considerations. Computers & Industrial Engineering. Volume 63, Issue 1, 46–57.

S. Eilon, J. R. King, D.E. Hutchinson. 1966. A Study in Equipment Replacement. Journal of the Operational Research Society 17, 59–71. 

JMFI´m a Fleet Management expert, and the manager of Advanced Fleet Management Consulting, that provides Fleet Management Consultancy Services.