Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Reducing Fleet Costs By Reducing Fleet Costs By Increasing Fleet Replacement Increasing Fleet Replacement
Spending:Spending:A Case StudyA Case Study
Paul Lauria, PresidentMercury Associates, Inc.
A Presentation at
25.4.2007 ♦ Prague, Czech Republic
FLEET MANAGEMENTCEE
2007
1Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Case Study OverviewCase Study Overview● The Importance of an Effective Fleet Replacement
Program
● Determination of Optimal Vehicle Replacement Cycles
● Determination of Future Fleet Replacement Costs
● Comparison of Alternative Capital Financing Approaches
● Estimation of Operating Cost Savings Associated with Fleet Renewal
● Total Fleet Cost Reduction Opportunities
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The Importance of an The Importance of an Effective Fleet Effective Fleet Replacement Replacement
ProgramProgram
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Why is the timely replacement of Why is the timely replacement of vehicles important?vehicles important?
● Controlling employee and public safety
● Controlling fleet maintenance and repair costs
● Managing total costs of asset ownership
● Promoting employee productivity
● Promoting efficiency of fleet management and maintenance activities
● Projecting a positive image to customers, upper management, taxpayers, elected officials, and/or the general public
● Avoiding a large backlog of fleet replacement needs
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Determination of Determination of Optimal Vehicle Optimal Vehicle
Replacement CyclesReplacement Cycles
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CAPITALOPERATING
TOTAL
TIME/USAGETIME/USAGE
CO
ST
CO
ST
*
Economic Theory of Vehicle Economic Theory of Vehicle ReplacementReplacement
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r(1+r)n
(1+r)n-1EAC = NPV ∗
Where:
EAC Is the equivalent annual cost of a stream of future costs
NPV Is the present value of a stream of future costs
r Is the discount rate less inflation
n Is the length in years of the stream of costs
Calculating Equivalent Annual CostCalculating Equivalent Annual Cost
7Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Sample Life Cycle Costs:Sample Life Cycle Costs:Refuse TruckRefuse Truck
Capital, Operating, and Total Cost Trend Lines
$-
$50
$100
$150
$200
$250
$300
1 2 3 4 5 6 7 8 9Vehicle Age (years)
Cos
t (00
0)
Annual Depreciation Annual Operating Cost Annual Total Cost
8Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Sample Life Cycle Cost Analysis Sample Life Cycle Cost Analysis Results: Refuse TruckResults: Refuse Truck
$ 124,945$ 108,186$ 95,824$ 87,162$ 81,809$ 79,672 $ 80,883 $ 84,258$ 55,709 Equivalent Annual Cost
$ 972,835$ 759,433$ 597,009$ 472,176$ 374,659$ 296,148 $ 228,786 $ 161,225$ 54,086 NPV of Cumulative Total Cost
$1,031,205$ 804,999$ 632,829$ 500,506$ 397,139$ 313,917$ 242,513$ 170,898$ 57,331 Cumulative Total Cost
$ 226,205$ 172,170$ 132,323$ 103,368$ 83,222$ 71,404$ 71,615$ 113,567$ 57,331 Annual Total Cost
TOTAL COST
$ 864,641$ 640,556$ 471,133$ 342,497$ 244,315$ 168,894$ 110,503$ 64,876$ 28,831 Cumulative Operating Cost
$ 224,086$ 169,422$ 128,636$ 98,182$ 75,421$ 58,390$ 45,628$ 36,045 $ 28,831 Total Annual Operating Cost
$ 12,182$ 11,710$ 11,256$ 10,820$ 10,401$ 9,998$ 9,611$ 9,239 $ 8,881 Annual Fuel Cost
$ 211,904$ 157,712$ 117,380$ 87,361$ 65,020$ 48,392$ 36,017$ 26,806$ 19,951 Extrapolated Annual M&R Cost
$ 150,313$ 124,926$ 79,229$ 100,808$ 66,007$ 38,610$ 28,137$ 15,021 Mean Annual M&R Cost from FMS
OPERATING COST
$ 166,564$ 164,444$ 161,696$ 158,009$ 152,824$ 145,023 $ 132,009$ 106,022$ 28,500 Cumulative Depreciation
$ 2,120$ 2,748$ 3,687$ 5,186$ 7,801$ 13,013 $ 25,987$ 77,522$ 28,500 Annual Depreciation
$ 23,436$ 25,556$ 28,304$ 31,991$ 37,176$ 44,977 $ 57,991$ 83,978$ 161,500Total Residual Value
CAPITAL COST
95,20284,624 74,046 63,468 52,890 42,312 31,73421,156 10,578 Mileage at replacement
987654321REPLACEMENT CYCLE
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Refuse TruckRefuse TruckFleetFleet--wide Cost Savingswide Cost Savings
(Current v Optimal Cycle)(Current v Optimal Cycle)
$ 5,794,962$ 45,273 4
$ 5,521,452 $ 43,136 5
$ 4,836,150 $ 37,782 6
$ 3,727,511 $ 29,121 7
$ 2,145,121 $ 16,759 8
$ $ 9
Annual Fleet-Wide Cost Savings
Annual Cost Savings per Unit
Replacement Cycle
(years)
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Life Cycle Cost Savings for 8 Vehicle Life Cycle Cost Savings for 8 Vehicle TypesTypes
$ 3,225,931
$ 28,851 $ 28,851$ 48,344$ 77,195916Fire Pumper Truck
$ 924,065 $ 6,745$ 19,986$ 26,731920Dump Truck
$ 76,356 $ 5,454$ 17,947$ 23,401917Bucket Truck
$ 164,692 $ 2,167$ 14,098$ 16,2651020Utility Truck
$ 1,411,332$ 2,834$ 5,989$ 8,823616¾-Ton Pickup Truck
$ 578,860 $ 2,060$ 4,761$ 6,821512½-Ton Pickup Truck
$ 41,775 $ 1,671$ 5,379$ 7,0508157 to 9-Passenger Van
Annual Fleet-Wide
Savings
Annual Per-Unit Savings
EAC Under
Recomd Cycle
EAC Under
Current Cycle
Recomd Cycle
(years)
Current Cycle
(years)VehicleType
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Determination of Determination of Future Fleet Future Fleet
Replacement CostsReplacement Costs
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Sample Replacement CyclesSample Replacement Cycles
57,000120Medium-Duty Utility Truck
75,000108Fire Pumper Truck
56,00010810-Yard Dump Truck
60,00096Passenger Van
70,00084Investigative Sedan
60,000722x4 3/4T Pickup Truck
53,000602x4 1/2T Pickup Truck
68,00060Patrol Car
42,00048Refuse Truck
50,00048Hybrid Electric Sedan
72,00024Ambulance (cab and
chassis)
MilesMonthsVehicle Type
13Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Sample Purchase PricesSample Purchase Prices
$ 78,616 Medium-Duty Utility Truck
$ 445,000 Fire Pumper Truck
$ 135,000 10-Yard Dump Truck
$ 18,256 Passenger Van
$ 16,076 Investigative Sedan
$ 15,843 2x4 3/4T Pickup Truck
$ 13,593 2x4 1/2T Pickup Truck
$ 24,357 Patrol Car
$ 190,000 Refuse Truck
$ 20,876 Hybrid Electric Sedan
$ 30,072 Ambulance (cab and chassis)
Purchase PriceVehicle Type
14Copyright © 2007 Mercury Associates, Inc. All rights reserved.
233Number of asset types
$128 MCurrent replacement backlog*
70%Percentage of units that exceed age and/or usage criteria for replacement
2,929Number of units that exceed age and/or usage criteria for replacement
$31 MAverage annual replacement cost*
$226 MReplacement cost*
$129 MOriginal purchase price
7.4Average recommended replacement cycle (years)
18.8Imputed average replacement cycle (years)
9.4Current average age (years)
4,198Total number of units
Fleet StatisticsFleet Statistics
* 2007 dollars
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Baseline Replacement PlanBaseline Replacement Plan
Gross Replacement Costs
$-
$20
$40
$60
$80
$100
$120
$140
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Fiscal Year
(Mill
ions
)
16Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Smoothed Replacement PlanSmoothed Replacement Plan
Gross Replacement Costs
$-
$20
$40
$60
$80
$100
$120
$140
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Fiscal Year
(Mill
ions
)
17Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Key Statistics for Baseline and Key Statistics for Baseline and Smoothed Replacement PlansSmoothed Replacement Plans
$ 28.9$ 31.5Average Annual Replacement Cost Years 1-5
$ 144.5$ 157.5Total Net Replacement Cost in Years 1-5
$ 24.3 $ 27.5Average Annual Replacement Cost Years 1-10
3,5194,221# Vehicles Replaced in Years 1-5
$ 10.6$ 15.9Total Sale Proceeds in Years 1-5
$ 155.1$ 173.4Total Replacement Expends in Years 1-5
7992,929# Vehicles Replaced in Year 1
$ 33.6$ 120.0Net Replacement Cost in Year 1
$ 0.6$ 8.1Used Vehicle Sale Proceeds in Year 1
$ 34.2$ 128.1Year 1 Replacement Expenditures
SmoothedBaselineStatistic
All amounts in nominal dollarsAll amounts in nominal dollars
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Comparison of Comparison of Alternative Capital Alternative Capital
Financing Financing ApproachesApproaches
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Methods of Financing Vehicle and Methods of Financing Vehicle and Equipment AcquisitionsEquipment Acquisitions
● Ad hoc (i.e., year-to-year) allocations or appropriations of cash
● Accumulation of cash reserves in a fleet replacement fund, usually through the use of an internal leasing or replacement cost charge-back program
● Borrowing cash from financial institutions, including the financing units of vehicle manufacturers
● Borrowing cash from investors through the issuance of bonds
● Leasing from a leasing company, bank, or commercial finance company
20Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Financing Approaches EvaluatedFinancing Approaches Evaluated
● Ad Hoc Allocations of Cash
● Reserve Fund and Charge-Back System
● Bonds
● Opened-End Operating Lease
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Key Analytical Parameters UsedKey Analytical Parameters Used● Under a Reserve Fund
♦ Charge-back rates are based on net capital cost of each vehicle (i.e., sale proceeds are returned to fund)
♦ Replacement rates are calculated for each vehicle and include two components:
Depreciation
Replacement Surcharge
♦ Book value of current assets estimated based on original purchase price less projected residual value
♦ Interest earning rate of 3 percent
22Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Key Analytical Parameters UsedKey Analytical Parameters Used● Under a Bond Program
♦ Financing periods used were 60 or 120 months
All vehicles with a life expectancy in excess of 60 months are assumed to be financed over 120 monthsAll others are assumed to be financed over 60 months
♦ “All-in” cost of capital in both cases is 3.89 percent
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Key Analytical Parameters UsedKey Analytical Parameters Used● Under a Lease Program
♦ Open-ended operating leaseAsset must be retained for minimum of 12 months, after which it can be turned in at any time before or after planned lease term
City participates in gain or loss on sale of asset at end of lease
♦ Lease periods range from 48 to 84 months
♦ Interest rate used is 5.3 percent for all periods
♦ Sales tax is calculated at 7.5 percent of capitalized cost and is collected at lease inception
24Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Capital Financing ComparisonCapital Financing ComparisonNet Funding Requirements
$-
$10
$20
$30
$40
$50
$60
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Fiscal Year
Fund
ing
Req
uire
men
t (m
illio
ns)
Ad hoc cash appropriations Reserve fund contributionsGO bond payments Operating lease payments
25Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Replacement Fund FinancingReplacement Fund Financing
Reserve Fund Financing
$-
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
$70.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Fiscal Year
(Mill
ions
)
Reserve Fund Balance Gross Replacement Cost
Reserve Fund Charge-Back Revenue Cash Infusion
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Net Funding Requirements by Net Funding Requirements by Capital Financing ApproachCapital Financing Approach
$ 18.3 M
$ 10.5 M
$ 30.7 M
$ 30.5 M
Years 1-5
$ 91.4 M
$ 52.5 M
$ 153.4 M
$ 152.6 M
Years 1-5
$ 23.1 M$ 7.8 MOperating Leases
$ 18.0 M$ 3.3 MBonds
Years 1-10Year 1Annual Average
$ 28.7 M$ 34.5 MReserve Fund and Charge-Back System
$ 27.4 M$ 33.6 MAd Hoc Allocations of Cash
$ 231.0 M$ 7.8 MOperating Leases
$ 180.4 M$ 3.3 MBonds
$ 286.5 M$ 34.5 MReserve Fund and Charge-Back System
$ 274.4 M$ 33.6 MAd Hoc Allocations of Cash
Years 1-10Year 1Total
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Estimation of Estimation of Operating Cost Operating Cost
Savings Associated Savings Associated with Fleet Renewalwith Fleet Renewal
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y = 202x1.093
0246810121416
Age in Years
0
$ 500
$ 1,000
$ 1,500
$ 2,000
$ 2,500
$ 3,000
$ 3,500
$ 4,000
$ 4,500
Ann
ual C
ost
Maintenance and Repair Cost per Vehicle Maintenance and Repair Cost per Vehicle Equivalent Unit (VEU)Equivalent Unit (VEU)
as a Function of VEU Ageas a Function of VEU Age
29Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Annual M&R Cost per VEU by AgeAnnual M&R Cost per VEU by Age
$ 202
$ 431
$ 671
$ 919
$ 1,173
$ 1,432
$ 1,695
$ 1,961
$ 2,230
$ 2,502
$ 2,777
$ 3,054
$ 3,333
$ 3,615
$ 3,898
$ 4,183
$ 4,469
$ 4,757
Cost
--
113%
56%
37%
28%
22%
18%
16%
14%
12%
11%
10%
9%
8%
8%
7%
7%
6%
% Increase
53%
36%
27%
22%
18%
16%
14%
12%
11%
10%
9%
8%
8%
7%
7%
6%
6%
--
% Decrease
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Age
30Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Reduction in Vehicle Age as a Result Reduction in Vehicle Age as a Result of Fleet Renewalof Fleet Renewal
0
2
4
6
8
10
12
14
Ave
rage
Veh
icle
Age
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Year
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Increase in Vehicle Age as a Result of Increase in Vehicle Age as a Result of Maintaining Current Spending LevelMaintaining Current Spending Level
0
2
4
6
8
10
12
14
Ave
rage
Veh
icle
Age
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Year
32Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Future Replacement Costs Holding Recent Future Replacement Costs Holding Recent Spending Level Constant for 10 YearsSpending Level Constant for 10 Years
Gross Replacement Costs
$-
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
$140.0
$160.0
$180.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Fiscal Year
(Mill
ions
)
33Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Fuel Cost SavingsFuel Cost Savings
Cost amounts in constant dollarsCost amounts in constant dollars
$4,001,860 1,778,60412.320
$4,394,900 1,953,28911.210
$4,474,807 1,988,80311.09
$4,515,860 2,007,04910.98
$4,557,674 2,025,63310.87
$4,600,269 2,044,56410.76
$4,637,018 2,060,89710.65
$4,683,388 2,081,50610.54
$4,730,222 2,102,32110.43
$4,777,524 2,123,34410.32
$4,825,299 2,144,57710.21
$4,867,487 2,163,32810.1Current
CostGallons UsedMiles per
GallonYear
34Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Employee Downtime Cost SavingsEmployee Downtime Cost SavingsNumber of vehicles in the fleetWork days per yearVehicle work days per yearVehicle days out of service per year @ 10 percent downtime rateLost employee productivity per year @ 3 hours per day of vehicle downtimeFTE employees worth of lost productivity at 1,500 productive hours per employee per yearAdditional salary and fringe benefit costs per year @ $50,000 per FTE employee to cover lost productivityCost savings associated with reducing the downtime rate to the industry standard of 5 percent
4,198 4,198 240 240 1,007,5201,007,520100,752100,752
302,256302,256
202202
$10,100,000$10,100,000
$ 5,050,000$ 5,050,000
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Total Fleet Cost Total Fleet Cost Reduction Reduction
OpportunitiesOpportunities
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Key Assumptions Key Assumptions
● Vehicle acquisitions are financed with bonds
● All costs increase at an annual inflation rate of 3 percent
● M&R cost savings are only 65 percent achievable in Year 1 and are not 100 percent achievable until Year 5
37Copyright © 2007 Mercury Associates, Inc. All rights reserved.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
$0
$10
$20
$30
$40
$50
Ann
ual C
ost (
mill
ions
)
Year
Fleet Replacement Costs
38Copyright © 2007 Mercury Associates, Inc. All rights reserved.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
$0
$10
$20
$30
$40
$50
Ann
ual C
ost (
mill
ions
)
Year
Fleet Maintenance and Repair Costs
39Copyright © 2007 Mercury Associates, Inc. All rights reserved.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
$0
$10
$20
$30
$40
$50
Ann
ual C
ost (
mill
ions
)
Year
Combined Fleet Maintenance and Replacement Costs
40Copyright © 2007 Mercury Associates, Inc. All rights reserved.
Costs of Fleet Renewal versus Costs of Fleet Renewal versus Status QuoStatus Quo
Cost Category 1 2 3 4 5 6 7 8 9 10 TotalAcquisition Value 34.2$ 33.8$ 33.1$ 32.7$ 30.3$ 30.3$ 16.1$ 28.8$ 30.8$ 45.3$ 315.4$ Bond Payments 3.9$ 8.2$ 12.7$ 17.4$ 21.9$ 25.7$ 27.5$ 32.1$ 34.6$ 37.5$ 221.5$ Remktng Proceeds 0.6$ 1.1$ 2.4$ 3.9$ 3.4$ 3.4$ 3.8$ 6.2$ 6.9$ 9.2$ 41.1$ Maint & Repair 12.3$ 9.3$ 6.7$ 5.6$ 5.1$ 5.7$ 6.9$ 8.0$ 8.3$ 8.6$ 76.5$ Fuel 4.8$ 4.8$ 4.7$ 4.7$ 4.6$ 4.6$ 4.6$ 4.5$ 4.5$ 4.4$ 46.2$
Total 20.4$ 21.2$ 21.7$ 23.7$ 28.2$ 32.6$ 35.2$ 38.5$ 40.5$ 41.2$ 303.1$
Cost Category 1 2 3 4 5 6 7 8 9 10 TotalAcquisition Value 9.2$ 9.3$ 9.3$ 9.5$ 9.2$ 9.2$ 9.2$ 9.3$ 9.4$ 12.8$ 96.5$ Bond Payments 1.1$ 2.1$ 3.3$ 4.4$ 5.5$ 6.7$ 7.8$ 8.9$ 10.3$ 12.0$ 62.2$ Remktng Proceeds 0.2$ 0.2$ 0.5$ 0.3$ 0.3$ 0.5$ 0.2$ 0.5$ 0.4$ 1.8$ 5.0$ Maint & Repair 15.1$ 16.2$ 17.7$ 18.9$ 20.0$ 21.4$ 21.7$ 23.3$ 25.1$ 28.1$ 207.6$ Fuel 4.9$ 5.0$ 5.0$ 5.1$ 5.1$ 5.2$ 5.2$ 5.3$ 5.3$ 5.4$ 51.5$
Total 21.0$ 23.1$ 25.5$ 28.1$ 30.3$ 32.8$ 34.4$ 37.0$ 40.3$ 43.7$ 316.3$
Annual Savings 0.6$ 1.9$ 3.9$ 4.4$ 2.2$ 0.2$ (0.7)$ (1.5)$ (0.2)$ 2.4$ 13.2$ Cum Savings 0.6$ 2.5$ 6.4$ 10.7$ 12.9$ 13.1$ 12.4$ 10.9$ 10.7$ 13.2$
Fleet Renewal Costs by Year
Status Quo Costs by Year
Savings from Fleet Renewal Program by Year
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QuestionsQuestions
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For More InformationFor More Information
Paul Lauria
Mercury Associates, Inc.
www.mercurywww.mercury--assoc.comassoc.com