fleet replacement case study...

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


The Importance of an The Importance of an Effective Fleet Effective Fleet Replacement Replacement

ProgramProgram


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


Determination of Determination of Optimal Vehicle Optimal Vehicle

Replacement CyclesReplacement Cycles


CAPITALOPERATING

TOTAL

TIME/USAGETIME/USAGE

CO

ST

CO

ST

*

Economic Theory of Vehicle Economic Theory of Vehicle ReplacementReplacement


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


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


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


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)


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


Determination of Determination of Future Fleet Future Fleet

Replacement CostsReplacement Costs


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


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


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


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

)


Smoothed Replacement PlanSmoothed Replacement Plan


$-

$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

)


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


Comparison of Comparison of Alternative Capital Alternative Capital

Financing Financing ApproachesApproaches


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


Financing Approaches EvaluatedFinancing Approaches Evaluated

● Ad Hoc Allocations of Cash

● Reserve Fund and Charge-Back System

● Bonds

● Opened-End Operating Lease


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


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


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


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


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


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


Estimation of Estimation of Operating Cost Operating Cost

Savings Associated Savings Associated with Fleet Renewalwith Fleet Renewal


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


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


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


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


Future Replacement Costs Holding Recent Future Replacement Costs Holding Recent Spending Level Constant for 10 YearsSpending Level Constant for 10 Years


$-

$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

)


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


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


Total Fleet Cost Total Fleet Cost Reduction Reduction

OpportunitiesOpportunities


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


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


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


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


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


QuestionsQuestions


For More InformationFor More Information

Paul Lauria

Mercury Associates, Inc.

[email protected]

www.mercurywww.mercury--assoc.comassoc.com

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