How to Get a Newer,

Better Fleet
Gary Hatfield
Mercury Associates
Why do fleets get too old?
– Lack of replacement funding
– Inadequate replacement planning
– Lack of structured approach
– Poor data
– Failure or inability of fleet manager to
communicate the problem to upper
management and CFO

© 2014 Mercury Associates

Why is the timely replacement of
vehicles important?
– Getting a newer, better fleet
– Projecting a positive image
– Managing total costs of vehicle ownership
– Minimizing fleet maintenance costs
– Improving safety and technology
– Improving employee productivity
– Reducing fuel consumption and emissions
– Improving utilization of vehicles
– Reducing the need for spare vehicles

© 2014 Mercury Associates

Why aren’t vehicles replaced in a
timely manner?
– Choice of financing approach affects decisions:
• Pay before you go versus pay as you go
(purchase vs. lease)
• Sunk cost versus ongoing depreciation
– Focus on marginal M&R cost versus total cost
– Lack of understanding of vehicle life-cycle
costs and how to compute the ideal cycle
– Lack of understanding of the magnitude and
volatility of fleet replacement costs
– Lack of understanding of the impact of vehicle
age on vehicle performance

© 2014 Mercury Associates

How do we fix the problem?
1. Right-size and Right-type the fleet
(VAM)
2. Optimize replacement cycles for each
type of vehicle
3. Compute the cost difference
between current and optimal
replacement cycles
4. Use the cost savings to make the
business case for sufficient capital
funding
5. Develop a long-range capital-funding
plan
6. Alternatively, lease instead of buy

© 2014 Mercury Associates

1. Right-size and Right-Type the
Fleet (VAM for Federal fleets)
• GSA provides VAM guidance for eliminating
unnecessary or non-essential vehicles from an
agency's fleet inventory – FMR Bulletin B-30
• Ensure lifecycle cost-effectiveness (lease vs.
own; optimized replacement cycles for owned)
• VAM must address composition of light duty
fleets (i.e., vehicle types and sizes)
• Agencies must determine their optimal fleet
inventory (including alternatively fueled
vehicles) using the VAM and post on agency
websites
• Agencies must develop and submit fleet
management plans annually for achieving their
inventory targets

© 2014 Mercury Associates

Total Cost of Ownership – TCO:
– Essential for determining
optimum replacement cycle
– Used for comparing buying vs.
leasing
– Aggregated total of all costs of
owning and operating a vehicle
over a given life span (lifecycle)
– Includes all fixed and variable
costs

© 2014 Mercury Associates

 Depreciation
Fuel

Interest
Insurance

Maintenance
License & Tax

Source: ConsumerReports.org
• Fixed Costs:
– Depreciation = purchase price
+ upfitting cost – resale value
– Taxes, insurance, license
• Variable Costs
– Fuel
– Maintenance & repair – never
include accident costs
• TCO must include ALL costs!

© 2014 Mercury Associates

2. Optimizing Vehicle
Replacement Cycles
– Reduces fleet cost
– Makes business case for
replacement funding
– Usually results in a newer,
safer, more fuel-efficient fleet
– Establishes the lifecycle that
minimizes Equivalent Annual
Cost (EAC)
– Specifies the year (age) vehicle
should be sold
© 2014 Mercury Associates
 Lifecycle Cost Analysis
(Single-Axle Dump Truck)
$25

Total Cost of Ownership

$20
Costs (000)

$15
Ideal
Replacement
$10
M&O Cost

$5

Depreciation
$-
1 2 3 4 5 6 7 8 9 10 11 12
Replacement Cycle (years)
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© 2014 Mercury Associates
Determining Cost Savings
– Develop your Lifecycle Cost Analysis
model (LCA - get help from your CFO
office or fleet expert if needed)
– Choose a class of vehicles with large
population – the more the better
– Gather all required data elements
– Run the LCA model to determine
optimal replacement age
– Compare existing cycle EAC with
optimum cycle EAC and compute
annual cost savings
– Multiply annual cost savings per
vehicle x number of vehicles
© 2014 Mercury Associates
 Optimizing a Replacement Cycle
ORCA™ = Optimized Replacement Cycle Analysis
Single-Axle Dump Truck
Replacement Cycle 1 2 3 4 5 6 7 8 9
Meter at replacement 6,209 12,418 18,627 24,836 31,045 37,254 43,463 49,672 55,881
CAPITAL COST
Total Residual Value $ 114,750 $104,288 $93,094 $84,085 $75,972 $ 70,426 $ 66,091 $ 63,093 $ 59,855
Annual Depreciation $ 20,250 $ 10,463 $11,194 $ 9,009 $ 8,113 $ 5,546 $ 4,335 $ 2,998 $ 3,238
Cumulative Depreciation $ 20,250 $ 30,713 $41,906 $50,915 $59,028 $ 64,574 $ 68,909 $ 71,907 $ 75,145
OPERATING COSTS
Annual M&R Cost $ 2,963 $ 4,164 $ 5,145 $ 6,028 $ 6,863 $ 7,671 $ 8,466 $ 9,258 $ 10,053
Annual Fuel Cost $ 2,755 $ 2,867 $ 2,982 $ 3,102 $ 3,227 $ 3,357 $ 3,493 $ 3,633 $ 3,780
Total Annual Operating Cost $ 5,718 $ 7,031 $ 8,127 $ 9,131 $10,090 $ 11,028 $ 11,959 $ 12,892 $ 13,833
Cumulative Operating Cost $ 5,718 $ 12,749 $20,876 $30,007 $40,097 $ 51,125 $ 63,084 $ 75,975 $ 89,809
TOTAL COST
Annual Total Cost $ 25,968 $ 17,493 $19,320 $18,139 $18,203 $ 16,574 $ 16,294 $ 15,890 $ 17,071
Cumulative Total Cost $ 25,968 $ 43,462 $62,782 $80,921 $99,125 $115,699 $131,993 $147,883 $164,954
NPV of Cumulative Total Cost $ 24,499 $ 41,002 $59,228 $76,341 $93,514 $109,150 $124,522 $139,512 $155,617
Equivalent Annual Cost $ 25,234 $ 21,428 $20,939 $20,538 $20,419 $ 20,149 $ 19,987 $ 19,874 $ 19,986

What data elements are required?

© 2014 Mercury Associates 13

3. Compute Cost Difference
Between Current & Optimal Cycles
Current EAC Under EAC Under Annual
Vehicle Cycle Recommended Current Recommended Per-Unit Annual Fleet-
Type (years) Cycle (years) Cycle Cycle Savings Wide Savings
Hybrid-Electric Sedan 4 4 $ 4,053 $ 4,053 $ $
7 to 9-Passenger Van 15 8 $ 7,050 $ 5,379 $ 1,671 $ 138,684
Patrol Car 8 6 $ 9,701 $ 9,405 $ 296 $ 510,648
Investigative Sedan 11 7 $ 4,777 $ 4,214 $ 421 $ 414,298
½-Ton Pickup Truck 12 5 $ 6,821 $ 4,761 $ 2,060 $ 688, 102
¾-Ton Pickup Truck 16 6 $ 8,823 $ 5,989 $ 2,834 $ 2,324,056
Utility Truck 20 10 $ 16,265 $ 14,098 $ 2,167 $ 318.567
Bucket Truck 17 9 $ 23,401 $ 17,947 $ 5,454 $ 414,530
Dump Truck (165) 20 8 $ 26,731 $ 19,874 $ 6,857 $ 1,131,405
Refuse Truck 9 4 $ 124,945 $ 79,672 $ 45,273 $ 5,794,962
Ambulance 4 2 $ 27,944 $ 23,246 $ 4,698 $ 483,873
Fire Pumper Truck 16 9 $ 77,195 $ 48,344 $ 28,851 $ 3,289,031

Total Savings > $14.5 Million per Year!

© 2014 Mercury Associates 14
4. Use $ Savings for Your Capital
Funding Business Case

© 2014 Mercury Associates

Don’t be intimidated by the
business case…

Just show them the savings!

5. Develop Long Range Capital
Funding Plan
1. Identify purchase prices (with
inflation) for each type of asset
2. Project future replacement dates and
costs for each asset
3. Calculate total fleet replacement
costs for each future year
4. “Smooth” the plan by delaying or
advancing the replacement of
specific vehicles to reduce near-term
peaks and valleys in fleet
replacement costs

© 2014 Mercury Associates

Baseline Plan – Existing Fleet

Gross Replacement Costs - Existing Fleet Size

$300

$260 Million Backlog

$250

$200
(Millions)

$150

$100

$50

$0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Fiscal Year

© 2014 Mercury Associates

Baseline Plan – Right Sized
Fleet
Gross Replacement Costs
$300

$250

$210 Million Backlog

$200
(Millions)

$150

$100

$50

$0
20102011201220132014201520162017201820192020202120222023202420252026202720282029
Fiscal Year

© 2014 Mercury Associates

 Smoothed Plan
Gross Replacement Costs – Smoothed
$300

$250

$200
(Millions)

$150
$125 Million Backlog
$100

$50

$0
20102011201220132014201520162017201820192020202120222023202420252026202720282029
Fiscal Year

Approximately $50M per year needed to sustain the fleet

© 2014 Mercury Associates
 Comparison – Baseline vs.
Smoothed
Baseline v Smoothed Costs
$300

$250

$200
(Millions)

$150

$100

$50

$0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Fiscal Year
Baseline Smoothed

© 2014 Mercury Associates 18

How do we get more capital $
for fleet replacement?
1. Empirically identify optimal vehicle
replacement cycles
2. Develop a plan that quantifies long-term
fleet replacement costs
3. Identify total fleet costs under different
levels of replacement spending
4. Work with the CFO to show potential
savings with proper investment
Every excess dollar spent on a fleet due to
suboptimal replacement practices is a
dollar that cannot be devoted to an
agency’s primary mission!

© 2014 Mercury Associates

Summary
– An old, costly fleet did not happen
overnight and cannot be fixed quickly
– Optimize replacement cycles
– Develop long-term capital plan
– Establish a 5-year plan for fleet
renewal

© 2014 Mercury Associates

MERCURY ASSOCIATES, INC.
“Specializing in the science of fleet management.”

For more information, contact:

Gary Hatfield
Vice President, Federal Fleet Consulting

ghatfield@mercury-assoc.com
(941-685-6907)

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