Traditionally, fleet replacement policy is expressed as a combination of time and mileage, such as months-in-service and mileage bands. The policy is based on the converse trending of fixed and variable expenses during the life of the vehicle. Fixed costs tend to decelerate as a vehicle ages, while variable/operating costs tend to increase. When these two costs are charted over the life of a vehicle, the conventional wisdom is to replace a vehicle when the descending fixed cost line intersects the rising variable cost line.
Today, a growing number of fleets are shifting to more flexible vehicle replacement cycles. In fact, some fleets no longer call their replacement cycle a “policy” and now refer to it as a “guideline.” The rationale is that they want to reserve the right to determine when to take a vehicle out of service based on prevailing market conditions, rather than predetermined mileage and/or months-in-service parameters. Enabling this shift is the growing sophistication of lifecycle optimization modeling, in particular, the development of analytics to calculate the various “what if” scenarios to identify the optimal vehicle replacement parameters.
A flexible replacement guideline can take diametrically opposite directions. One direction could be to extend a replacement cycle as a short-term solution to compensate for a reduction in a capital expenditure budget. For example, service fleets, which have higher cap costs due to additional upfit equipment, will keep vehicles in service longer than light-duty fleets to control capital expenditures.
The other direction in a flexible replacement guideline is to shorten service life to shortcycle vehicles to take advantage of an exceptionally strong resale market, as was the case several years ago. Some fleets have decided they don’t want to be locked into a specified vehicle replacement cycle and prefer to remain nimble with a market-driven flexible replacement strategy. This mindset believes it is financially prudent to have greater flexibility in replacement cycling since extenuating market circumstances may make it more advantageous to either keep vehicles in service longer or shorter, depending on market conditions.