This document discusses factors to consider when evaluating fleet lifecycle strategies and determining the optimal approach. It outlines benefits and tradeoffs of both shorter and extended vehicle cycles. Key aspects addressed include lease payments, maintenance costs, fuel impacts, resale value management, and how the right strategy depends on a fleet's specific business needs and usage patterns. The document emphasizes that a thorough, data-driven analysis is needed to identify the most cost-effective option.

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HAVE YOU FULLY
OPTIMIZED YOUR
FLEET LIFECYCLES?
WHITE PAPER SPRING 2017

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When was the last time you evaluated your fleet lifecycle practices? Could you
be leaving money on the table because your fleet is no longer fully optimized for
your business? Lease structures, fuel costs, maintenance schedules, and resale
values should be scrutinized as markets change and your business evolves. To
be effective, every business should evaluate its fleet policy to ensure it meets
the organization’s specific needs and accounts for the manner in which it
operates. When it comes to optimizing fleet lifecycles, one answer doesn’t work
for all. Most importantly, know Merchants Fleet Management can help identify
structures and policies that will best meet your operational goals.
THE LIFECYCLE EQUATION
IS IT BETTER TO CYCLE VEHICLES EVERY FEW YEARS
OR RUN THEM FOR A LONG TIME?
Whether you rotate your fleet on a shorter cycle or hold vehicles for a long time,
the cost per mile could be the same, or very different. There are benefits to both
approaches, and the key is evaluation of the best fit for your organizational
need and culture. Some things to be considered on either side of the equation:

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LEASE PAYMENTS
DOES CYCLING VEHICLES FASTER WHILE INCURRING CONSTANT LEASE
PAYMENTS HAVE BENEFIT, OR IS THE “FREE CAR” A BETTER ALTERNATIVE?
One of the most common pushbacks for advocates of long lifecycles is the
lack of lease payments after the vehicle has been amortized. Minimizing capital
expenses on the balance sheet certainly has its advantages, especially with de-
centralized operations functioning as their own profit and loss. While it may be
difficult to argue against the “free car,” the tradeoffs include higher maintenance
expenses, increased non-preventive repairs and the associated downtime, and
higher vehicle acquisition costs. For fleets cycling on shorter terms, these factors
are well understood. Fleets operating under shorter terms of service will incur
ongoing lease payments, and it will typically be the #1 or #2 operating cost
within the fleet. Managing amortization terms, selling vehicles at optimal times
and vehicle resales all require more attention. At the same time, non-preventive
repairs and downtime are largely avoided, better fuel economy can be achieved,
and higher discounts from the OEM’s translate into lower origination costs and
lease payments. For fleets under this model, incurring lease payments is actually
• Increase cash needs for ongoing
lease payments
• Vehicle amortization terms
their impact on lifecycle cashflow
• Predictability in fleet
operating costs
• Increased new vehicle discounts
and lower acquisition costs
• Optimizing vehicles for
maximum resale
• Lease payments incurred over
a portion of the service life
• Flexibility in amortization terms
• Ease in management around
vehicle replacements, upfit
coordination, and resale
processes
• Increased variability in
maintenance spends
maintenance management
• Allows for amortizing of
expensive specialty equipment
over a longer period
SHORTER LIFECYCLES EXTENDED CYCLES

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the path to lowest cost of ownership. The key is honing in on the lifecycle strategy
that proves most effective and cost efficient for your operation through evaluation
of good fleet data and predictive analytics.
MAINTENANCE COSTS
WHAT ARE THE POTENTIAL MAINTENANCE SPEND
IMPACTS OF LONG VS. SHORT CYCLING?
Proponents of longer cycles are quick to point out that a large maintenance
spend is needed to overcome the lack of a lease payment. Fleets under this
model realize that while the repair costs they incur are more expensive in
nature, often take longer to complete, are less predictable in terms of cost,
and more time needed to manage the process, continuing to squeeze each
vehicle for its maximum useful life can lead to the lower cost of ownership.
For fleets under shorter cycles, maintenance management can be less of an
administrative burden with 80 to 90 percent of all repairs being oil changes, tire
replacements, brake jobs, and general preventive services with minimal oversight
and maximized driver uptime. At the same time, these fleets are incurring the
lease payment for those vehicles continuously throughout the lifecycle, which
shifts more of the fleet manager’s time and attention to other areas in place
of maintenance. A data-driven approach to identifying the tipping point when
increased maintenance impacts total cost of ownership is key.

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FUEL IMPACT
WHAT ARE THE POTENTIAL FUEL IMPACTS
ON DIFFERENT LIFECYCLE STRATEGIES?
The decline in fuel prices over the past several years has provided significant cost
reductions for all fleets. Those that keep vehicles in service for longer will place
more focus on managing driver behaviors that impact fuel consumption such as
idle time, speeding, and purchasing controls as ways to reduce fuel spend. In
addition to driver behaviors, fleets managing to shorter cycles benefit from the
OEM’s production of ever-increasing fuel efficient offerings. Passenger vehicle
MPG increased from 29.5 to 36.4 average miles per gallon over a ten-year
period and light trucks improved from 19.5 to 21.4 miles per gallon.1
Fleets
under shorter lifecycles take advantage of this simply by replacing vehicles.
RESALE CONSIDERATIONS
WHAT ARE THE TRADEOFFS IN
DEPRECIATION MANAGEMENT RESALE?
All fleet stakeholders want to sell their used fleet vehicles for the most money
in the shortest amount of time. For fleets under shorter lifecycles, depreciation
is typically one of the largest fleet costs, and vehicle resale and depreciation
management becomes a bigger focus. Fleets under this model benefit from
higher gross proceeds at sale, and to realize this, importance is placed on
managing a number of key areas including used vehicle sale timing, when orders
are placed, wholesale resale market periods of strength, residual value-adding
36.4
INCREASE OVER 10 YEARS
29.5
21.4
19.5

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option content, and OEM rebate negotiations. Good fleet and industry data are
at the core of effectively managing this type of cycle. Fleets with longer lifecycles
are somewhat insulated from year-over-year model changes, coordinating the
ordering process, changes in vehicle configurations and upfit specifications, and
resale market fluctuations. The tradeoff is lower sale proceeds.
LIFECYCLE STRATEGY
WHAT IS THE RIGHT LIFECYCLE STRATEGY FOR MY FLEET?
The best way to answer this question is to evaluate the facets of your business
and the organization’s historical fleet usage. There is no one formula for
determining the short-lifecycle versus long-lifecycle tipping point, which is why
careful evaluation using predictive analytics is so important. Using actual fleet
and market data to understand how key factors impact total cost of ownership
for either scenario is crucial to understanding which strategy may be a good
fit. At the same time, giving consideration to business operations and the
bottom line is a critical piece of the equation. Ultimately, Merchant’s Fleet
Management consultants and analysts have a wealth of experience working
with all types of business fleets.
1.
United States Department of Transportation fuel economy data 2004 to 2014