In the 1970s and 1980s, fleet management evolved from the technician-led operation in which the head technician supervised fleet operations to that of a certified professional who functions as an administrator. Increasingly these professional fleet management operations were set up as internal service programs. Managers became responsible for balance sheets reflecting both expenditures and revenues, while delivering a full set of services and controlling maintenance and operational cost.
Most grew into multimillion-dollar operations that required effective control of all cost factors to sustain a high-service level. Thus, the vehicle replacement policy was created.
A formal vehicle replacement policy was a necessary tool for the progressive governmental fleet manager who wanted to establish a policy and implement procedures to control funding and replacement cycles for vehicles and equipment. The replacement policy was also necessary to complete the mission of the various agencies fleet management served.
Starting a Replacement Policy Fund
Vehicle replacement programs can be launched through two methods: seed money and replacement fees. An initial one-time funding source provides seed money to begin purchasing new vehicles and equipment. Replacement fees are paid by the customers who currently own the vehicles.
Unlike leasing programs or one-time capital expenditures, this type of replacement policy is a forward-funded concept. Funds are gradually accumulated to become available when a vehicle or piece of equipment must be replaced.
While employed with Miami-Dade County, Fla. during the early part of the ’80s, my goal was to design a process to fill departments’ new-vehicle requirements. Most administrative sedans were recycled police vehicles or a variety of old vehicles that had surpassed their economic lifecycle.
We submitted a one-time funding request through the budget process, and the Fleet Management Division received $1.5 million to purchase vehicles for distribution to the departments in greatest need of vehicle replacement. Departments then began paying a monthly replacement fee for each vehicle instead of funding purchases out of their budgets. The majority of vehicles were sedans and light trucks, placed on a replacement cycle of six to seven years. The replacement policy fee, collected monthly, was then used annually to continue purchasing vehicles.
The program’s biggest accomplishment, in addition to securing the seed money, was the police department’s agreement to purchase vehicles with its capital funds and simultaneously start paying replacement fees for vehicles that had not been obtained with the original seed money. With the seed money, this replacement fee buy-in helped foster the fund’s rapid growth, expanding the program to all types of vehicles and equipment. The fund now collects more than $38 million a year and supports a fleet of more than 9,000 vehicles.
Palm Beach Begins Fund
After becoming the director of fleet management for Palm Beach County, Fla. in 1990, one of my objectives was to start a replacement policy fund. At that time in Palm Beach County, no formal funding source was available to purchase replacement vehicles. Most departments within the county did not view vehicle replacement as a high priority and would rather spend money on expanding programs or saving jobs during tight budgets. The first expense cut in the budget process was usually capital items, including vehicles.
A task team was established to develop the vehicle replacement policy at Palm Beach County. The team included the budget director, directors of the departments with the largest numbers of vehicles, and fleet management staff. Foregoing the seed money option, the group chose to initiate a replacement fund. Each vehicle was evaluated, and a replacement policy fee was determined by its remaining life and the original purchase price. These monthly replacement fees were then implemented in the next budget cycle.
It wasn’t easy getting departments to start paying a fee on vehicles they had already purchased. Managers felt that was a double charge on paid-for vehicles. Clear and consistent communications were required to explain that the fee covered replacement of current vehicles and that future budgets would no longer require new-vehicle capital expense items.
Detailing key advantages of the program helped sell it to department directors. Among the benefits was the transfer of responsibility to fleet management for justifying replacements each year. In addition, although replacement charges would increase vehicle cost each year, those costs would be viewed by the budget office as part of the operation cost rather than a capital purchase.
Another selling point was that fleet would handle new vehicle acquisition through purchasing replacing vehicles using established cycles and guidelines with Budget Division endorsement.
In 1991, the first year of Palm Beach County implemented the policy, fees produced about $1 million. The 2004 budget cycle fund will generate about $10 million.
In both Miami-Dade and Palm Beach counties, the replacement policy fund produced another benefit —reduced spare vehicle inventory. Fleet established a loaner/pool program, recycling replaced vehicles that still had remaining useful life after being replaced with newer vehicles. The loaner/pool program eliminated the need for individual department inventories. The supply of newer, more reliable vehicles further reduced the required number of spare and loaner vehicles, and their utilization was monitored and controlled by fleet management, improving efficiency. Customers dropped off vehicles at the shop for maintenance or repair and quickly left in a loaner vehicle.
The loaner fleet was also used to replace vehicles that had been damaged totally or were not economical to repair. These vehicles were then replaced in the next budget cycle.
Setting Replacement Policy Rates
The following steps will guide the process of establishing replacement policy rates.
- Determine lifecycles for each vehicle in your fleet. Monthly payments are set up on a date basis, but they also include mileage targets.
- Establish a minimum number of miles per year that a vehicle must travel to justify permanent assignment. If annual mileage falls below that minimum, a pool vehicle or mileage reimbursement should be assigned to that function. When a pool vehicle or reimbursement is not feasible, extend the number of years in the cycle for these low-mileage vehicles.
- Build in inflation rates of 3-5 percent per year. Remember, you are forward-funding replacement cost for the purchase of a new vehicle.
- Establish salvage values and factor them in the formula for the monthly rate. Make sure the sale proceeds from the disposed vehicles are returned to the replacement fund.
- Include all related loaner and pool fleet costs in the monthly rate, e.g., administration and maintenance.
- Calculate the rate formula using the actual vehicle cost, not a budget or estimated projection.
- Once set, apply the rate for the life of the vehicle. Do not change the rate with each budget cycle.
- When a department requires additional new vehicles (as opposed to replacements), include the capital cost of the new units in the original program/position budget request. The department then also begins paying into the replacement policy fund for the additional units. After a few years, your fund may become financially established enough to fund the additional vehicle itself.
With a funded vehicle replacement policy in place and a good preventive maintenance program, you are on the way to a cost-effective and efficient-running operation
Case Study: Palm Beach County Replacement Policy Monthly Fees
2004 Half-ton Pickup Purchase price: $12,759
Replacement cycle: Six years
Mileage target: 80,000.
Salvage Value: 15 percent
Annual Inflation Rate: 5 percent
Administration/Loaner Cost: $30 per month
Monthly Fee: $241 Note: In Palm Beach County, administration, and loaner cost are not charged for assets when original purchase price is less then $10,000. Additionally, loaner vehicles for heavy equipment and large specialty trucks are not available.
For more information: Doug Weichman, CAFM, is director of fleet management for Palm Beach County, Fla. He can be reached at [email protected]