In haulage business, Replacement Policy is one of the most critical aspects of fleet management which should be of considerable interest to business owners. Nearly every other cost, both fixed and variable, hinges upon when vehicles are replaced. Maintenance and repair expense, fuel efficiency, and of course, depreciation are all sensitive to replacement policy.

 

REPLACEMENT POLICY DEFINED: ITS RELEVANCE WITHIN THE CONTEXT OF HAULAGE INDUSTRY IN NIGERIA

Replacement policy belong to a body of knowledge in Operations Research that is central to the decision making process of determining the most optimal timing of disposing and replacing an equipment in use with a substitute possibly of newer and better usage relevance. Replacement actually becomes absolutely necessary when a company is faced with a fast deteriorating state of the asset or failure or breakdown in operation. However, most responsible organization would rather not wait for this to occur before setting out to draw up a forward-looking policy on their assets replacement.

For the haulage industry, it becomes even more germane when the probable impact of a flawed or non-existent replacement policy on the operation and performance is duly considered. For Nigeria in particular where the recourse for a long time until recently has been to drive haulage business with assets or trucks acquired from Used Vehicle market of Europe and America, the relevance of a well advised replacement policy cannot be overemphasized. But then, what most of the entrepreneurs in this category failed to appreciate is that the replacement cycle in these markets which hitherto favoured the offer for sale of relatively newer and low mileage trucks is in itself witnessing a drastic change.

In US and Europe for example, for many years, the most commonly accepted cycle has revolved around time/mileage combinations of approximately 48 months and 75,000-100,000 miles for trucks. While it is generally agreed that this cycle may be a reflection of certain logic, the many changes in vehicles, warranties, and financial considerations have led some fleets to consider lengthening replacement policy. Hitherto, in line with the above stated logic, it was believed that vehicles kept beyond three years or 65,000 miles risk major component failure, as well as a drop in residual value, the combination of which causes total lifecycle costs to rise. Replace too soon, and depreciation will be too high; replace too late, and both mechanical failure risk as well as overall variable expense will spike. But now (in fact since 2007-8) the trend is changing; there is now more inclination to extending the replacement cycle of assets well beyond the 100,000 miles benchmark. With an enhanced Maintenance Budget and a tightly managed asset maintenance schedule, more and more companies from where these used trucks come from have now found more ingenious ways to ensure trucks remain in operation for a reasonably lengthier period of time.

The implication of the scenario painted above is the increasing likelihood that any truck gotten from the used vehicle markets of Europe and America under the present dispensation will probably be assets that have extensively served their time including that of its effective and cost-efficient life cycle. Hence it is not too surprising to observe the very high spate of some of the worst accidents on our roads involving some of these over-used trucks. While the drivers’ culpability cannot be completely ruled out, a number of these accidents have indeed been traced to either brake, tyre or another major component’s failure.

But it is heartwarming to observe that more and more emerging corporate entrants into the industry are now beginning to embrace the idea of running haulage business with brand new, locally sourced and tropically compliant brand of trucks.

This development, that is increasing appetite for brand new vehicles, has therefore made a proper understanding of the replacement policy much more important than before. In essence, it is expected that haulage companies should take a keen interest in having a highly functional policy for their asset replacement in place. Replacement policy has gone beyond the level of barely mouthing statement like ‘our truck should serve us for 5-7 years or even 8years’. Proper planning and strategy has to be devised such that the operation of the business is not grounded on account of vehicle failure or fast increasing maintenance cost that far outweighs the benefit of freight return.

The reality or perhaps what could qualify as the ‘dilemma of Replacement Policy’ is that if the fleet entrepreneur replaces his vehicles too soon, it will cost his company money. Conversely, if he waits too long, it will again cost his company money. The reason for a sound replacement planning is two-fold. One rea­son is that drivers require safe, modern, reliable transportation if they are to do their jobs efficiently. The other reason is to provide haulage services at rea­sonable cost. In another sense, it is more like wanting minimum depreciation expense without incurring excessive maintenance cost (i.e. the longer your truck stays in service, the better the spread of your depreciation expense and the lesser too). A company striving for sound management and viewing the driver as an important asset to the company and the asset plan, of strategic corporate benefit, will adopt a plan somewhat different than say, a government or a utility fleet, which does not or cannot share a philosophy centering on the human aspect rather than bare trans­portation and stark economy of operation.

While there are much more sophisticated core operations research formulas for determining or estimating an optimal replacement cycle, this paper will deliberately not go that path. Rather, attempt will be made to appraise the much more practical and locally relevant options that can be adopted and still deliver same result if not better.

 

………………………………………..To be Continued in Part Two

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