METHODS OF ESTIMATING A MOST OPTIMAL REPLACEMENT CYCLE

SIMPLISTIC REPLACEMENT PLAN

The simplest replacement pro­gram and the one requiring the least amount of analysis is to replace a vehicle after a specific amount of time. It is not rocket science to count up how long the truck has been in service and determine ahead of time what time you simply want to dispose of it. This plan is easy to establish and administer but because simplicity is its only virtue, it is practically worthless. A truck may be replaced with too little or too much mileage which will in essence nullify whatever can be gained as asset disposal return.

DISTANCE OR MILEAGE DRIVEN REPLACEMENT PLAN

Another replacement program that has disadvan­tages is the one that requires re­placement after a specific number of kilometers or distance has been chalked up; say 100,000, 150,000 or 200,000km. The big fault with this plan is that the critical mileage may occur at an obviously bad time. For example, probably at a period when the used vehicle market is in gross decline or maybe a few weeks before newer and much more cost effective and substantially affordable models hit the market.

COMBINED THERAPY REPLACEMENT POLICY

A combination replacement theory of replacing at a specific time or specific mileage, which­ever comes first infers on the surface that the element which comes first is better. This definitely will come with an added mental burden of determining which contingency will occur first.

Replacing according to time alone im­poses a restriction in one dimension; the time is right, but mileage can be anything. Replacing according to mileage alone imposes another restriction in another dimension; if mileage is right, then time can be anything. The ‘either-or’ approach imposes two restrictions: time not to exceed a certain mileage and mileage not to exceed a certain time. The end result is that excesses are avoided, but this program does not assure correct timing for effective utilization.

THE ‘NO PLAN AT ALL’ REPLACEMENT POLICY

Another replacement program which appears to be an extreme position is what has been called “no plan at all” or “drive it until it dies” policy. This principle is at work when fleet man­agement team abdicates its functions of management and does not announce and stand by a resolute, justifiable and equitable replacement policy. In practice, this simply means leaving things entirely to chance until probably when the vehicle creates enough challenges bordering on operational failure or excessive ramping-up of maintenance cost such that disposal or outright sale is the only plausible recourse.

ECONOMIC LAWS DRIVEN REPLACEMENT POLICY

This replacement policy is the result of continuing analysis of markets and marketing techniques and the analysis of certain economic laws that drives the auto industry. It is founded on the following practical rules:

Barring   such   unforeseen   events   as   a   national emergency, the resale value of a given vehicle goes down each succeeding year. The important thing is that most of the decline in value from original cost occurs in the first year. There is a lesser drop in value the second year and still less the third year, so that the longer a car is in service, the lower the depreciation rate.

Conditions being equal, it is not mileage on a vehicle that determines its resale value, but its model age. For example, a 2006 Mack model placed in service last August today is worth no more than another 2006 Mack delivered 10 months earlier. They are both 7years old cars today and length of service isn’t important.

Except in rare instances, the earlier in a model year a vehicle is traded or put on offer for disposal, the higher the resale value. Conversely, the later in the model year a car is traded, the lower the resale value.

The cost of maintenance and repairs increases as mileage accumulates and to a lesser extent, time

Every replacement transaction involves not one, but two vehicles comprising the one being sold and the one pur­chased to replace the old truck.

 

CLOSING REMARK

Using the above guidelines, it would appear that the optimal plan would be to adopt a replacement policy that assures low depreciation. The key is replacing at a time which assures effective use of a truck- neither too long nor too short and at a mileage which is neither too much nor too little. Under this plan, it is recommended that the haulage firm at the outset of the acquisition of an asset compute its mileage in serv­ice, with the mileage rate telling the season during which that truck should be replaced.  That season would now probably be defined by the combined effect of such variables as:

The application of the vehicle or type of fleet which will determine to an extent the speed at which it ramps up the estimated monthly mileage.

The depth and strength of the maintenance policy in place which will assist in preventing major components failure

The strength and coverage of the insurance policy on each asset which probably play a significantly role in determining the swiftness of response to a demand for repairs or maintenance

The technical and practical knowledge of the drivers assigned to each vehicle

We acknowledge the fact that Asset replacement strategy is a very broad topic Asset Management and so would not be too surprised if certain aspects have been excluded from this analysis. Kindly let us have your contributions to further enrich our understanding. If you also need further clarification on some salient points that have been raised in the two-part write-up, you may drop your observation and contact in the comment section.

Thank you.

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