How rational is your fleet replacement policy?
Fine tuning Asset Management
With all the ambiguity prevailing in the South African economy, this Topic has been dedicated to discussing vehicle replacement policy (VRP).
Given there is talk of Capex decisions being put on hold for now, NAAMSA figures, while slowing a little, are still holding up pretty well given the market uncertainty. Eminent Elections are also delaying shareholder commitment to long term investment in our demand-driven service industry. However, all these are not unusual events affecting Capex decisions in the road transport industry.
Before continuing it’s important to explain that we are not addressing adding vehicles to the fleet as this a very different discussion Topic.
The following 10 considerations may assist in bringing some rationale into this conversation:
Does the company have a documented Vehicle Replacement Policy (VRP) for the intended replacement vehicle, if so, when was it last reviewed?
Will the duration of this operation continue or change during the period of the replacement vehicle’s economic life?
Does the VRP accommodate specific operating criteria for the application in which the replacement vehicle will operate?
Has commitment to the VRP been followed and proven to be economically viable?
Which three criteria in the VRP have proven most effective in delivering value to the shareholders and clients?
Which three criteria in the VRP have not been achieved and for what reasons?
Does the vehicle life-to-date (LTD) information support rationale used in assessing the operation and financial performance of the replacement vehicle investment?
Is information available for scrutiny of operating expenditure, relative to income, over the LTD assessment period?
Will the period of the present operation continue for the economic life of the replacement vehicle?
Given that the present application might be terminated prior to the duration of the write off period for the replacement vehicle, has the book value of the replacement vehicle been factored into the costing calculations?
All the above might sound excessive and somewhat theoretically daunting but nevertheless imperative, as the operation into which the replacement vehicle or vehicles will be deployed might not accommodate the budgeted Return and therefore affect the trading results of the company. It’s therefore logical that Plan B will become necessary and this changes the whole perspective on which vehicles could possibly be deployed elsewhere and, therefore, which vehicles are to be replaced?
Another point to consider, depending on the nature of the operation, is whether or not it would be better to review the planned economic life of the fleet and perhaps resort to low-km used vehicles, or alternatively, readdress the fleet maintenance policy to include major reconditioning to effectively extend replacement periods.
There is no substitute for technically competent fleet management