Managing your vehicle replacement strategy is a continuous cycle. As the last quarter of the year pushes by, OEMs have begun production of new model year vehicles. At the same time, your company is involved in a process that is critically important to the entire company: annual budgeting. So while you are busy submitting this year’s new vehicle orders to the OEMs, you are simultaneously calculating how much capital you will need for next year’s new vehicle orders.
According to research by McKinsey & Co., more than half of corporate growth is directly attributable to capital expenditure. Knowing this, your senior executives will soon be combing through requests for capital from across the business, looking for ones that will produce the best return on investment (ROI).
Typically, finance executives rank the value of a project based on the cost of the request and how the company’s capital will be used. Their goal: make smart investment decisions that benefit the entire organization. Their greatest fear: missing opportunities for substantial growth and profitability. As they look at the ROI associated with each request, those they rank as most valuable will get the money requested; those found to be less valuable will not.
When they get to your capital request for new fleet vehicles, they will weigh it in the same regard. Will your vehicle replacement strategy strengthen the company? Will it allow the company to more efficiently deliver goods and services that will contribute to growth and profitability? Unless your request is well conceived and based on thorough analysis of your fleet operations, your planning could impose hardship on your company’s finances, inhibit senior executives from making sound future investments and contribute to lost competitiveness.
What if you could attune your vehicle replacement planning with the financial priorities of your business?
To ensure approval of your capital request for vehicle replacements, show senior executives how your plan aligns with their needs for improved cash flow, faster growth and competitive advantage. Let them know how you’ll:
- Make smarter supply chain decisions
Show the executives how your replacement schedule parallels peak periods for productivity and returns in the associated markets. Starting with the placement of new vehicle orders, you will have carefully coordinated them with OEM production and build-out schedules. This will help ensure vehicle availability and avoid production delays as the OEMs have arranged for their operations to be in full swing. Also, by choosing supply chain vendors that have established partnerships with one another, you’ll get road-ready vehicles in service faster. All of this will produce a continuous supply of vehicles necessary to keep your business moving forward.
You’ll also show them how you will monitor in-service vehicle performance and target ones with the highest operating costs for replacement. By cycling them out swiftly and choosing the appropriate resale outlet based on the current used vehicle sales market, you will maximize the return.
- Lower total cost of ownership (TCO)
Finance executives will want to hear how your plans to replace vehicles before maintenance costs and downtime begin to rise will produce resale results that lower TCO. In addition, looking at vehicle utilization will allow you to size your fleet to the needs of your business. In other words, not enough vehicles leads to lost profitability. However, if vehicles are underutilized or not required for delivering on your customer promise, you can eliminate costs from your fleet by liquidating them or swapping them with over-utilized units where applicable.
A cost-effective benefit of optimal replacement cycling is keeping up with the evolving safety and technology features. Each new model year, vehicles with the latest technology become more fuel efficient – another reduction in TCO. And advancements in vehicle and driver safety technology allow you to mitigate accidents costs and liability. This will be of utmost importance to your risk executives.
- Submit stable capital funding requests
If your executives are accustomed to the traditional age-mileage formula for replacement cycling, you can bring them awareness of how this aged method overlooks a number of variables that can affect total cost of ownership: depreciation, maintenance and repairs, cost of money and cash flow, insurance, fuel, downtime, and market conditions. Instead, introduce them to data analysis technology and predictive modeling methods, which have brought greater stability to replacement cycling and capital funding.
The ability to see your fleet’s data allows you to develop actionable plans based on real-time information, not simply intervals of age and mileage. When you prioritize replacements and develop accurate and consistent capital acquisition modeling, you can replace the most critical vehicles in your fleet in a timely manner.
- Replace the appropriate amount of vehicles
Finally, work with your senior executives to determine whether to lease or purchase new vehicles. The finance team will tell you this depends on their access to credit or financing. Their decision can impact the number of vehicles you can replace within a given replacement cycle. Often the best strategy is a mix of both leasing and purchasing. Leasing a portion of the fleet is a smart way to supplement your purchasing power when capital availability is limited. This allows you to maintain an optimal replacement strategy and remain within budget.
Don’t just walk away from your replacement goals by extending vehicle service terms. In the end, you’ll spend more in escalated operating costs while putting your finance team through the ups and downs of inconsistent capital requests. It’s important that your finance team work with you to settle on lease terms that align with your cost analysis and replacement strategy. Together, you can reduce the financial burden on annual capital expenditure budgets while still providing a viable, work-ready fleet.
You are at the mercy of your senior executives for the capital to back your vehicle replacement strategy. To win their support, you must demonstrate that your fleet management plan strengthens the business and will deliver on the company’s objectives for growth and profitability. Give them the confidence that their decisions to invest in the fleet are based on solid analyses and strong fleet management partnerships. When senior executives can envision a maximum return on investment, they will give you the capital you need to help guide the strategy of the company through your fleet.
YOUR FLEET IS AN INVESTMENT. AND IT’S TIME IT PAID OFF.
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Originally posted on Automotive Fleet