How to evaluate life cycle costs
The following is an exerpt from How to Evaluate Life Cycle Costs, a manual produced by Commercial Carrier University and sponsored by Castrol. CCU is an educational program produced by Commercial Carrier Journal that includes business management manuals, seminars aimed at improving management skills and a website. For more information, visit www.commercialcarrieruniversity.com.
Although some fleet managers might operate with few budget constraints, most live with financial limitations that may prevent them from replacing vehicles at the most economical time. At least twice a year, assess your fleet in light of any changes in the business, resale values, manufacturer incentives, and principal and interest costs.
When you make this assessment, establish a priority ranking that will guide you through the replacement cycle. Any vehicle targeted for replacement should receive a physical inspection by operating, maintenance and specification professionals to determine whether it is feasible to extend the vehicle’s life with some added investment in maintenance and repair. A vehicle assessment report will help you develop a ranking system to determine which vehicles should be replaced first.
Set priorities to determine which vehicles to replace with the available funds. The following method is one possible approach.
If a vehicle is due for replacement, project the total cost of the unit for the following year and compare it with the proposed replacement price. The price difference indicates whether the vehicle is beyond its economic point of replacement.
This priority ranking approach can be developed for an entire fleet by class of vehicle. If funding is available for equipment replacement, develop a replacement priority rating list to guide replacement decisions. To maintain the lowest vehicle cost and greatest vehicle availability, consider replacing older vehicles when the cost of operating and maintaining them is higher than the price of a new vehicle.
Identifying such costs requires meticulous data entry. But once you do that you have a wealth of information in various formats that you can analyze and use to make the most-informed equipment decisions. This is a basic concept of life-cycle costing and good business sense.
Broadly speaking, life-cycle costing helps you measure and compare ownership costs with operating costs. The object is to replace an old vehicle just before incurring significant maintenance costs and after amortizing a large investment.
Ownership costs represent the principal and interest costs incurred on a monthly basis until the vehicle is paid off. Ownership costs can be depreciated (reduced on a fixed period, such as five years) until full value is reached.
Operating and maintenance costs are familiar expenses. Operating costs include fuel, taxes and registration fees. Maintenance costs include labor and parts. You can track vehicle costs either manually or on a computer to accumulate life-cycle costs. Ownership costs are the most predictable. Maintenance and operating costs are less predictable, showing peaks and valleys. As the vehicle ages, additional costs are incurred. Measuring these additional costs allows you to predict future performance from historical information.
Vehicle costs can be scheduled or unscheduled. Scheduled component costs are preferable, because they usually are lower than their unscheduled counterparts. Brake replacement is scheduled; brake repair is unscheduled.
