Depreciation is the biggest component of the fleet operating cost pie. Managing it effectively is more important than ever. CAF asked Dominic Gaspari, Canadian Director of Finance at ARI to share the company’s recommendations on managing asset depreciation.
There are two parts of depreciation, acquisition cost and resale value. After a vehicle is taken from service and sold, the actual value that has been lost is determined by deducting the resale proceeds from the original cost. This is depreciation. Depreciation accounts for 45% of total operating costs for most fleets. Depreciation of a vehicle includes the cost of the vehicle itself, plus acquisition and upfitting costs, less the residual value. ARI recommends the following best practices for each area.
- Fleets need to look closely at different acquisition options: (i) leasing (open or closed), (ii) cash purchase, and (iii) finance purchase. A common misconception is that purchasing a vehicle is always cheaper than leasing. While sometimes true, it's not always the case. For example, when purchasing a vehicle, monthly costs will be higher because the payments are based on the full cost of the vehicle. When leasing, fleet customers only pay for the depreciation cost and taxes over a lease term that aligns with their utilization of the vehicle.
- Historical data should be used to analyze the true cost of ownership when considering leasing or purchasing a vehicle.
- Upfitting costs can be significant. When leasing, it is recommended to add these into the cap cost of the vehicle allowing customers to defer expenses over the vehicles useful life.
- The remarketing of a vehicle is sometimes downplayed because it occurs at a later point in time; however, this is one of the biggest opportunities to limit depreciation costs. To best maximize the resale value on vehicles, customers should partner with a fleet management remarketing specialist, who can leverage a large network of auction services to maximize returns.
- Having extensive remarketing options is even more critical for complex fleets that have a smaller resale market.
- Keep the vehicle in good condition. Meeting preventative maintenance requirements, employing safe drivers, and keeping mileage down all favorably impact a vehicle's resale value.
- Vehicle right-sizing. It's possible that a fleet operating midsize vehicles may be able to function properly by downsizing to compacts.
- Timing disposal. One of the worst times to dispose of a vehicle is right before a new model year comes out as the outgoing model will not hold its value as well. In these cases, it could make sense to extend the vehicles lifecycle.
- To reduce acquisition costs, effective communication between the customer, suppliers, and fleet management company early in the supply chain process is critical.
- Some vehicles have long lead times and extended upfitting requirements. Early ordering can ensure efficient scheduling.
- Regular specification review meetings should take place between fleet managers and the FMC to identify opportunities for cost savings. For example, will switching to an aluminum body result in savings by lowering the overall weight requirements of a vehicle? Are there OEM specifications already in place that make aftermarket equipment unnecessary? All options should be considered.
- When building more complex commercial vehicles - start initially with a pilot vehicle and make adjustments to vehicle specifications until the unit is built as planned. Making modifications, even minor ones, to a single unit is less expensive than doing it for the entire fleet.
- Fleet managers should always think strategically when procuring vehicles. When possible, negotiate pricing based on maximum volume. Consider standardizing the fleet to reduce the number of OEMs being used. This can lead to a more efficient supply chain, resulting in better communication and lower acquisition costs. Keep in mind the timing of OEM incentives. Outgoing models can have attractive deals as manufacturers try to clear these vehicles from Factory ordering has advantages - no dealer markup.
- Life Cycle: Whether to shorten the lifecycle or extend it is a common predicament for all fleet managers. If a vehicle is replaced too early, a company will likely spend too much in deprecation. On the flip side, when vehicles are replaced too late in the process, higher maintenance costs are incurred. Gone are the days where vehicles would be replaced based simply on age and mileage. Replacement cycle decisions can now be supported with the vast amount of data available; however, a solid understanding of how to interpret the information is necessary - it's vital that fleet managers pinpoint the right time to replace a vehicle, by finding a balance between a favorable resale value and an anticipated increase in maintenance costs.
- Avoid overly aggressive depreciation terms as this can lead to large adjustments on disposition. Choose a depreciation term that best matches the usage of the vehicle. Improper depreciation rates can also impact an employee's personal income tax if there is a personal use component to the vehicle (taxable benefits).
- Over purchasing fleet vehicles. Reluctance to right size impacts depreciation. Find out if it make sense to move from a larger to a smaller vehicle? Right-sizing also applies to the number of units in a fleet. Having more vehicles than necessary drives up depreciation costs.
- Don't be afraid to make changes to fleet policy. Be willing to incentivize drivers to follow preventative maintenance schedules and practice safe driving habits.
- Don’t focus on work routes, focus on route optimization. This is important for keeping mileage down, improving resale value.
- Over-use the vehicle during its term- Be sensitive to the use of a vehicle during its lease term. Considering spreading the mileage as evenly as possible across all similar vehicles in a fleet.
- Neglect correcting poor driver behaviour. Instead, focus more on it. Given the substantial amount of vehicle and driver data, it's now easier than before to focus on changing driver behavior.