Make vehicle and major equipment replacement decisions by the numbers
Production makes the real world happen, and reliable equipment is what makes production happen. For the industry to work smoothly, equipment must run efficiently, which means staying on top of your fleet and managing it effectively. Make equipment management a process. The equipment management cycle starts with selection and purchase. From there, owners must deal with the operation and maintenance until the machine is replaced.
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When equipment is intensively used and ages, repair costs go up and the likelihood of costly in-the-field failures rise. Develop a system to track equipment usage and costs to make smart replacement decisions.
PHOTO BY RON HALL.
Information is vital in fleet management. The right metrics help owners, their managers or mechanics identify problems and provide the right questions to ask to get to the root of issues. Don’t let the numbers run your fleet; let the numbers tell you what questions to ask.
If you see that your equipment is breaking down regularly, you have to stop and identify the reason why. Is your equipment maintenance program up to speed? Are your employees abusing the units? Do they need more training? Are your employees using the proper equipment for the tasks they’re doing?
What’s the plan?
Beyond that, do you have a replacement, rebuild or repair process? When a service vehicle or piece of equipment ages, maintenance costs go up. When the cost of the older unit exceeds the cost of a new machine, you might think you have to take action. But, you’re wrong. To trot out an old cliché: you’re a day late and a dollar short in terms of fleet management. You have to do something a year or two before that.
Why? Because when the cost of equipment repairs starts to go up, there’s a predictable pattern. For example, say you have a $50,000 machine that depreciates over 10 years, so it’s now worth $5,000. Maintenance on the machine is $1,500, so you’re at 30 percent of the unit’s value. With all of your maintenance costs – planned and unplanned – you’ve probably got another year before you’re at 50 percent of your residual value, and it’s not long before you’re at 100 percent. You must make a decision before that piece of equipment that was just sucking oil actually crashes and burns. The life cycle of a machine is predictable, so you have plenty of warning and plenty of time to decide to repair, rebuild or replace a piece of equipment.
Here’s another example: A truck now worth $10,000 needs $4,500 in repairs to keep it safe and operable. That’s 45 percent of its current value. Before you spend more than 30 percent of the equipment’s residual value on any repair, perform a total equipment repair analysis.
Another way to is to calculate what it will cost to rebuild or repair a particular unit. Make an educated guess about how much more service you can reasonably expect from that vehicle or unit, be it miles driven or hours of useful life, then divide those by the appropriate number for either the vehicle or production unit into the rebuild or repair costs.
Of course you must also weigh the knowledge and skill level of the individual performing the rebuild or repairs.
Do the math
This gives you concrete numbers to back you up when you’re considering your options. You might decide a repair or rebuild is enough for now, but the only way to know is by crunching the numbers.
When equipment reaches 30 percent of residual value, you’ve got to start considering what to do with the unit. By tracking the equipment, you can predict when you’re going to need the money for costly repairs and rebuilds, and when you’ll need replacements altogether.
As the residual value decreases and repair costs skyrocket, you must make a conscious decision about whether to replace it. Not only do the costs go up, but the unit’s reliability goes down. When a machine keeps decreasing in reliability, you finally get pushed to a point of no return. After all, equipment that’s not working can’t make you money.
What you must determine is that when an old machine breaks down (or is about to), how much more life can you reasonably expect to get out of the unit with either a rebuild or a repair? Use historical experience as a basis for your decision.
Here are a couple rules of thumb to consider when deciding to repair a unit. If you’re considering replacing a defective part with a rebuilt part, it must deliver more economy than a new part whether OEM or aftermarket.
Therefore, a rebuilt part’s cost that is more than half the cost of new and delivers less than three-quarters the life of new should be rejected for a new part. Should a part cost half the cost of new and deliver three-quarters the life or new or more, then use it in place of new.
Value is the key
Value is a key consideration when adding equipment to your fleet. The competitive nature of the industry requires us to go out and look for the best price. You identify what you want and write the specification. Keep in mind the overall needs of your fleet and how the new equipment must fit into those parameters. Be proactive instead of reactive when it comes to equipment purchases. Work with dealers who know your business and how you use the equipment. Look for a fair price that dealers will stick to, and make sure dealers back up their claims about equipment and maintenance costs.
John Dolce, with Wendel Consulting, Inc., has more than 30 years’ experience in the fleet industry as a manager for both public and private sector fleet operations. Reach him at <45 Light Oblique>[email protected]