Vehicle Acquisition and Disposal

The critical element in optimizing fleet lifecycle costs is determining vehicle ownership economics and replacement intervals and methods. The process begins with vehicle selection and acquisition.

The foundation for that is identifying transportation and operational requirements, and then evaluating the best ways of meeting those essentials. Once acquired, the appropriate maintenance and servicing schedule for each vehicle needs to be developed and adhered to. Next comes development of an ongoing fleet replacement policy. This involves figuring out when, and how, to dispose of vehicles.

When vehicles are managed correctly, a fleet can benefit from savings through optimal lifecycle cost due to more efficient vehicle operation, reduced downtime, improved safety, greater driver satisfaction and higher resale and/or trade-in values.

To make sound vehicle acquisition decisions, a broad spectrum of information needs to be gathered and then weighed against a number of factors, according to the NAFA Fleet Management Association's Certified Automotive Fleet Manager Program (CAFM). These factors include being aware of the fleet's needs, goals, resources, working environment and management philosophy.

CAFM is the oldest and largest fleet certification program in the world. A not-for-profit, individual membership professional society, NAFA serves the needs of members who manage fleets of automobiles, SUVs, trucks, vans and a wide range of specialized mobile equipment for organizations across the globe.

SELECTION STEPS
Typically, three main steps ought to be followed when selecting vehicles, CAFM says. The first is to analyze the various transportation options to meet identified operational needs and requirements and to reduce the total transportation costs in the organization, including the cost of vehicle purchases, leases, short-term, rentals, etc.

Analysis of operational needs and requirements, says CAFM, should include such considerations as:

• Travel conditions - Will travel be mainly on well-maintained highways and city streets, or include gravel, dirt or country roads? Will there be mountains, severe cold, severe heat or high winds? Will other conditions necessitate special engine sizes, suspension systems, etc.?

• Driving patterns - Will most travel be on highways, in cities or mixed? Will most trips be long and at high speeds, or will the vehicle make frequent stops and cover a small territory? Will the vehicle cover such large distances that range per load of fuel is critical?

• Predicted mileage - How many miles will the vehicle travel each month?

• Fuel requirements - Will the vehicle operate in regions where alternative fuel requirements must be met? Is it necessary to acquire a dual-fuel or flexible-fuel capacity? Is a hybrid vehicle suitable?

• Special equipment - Does vehicle use require heavy duty electrical systems, special lighting, decals or trim to increase visibility or installation of other specialized equipment? Will cellular telephones, computers, facsimile machines or other equipment be installed or require special adaptations?

• Legal requirements - Be aware that law or regulation at a variety of government levels may require provision of cargo security, special lighting or other equipment.

Following this evaluation comes selecting the most beneficial vehicle to lease or purchase. This is achieved by analyzing and evaluating historical and anticipated future lifecycle data. This should include a cost comparison of fuel types for the expected fuel consumption; maintenance and repair data; anticipated resale values; and expected emission levels when compared to other vehicles in the same class.

The third step, says CAFM, is consideration of other elements that may influence the selection decision, including the importance the fleet places on various selection factors. These factors may include initial cost, depreciation/resale value, repair record, economy of operation, environmental impact, serviceability and maintainability, safety features, warranty program, vehicle availability (delivery time), country of manufacture, company image and public perception, driver preference and insurance costs.

ALTERNATIVE FUEL

The same criteria for selecting a conventionally-fueled vehicle apply to selecting an alternative-fueled vehicle, CAFM says. It is importance to keep in mind, however, a vehicle's operational requirements when considering alternative fuel vehicles. By way of example, hybrid vehicles may be unsuitable for hauling large amounts of cargo. A natural gas-powered vehicle may have reduced range or cargo capacity - due to the fuel tank location - that may make it unsuitable for certain cargo tasks.

The location, accessibility and availability of the fuel and/or fueling sites are factors when determining if the alternative fuel vehicle can operate effectively.

For example, if the operational requirements require regional travel and the appropriate fuel is only available from a centralized location, an alternative fuel vehicle would not be a reasonable choice, CAFM says. Constructing fueling infrastructure, whether at a centralized or alternate location, is an expensive proposition that must be factored into the costs of operation. An alternative may be to partner with another agency or company with infrastructure already in place.

"Government mandates or organizational policy may dictate the use of alternative-fueled vehicles," notes CAFM. "This will more than likely result in higher acquisition costs, as the typical alternative fuel vehicle or alternative fuel conversion will increase the purchase cost of the vehicle.

"However, some agencies find that the positive public perception associated with reducing tailpipe emissions and reliance on foreign petroleum products is worth the additional acquisition and operating costs, while still others with government mandates may not have a choice.

"Still, it is critical that the alternative fuel vehicle selected addresses the appropriate selection criteria." CAFM says.

Selecting the alternative fuel option will affect resale of the vehicle as well. If the vehicle is a dedicated alternative-fueled vehicle, it is likely that the demand for this vehicle will be very limited when it is time to dispose of the vehicle, CAFM says. Most potential buyers will not have access to the fuel type. Even if the fuel is accessible to them, range may be limited if they have access to the fuel type in their immediate area only.

Dual fuel and flexible fuel vehicles may lessen the problem associated with remarketing dedicated alternative fuel vehicles.

Furthermore, warranties for alternative fuel vehicles, including conversions, may be different from the standard manufacturer's warranty. This can affect both operating costs and vehicle availability if the warranty work must be performed by the dealer or company performing the conversion.

Whether the warranty repair work is performed in-house or outsourced, qualified technicians must be available to perform the work, points out CAFM. The lack of qualified technicians available to perform repairs could result in reduced vehicle availability, reliability and, ultimately, driver satisfaction. "This will be even more critical once the warranty expires.

"Dealer support for factory-built alternative fuel vehicles should be available, CAFM says. "Support for converted vehicles may or may not be available. Even if technicians are trained and knowledgeable, parts may be hard to source or perhaps unavailable."

USED EQUIPMENT

Depending on the fleet and its operation, it may be advantageous to consider acquisition of used vehicles. CAFM says that for a variety of reasons, some fleet managers have identified situations in which their fleet's needs can best be met by purchasing well-equipped, low-mileage used vehicles of recent vintage, or entering a short-term lease in certain circumstances.

"The idea of buying used vehicles might be expected to generate some negative feelings initially," says CAFM. "However, if savings - for cost avoidance - can be documented, the idea could become worthy of closer investigation."

Additional considerations for used vehicles should include reduced purchase price equal to depreciation, potential additional costs for necessary mechanical repairs or cosmetic improvements, limited warranty coverage and reduced resale or trade-in value when the vehicle is replaced.

RESEARCH APPROACHES

There are a number of methods for researching possible vehicle choices, according to CAFM. Among them:

• Personal expertise - "Trust your own knowledge and experience but be open to new products and technology. Work to increase your own knowledge."

• Equipment history - Comprehensive factual operating and maintenance history on existing equipment is an invaluable resource, pinpointing problem areas and supplying benchmarks from which to evaluate other equipment.

• Trade journals - Journals and other periodicals often feature evaluations of equipment. Ads and new product sections offers sources of manufacturer literature. Create a resource file of articles and product literature.

• Vehicle dealers and manufacturers - The dealer or manufacturer knows his product best. Develop strong professional working relationships with primary vendors. They are the best sources of product literature, demos, fact books and general knowledge.

• Demos - "There is no substitute for eyeballing the iron." Try whenever possible to evaluate demos in a working environment, preferably with a used machine. Involve the user and operators if possible.

• Other users/trade associations - Seek the opinion - and recognize it as opinion - from other equipment users and fleet managers. Try to seek out individuals with similar operations. User associations often are superb places to share information.

ACQUISITION COSTS

Determining vehicle lifecycle costs is one of the most important, and most complex, steps of the vehicle selection process, observes CAFM. The procedure varies, depending on whether a fleet is owned, uses open-end finance leases or uses closed-end leases.

If vehicles are being acquired through open-end finance leases, the process focuses on four major steps: calculate capitalized cost to determine ownership or lease costs; project resale values; determine operating costs; and then total these costs for each vehicle being considered. Here is CAFM's overview:

• Capitalized cost - Obtain the dealer invoice prices - if available - and consider and deduct all available pricing options. If analyzing costs before final information is available from manufacturers, estimate dealer invoice based upon the previous year's model. Factory sales representatives, dealership or leasing company salespeople can provide their estimates.

Pricing options and special fleet considerations can include: monetary incentives, special programs, guaranteed market value plans (assure that a vehicle's depreciation will be at least as good as a competitive vehicle's depreciation, based on a published source), price protection (guarantee against increase in vehicle cost is usually available only before introduction of new model year, with order and delivery before specified deadlines) and rebate programs (offer credit after delivery). Next, add or deduct any dealer or leasing company charges or discounts.

• Lease costs - Determine the number of months that the vehicle will be in service, then estimate the resale value of this vehicle at the time it will be removed from service. This can be done by checking the current return on similar vehicles at auction or using used vehicle valuation guides. Next, subtract the resale value from the capitalized cost to determine actual depreciation.

• Operating costs - Estimate fuel and maintenance costs by figuring miles per gallon, miles to be traveled, maintenance costs, any special arrangements for maintenance which were offered by or negotiated with manufacturers, and any repairs which are covered by extended service plans.

The lifecycle cost can be determined by adding the total lease cost and the total operating cost to determine the total fixed and operating costs. The number calculated for one vehicle type can be compared to the number calculated for each other vehicle type being considered.

CLOSED-END LEASES

Vehicles may also be acquired using a closed-end lease. This consists of a fixed monthly payment determined at the initiation of the lease by the lessor, explains CAFM. This payment includes charges for depreciation, interest and administrative overhead. For a full maintenance type of closed-end lease, it also includes a charge for maintenance.

Because the lessor assumes the depreciation risk under a closed-end lease, resale value is not a principal consideration for the lessee, nor is capitalized cost, except to the extent that it influences the amount of the monthly lease payment.

However, CAFM points out, the fleet may need to include a factor for excess mileage charges and another for anticipated excess wear and tear on any closed-end lease. Operating costs should be computed as described previously, but with the exception of the cost of routine oil changes. Maintenance costs need not be computed if the lease is a maintenance lease.

If a fleet is owned rather than leased and the vehicles are purchased with borrowed money, ownership cost (replacing lease cost) consists of the down payment (if any), interest cost and payment of principal (analogous to the reserve for depreciation in an open-end lease).

Resale value is important because when the vehicle is sold, the owner retains any excess of sale proceeds over the loan balance due. Therefore, the determination of capitalized cost is as important a step as it is in the case of an open-end lease.

Operating costs also must be computed as described for an open-end lease.

Many government fleets may take advantage of special, high volume discounts which have been developed by a government bid process, notes CAFM. Often, prices for the vehicles available under the state contract are advantageous. Many states invite local governments to make their purchases through the current state contract.

When all these steps have been completed, CAFM recommends ranking the selection criteria in order of importance. This can help in making a sound acquisition decision. "There is no bad equipment, only wrong equipment in the wrong application."

MANAGEMENT REVIEW

Prior to placing a vehicle order, it is always advisable to have management review the equipment specifications for their approval and support, advises CAFM. "Be prepared to share the basis for your recommendations. Factual data, recommendations from various sources and your own understanding of your employer's needs should be presented freely to support your recommendations.

"Don't be surprised if someone questions the relative importance of some factors or expresses some other preferences. If it is necessary to alter the final selector, recognize that the change may not be a reflection on your expertise as a fleet manager but rather demonstrates a desire by management to satisfy other, non-fleet concerns."

Once the order is approved, CAFM says the acquisition process should take the following steps:

Determine costs and specs for each vehicle to be acquired - Research and negotiate the exact, updated cost of each specific vehicle. Seek face-to-face meetings with a vehicle dealer or OEM representative to ensure that each vehicle is being acquired at the best price. Come away with a completed "build spec" or "quick spec" - the vehicle specification in code at a predetermined price - for each vehicle.

Process any driver selections - If a driver is given a choice of vehicles or is permitted to select certain vehicle options, such as paint, interiors, accessories, etc., the necessary paperwork needs to be completed.

Place the vehicle requisition/order - When each specific detail of a vehicle has been decided, the vehicle requisition/purchase order, or vehicle lease order, needs to be prepared. When this form is completed with every code and specified price and signed, it must be submitted to a dealer or a leasing company before any vehicle will be built.

Verify confirmation of order - Once the order has been placed, the dealer or leasing company will send a confirmation of order report. It is very important that every detail of this confirmation be immediately checked and verified to be absolutely certain that it reflects the items ordered, stresses CAFM.

Also at this point, a copy of the confirmation of order report should be given to the driver who will receive the vehicle so the driver, too, can confirm his order details.

Review any status reports - From time to time, status reports from the vehicle manufacturer or leasing company may be issued, advising of how the ordered vehicle is moving through the manufacturing and delivery process.

Review delivery confirmation - When the vehicle is built, it will be delivered by the process established at the time of order to the person and place directed, and will be signed for by someone representing the fleet. After the new vehicle has been delivered, a delivery receipt will be sent from the source which processed the order.

If a used vehicle was to be picked up at time of delivery, this would be a good time to ascertain that this process was completed.

Process invoice and final paperwork - The final invoice and related paperwork associated with the purchase or lease of the vehicle will also be sent. "It is essential to carefully verify every item on the invoice," says CAFM. "This is your opportunity to assure that you are being charged the correct price for each element of the vehicle, and to be certain that all fleet incentives, special programs or other arrangements you negotiated are properly reflected."

DISPOSAL CONCERNS

It is important to recognize that what vehicles are purchased, when they are purchased, color, options and accessories, etc., not only impact the value of the vehicle at initial purchase but also significantly influence the vehicle's resale/trade-in value when it is disposed of. "While fleet use is a key factor when selecting vehicles, also keep in mind the retail market and what is demanded from that market," CAFM says.

Moreover, at the time a vehicle is purchased, a fleet needs to predetermine the likely disposal time frame and ensure budgets anticipate potential replacement costs.

Fleet replacement policies are most effective when also teamed with a fleet remarketing policy, says CAFM. "While a replacement policy can set the guidelines of what to acquire at the most opportune time, the remarketing policy sets the guidelines in actually determining the opportune time. Elements of both policies will overlap, but they should not just restate information, they should compliment each other."

As an example, the replacement policy may indicate which sedans are the best for a sale force, but the remarketing policy may show when and where the old sedan in the fleet should be sold.

Fleet managers can certainly have a replacement policy with no remarketing policy, but when both policies are clearly defined, the acquisition dollars being spent and the sales dollars being realized can be maximized, CAFM notes.

Regardless of how vehicles are disposed of, each vehicle sale should be audited to ensure such items as: end-user condition reports match the description of the vehicle when it was sold, that sale proceeds are in line with industry benchmarks and that this was the most efficient way to dispose of the vehicles. "Depending upon the size of the fleet and number of vehicles sold annually, vehicle sale proceeds can significantly affect the bottom line, either positively or negatively.

"It is up to you to market your vehicles effectively, use the disposal method resulting in the greatest residual return, ensure all legal issues are addressed, and continually analyze your disposal function," says CAFM.

As would be expected, there are many factors that affect resale or trade-in value. Among these: vehicle makes and models, age, mileage, condition, options and accessories, maintenance level, geographic location, time of year, market glut and interest rates.

There are also a variety of ways in which to remarket used or surplus equipment, including: sales to employees, sell or trade-in to a dealer, sell to a wholesaler, sell direct, conduct an in-house equipment auction, contract with an auction company or use an equipment broker. Equipment not worth selling for re-use could be sold for salvage or scrap.

When setting prices and values for used equipment, CAFM suggests obtaining price comparisons of similar vehicles sold in a fleet's area. This can be done by reviewing pricing in national trucks-for-sale publications and websites. Used equipment valuation guides are another good source for determining a vehicle's worth.

Evaluating and pricing equipment to determine the true value is important before deciding to trade, wholesale, retail or auction, says CAFM. Consider the quantity and pricing of similar trucks currently in the marketplace. This will impact the value of your trades."

EYE APPEAL

"Regardless of how a vehicle is disposed of, vehicle appearance and condition can pay big dividends by improving both its value and sales appeal," says Jim Gleason, a veteran commercial truck sales professional and equipment broker based in Micco, FL. "It is best to maintain a vehicle's appearance by taking good care of the vehicle with regular preventive maintenance and automotive hygiene throughout its use, rather than having to invest time and money into cleaning it up at replacement time.

"The visual appearance of a vehicle makes the most lasting impression," he gores on. "That old expression - ‘eye appeal is buy appeal' - is true. Some buyers will overlook certain mechanical defects if they like the look of the vehicle."

Improving vehicle appearance can be as simple are cleaning out the interior; repairing ripped seats; removing stains from carpets and seats; making sure there are no missing knobs and buttons; removing stickers and decals; and repairing or replacing cracked windows and windshields, Gleason says.

The exterior should be washed and detailed, the engine compartment cleaned, tires should match and have ample tread depth and sound casings, and on sleeper tractors, the mattress should be replaced with a new one, adds Eddie Walker, a long-time used truck sales professional and owner of the Best Used Trucks used truck dealership in Fort Worth, TX.

Additionally, Walker and Gleason advise making all needed repairs so that any commercial vehicle can pass a U.S. DOT safety inspection, and having all service, maintenance and repair records for each vehicle. They also say fleets might consider vehicle adding warranties to equipment for sale as a way to increase appeal and value.

There are several providers that offer truck engine and powertrain warranties, including National Truck Protection, Premium 2000+ and American Truck Protection.

TRADE TERMS

It is important to decide upon trade terms and conditions for vehicles that are to be traded or returned, says Marty Crawford, president of the Used Truck Association (UTA) and senior account manager for dealer sales development at Arrow Truck Sales, a used truck dealer with locations throughout the U.S. and Canada.

"Many times the maintenance department is not told in what condition the trucks are to be traded or sold, and this slows the process and causes great confusion between the maintenance department and management, often placing the maintenance department in the middle without authority to correct the problem," he explains.

The UTA - an impartial organization comprised of used truck professionals and associated businesses committed to strengthening the used truck industry - has created a set of guidelines for industry-standard trade terms and conditions for establishing the condition of a used truck, as agreed to by both seller and buyer. Meant to reduce confusion in the marketplace, the guideline covers engines, drivetrains, brakes, tires, frame, cabs, sleepers and bodies.

Crawford suggests not having potential buyers or resellers inspect vehicles to be sold or traded-in trucks until they have been repaired, as most buyers or sellers won't pay for the vehicles until they are in "trade terms."

Companies often used their trades as partial payment for the new trucks, he says. If the trades are not ready, this can slow the delivery on the new trucks.

Don't overlook establishing when the buyer will remove the used vehicles, adds Crawford. Some buyers will leave vehicles on the company's lot until they are sold, which could be months later. "It is best to have a stated schedule for removal."

VEHICLE RECONDITIONING

Fleet managers should carefully weigh the costs involved with "reconditioning" against the costs of a replacement unit, advises CAFM. Its definition of reconditioning is not repairing parts or systems that are defective, but rather replacing a set number of components and systems to bring the vehicle back to like-new standards. This may involve replacing some components that appear to be functioning perfectly or strictly performing cosmetic reconditioning.

Reconditioning can be performed by an auction, a specialized reconditioning company or by the company selling the vehicle. Cost analysis should be conducted before deciding which method is the best, CAFM says.

"Too much or too little reconditioning can adversely affect net sale price. Reconditioning must add value or significantly aid the sales process. Reconditioning which merely returns its own costs is a waste of time and effort."

Equally important to the reconditioning decision is the targeted market for the sale, price trends within the used vehicle marketplace and how the vehicle will be disposed of. CAFM says vehicles that are going to be sold via a retail method should probably get more reconditioning than those that will be remarketed through a wholesale channel.

In addition, there are many other factors that influence the type of reconditioning on a vehicle, including the vehicle type, present condition, age and value; mileage; amount of reconditioning required; vehicle downtime; current market conditions; and time of year a vehicle will be sold.

"Be especially judicious when considering the expense of mechanical reconditioning, because mechanical reconditioning is, for the most part, invisible to the buyer," cautions CAFM. "For example, a car or truck with a newly rebuilt transmission is normally worth no more than the same vehicle with an original, but properly operating transmission. When a vehicle is sold wholesale, minor mechanical problems resulting from minor wear and tear are usually not repaired."

Further, CAFM notes that a vehicle is almost always more valuable if it runs because an inoperable vehicle invites speculation about expensive repairs. "Avoid selling any inoperable vehicle if the disability, such as a locked starter motor, can be cured at nominal cost."

BEST RETURN

The goal from the beginning of vehicle acquisition through a vehicle's lifecycle is to select the appropriate vehicle for the intended application, perform proper preventive maintenance, do timely repair and upkeep, and dispose of it in the way that brings in the most money.

Establishing effective vehicle replacement and reconditioning policies can help a fleet acquire the best vehicle to get the job done while a good vehicle maintenance policy can maximize the dollars being returned to the fleet when the vehicle is sold. Both policies need to be ongoing, flexible and changed as appropriate to allow the broadest opportunities possible in acquiring, replacing and disposing vehicles.

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