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Fleet management: the replacement problem

By Horacio de la Fuente, industry expert

Researcher Adam Redmer, from the Poznan University of Technology, Poznan, Poland, published an article online (by regarding the fleet replacement problem. The article provides an up to date review on this issue. Here there are some of the key issues.

Fleets constitute the most important production means in transportation. Their appropriate management is crucial for all companies having transportation duties. The paper discusses ways of building replacement strategies for companies’ fleets of vehicles. It means deciding for how long to exploit particular vehicles in a fleet (the fleet replacement problem – FR). The essence of this problem lies in the minimization of vehicle / fleet exploitation costs by balancing ownership and utilization costs and taking into account budget limitations.

The solution shows that there exist optimal exploitation periods of particular vehicles in a fleet. However, combination of them gives a replacement plan for an entire fleet violating budget constraints. But it is possible to adjust individual age to replacement of particular vehicles to fulfill budget constraints without losing economical optimality of a developed replacement plan for an entire fleet.

The decision for how long to exploit particular vehicles in a fleet or when to dispose / replace them and by what type of a brand new or used vehicles, including selection of vehicles investment / acquisition option (e.g. to buy on cash, credit, lease or rent), is called a fleet replacement (FR) problem.

The FR problem can be considered on a level of single vehicles or on a level of entire fleets. It makes a significant difference in the way budget limitations are taken into account. When single vehicles are considered budget limitations can be skipped or they just simply can’t be taken into account since budgets are defined on a fleet level, not on a level of single vehicles. In contradiction, whereas entire fleets are considered budget limitations are crucial when developing replacement plans.

On a single vehicle level of considerations the essence of the FR problem is to exploit vehicles not too short and not too long. Too short exploitation periods result in high vehicle ownership costs, whereas too long exploitation periods result in high vehicle utilization costs. High ownership costs a caused by a steep decrease in a vehicles’ residual value (RV) in early years of their exploitation life. High utilization costs a caused by technical condition deterioration and increased downtimes associated with it.

Methods for solving the FR problem can be divided into the preventive and the failure based ones. But in the case of the preventive replacement methods it is necessary to define time to replacement, which is obvious in the case of the failure based methods since it is just a moment of a failure. There are two ways of defining that time (an exploitation period) when using the preventive based methods. They are: age-based replacement and group replacement. Considering vehicles, including trucks, the preventive age-based replacement methods can be applied. Instead of an age a cumulative utilization, e.g. mileage can be used as well.

Regardless if an age of a vehicle (an exploitation period) or a cumulative utilization (mileage) is used the general aim when planning replacement is to minimize overall exploitation costs, usually discounted ones. The general drawback of the existing solution methods for the FR problem is that they assume a constant utilization of equipment including vehicles, during its operational lifetime

Two different solutions of the problem have been found. The solutions named “optimal” and “smooth” one. The optimal solution means a replacement plan constructed based on the optimal age to replacement calculated separately for each one vehicle in the fleet. In this solution the budget constraint has been relaxed (skipped). The smooth solution means a replacement plan constructed based on the age to replacement calculated for particular vehicles in the fleet simultaneously (at the same time) trying to keep investment expenditures in a certain range (the budget).

Both solutions are very similar, equally good, when taking into account the average unit fleet exploitation costs they result in (less than 1% difference). Moreover, the average age to replacement is similar in both solutions as well. It is around 7 years of exploitation to the moment of replacement (based on the optimal solution 6.5 years and on the smooth one 7.1 years – precisely). The significant difference is when taking into account budget limitations and net fleet investments the both solutions result in within particular fiscal years.

The optimal solution from the budget limitations point of view is a significantly worse solution for the company operating analyzed fleet than the smooth one. The optimal solution results in the net fleet investments varying much from year to year. Moreover, this solution requires high expenditures in the first one fiscal year. On the contrary, the researcher highlight the smooth solution does not cause capital investment surges in time, requires small expenditures in the first three fiscal years and the expenditures in the further years are relatively flat.

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