Tackling the Challenges of Fleet Modernization: A Case Studymercury-assoc.com/wp-content/uploads/Tackling_the... · CityofBalAmoreFleetin2012 • FleetSize –...

Tackling the Challenges of Fleet Modernization:

A Case Study NAFA 2015 Institute & Expo

Orlando, FL

Chichi Nyagah-Nash & Paul Lauria

Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*

PresentaAon*Overview*

•  Principles*of*Vehicle*and*Fleet*Replacement*•  City*of*BalAmore*Fleet*Replacement*PracAces*c.*2012*

•  Making*the*Case*for*Fleet*ModernizaAon*•  ImplemenAng*the*Fleet*ModernizaAon*Plan:*The*Story*so*Far*

•  Lesson*Learned*

1*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*

Principles*of*Vehicle*and*Fleet*Replacement*


Life*Cycle*Costs*of*a*Vehicle*

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Costs"(000)*

Replacement"Cycle"(years)*

Capital, Operating and Total Cost Trend Lines*(Single-Axle Dump Truck)*


Basic*Truths*About*Vehicle*Replacement*

•  A*fleet*of*properly*replaced*vehicles*is*cheaper*than*one*with*improperly*replaced*vehicles*

•  If*you*can*afford*to*operate*an*old*fleet*you*can*afford*to*operate*a*less*old*one*

•  Not*spending*money*on*fleet*replacement*does*not*save*an*organizaAon*money*or*help*the*“boUom*line”*–*except,*perhaps,*in*the*short*term;*over*the*long*term,*it*detracts*from*an*organizaAon’s*mission*and/or*boUom*line*


Why*do*organizaAons*have*old*fleets?*

•  Lack*of*understanding*of*vehicle*life*cycle*cost*principles*(the*U`shaped*curve)*

•  Lack*of*visibility*of*vehicle*and*fleet*costs*•  Lack*of*understanding*of*the*magnitude*and*yearòver`year*

lumpiness*of*fleet*replacement*costs*•  Lack*of*apprecia2on*of*the*importance*of*the*fleet*to*overall*

organizaAonal*success*•  Skep2cism*about*the*need*for*every*vehicle*in*the*fleet*•  Use*of*capital*financing*methods*that*impede*or*actually*

discourage*the*Amely*replacement*of*vehicles*due*to*the*misalignment*of*the*financial*and*economic*impacts*of*retain*versus*replace*decisions*


Why*should*we*care*about*all*this*stuff?*

•  Fleet*cost*•  Fleet*reliability*•  Fleet*safety*•  Fleet*suitability*•  Fleet*sustainability*•  Employee*performance*•  Employee*job*saAsfacAon*•  OrganizaAon*image*•  OrganizaAon*performance*and*success**


City*of*BalAmore*Fleet*Replacement*PracAces*c.*2012*


City*of*BalAmore*Fleet*in*2012*•  Fleet*Size*

–  4,919*vehicles*and*pieces*of*equipment*(“assets”)*•  Fleet*Management*

–  Centralized*in*the*Fleet*Management*Division*(FMD)*of*the*Department*of*General*Services*

•  Fleet*Costs*–  FMD*costs*accounted*for*in*an*internal*service*fund*(the*Mobile*

Equipment*Fund*–*MEF)*and*financed*through*a*cost*charge`back*system*

–  Fleet*capital*costs*financed*using*combinaAon*of*cash*from*replacement*reserves*accumulated*in*MEF*and*cash*from*ad*hoc*appropriaAons*

•  Fleet*Ownership*–  80*percent*General*Fund;*20*percent*enterprise*funds*–  44*percent*MEFòwned;*56*percent*agencyòwned*


2012*Baseline7Fleet*Replacement*Plan7

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2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

(Mill

ions

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Fiscal Year

Gross Replacement Costs


2012*Replacement*StaAsAcs7

10*

Number of assets in the fleet 4,013

Number of asset types 215

Current average age (years) 8.0

Imputed average replacement cycle (years) 16.0

Average recommended replacement cycle (years) 8.0

Average asset replacement cost (2012 $) $57,841

Total fleet replacement cost (2012 $) $ 232 M

Average annual fleet replacement cost (2012 $) $ 29 M

Current/deferred replacement spending need $ 104 M

Number of assets that meet/exceed recommended age in 2013 1,938

Percentage of assets that meet exceed recommended age in 2013 48.3%


2012*Replacement*StaAsAcs7

11*

Number of assets in the fleet 4,013

Number of asset types 215

Current average age (years) 8.0

Imputed average replacement cycle (years) 16.0

Average recommended replacement cycle (years) 8.0

Average asset replacement cost (2012 $) $57,841

Total fleet replacement cost (2012 $) $ 232 M

Average annual fleet replacement cost (2012 $) $ 29 M

Current/deferred replacement spending need $ 104 M

Number of assets that meet/exceed recommended age in 2013 1,938

Percentage of assets that meet exceed recommended age in 2013 48.3%

Projected unencumbered MEF cash balance at end of 2012 $ 45 M


Conclusion*The*City*had*a*fleet*replacement*program*that*was*sound*in*principle*but*flawed*in*execuAon*

–  $10*M*in*average*annual*replacement*spending*–  $29*M*in*average*annual*replacement*costs*–  $45*M*in*replacement*reserves*–  $104*M*in*current*and*deferred*replacement*spending*needs*($75*M*backlog)*


How*might*the*City*respond*to*the*baseline*replacement*cost*analysis?*

•  Do*nothing*•  Spend*down*the*reserve*fund*balance*and*deal*with*the*rest*of*the*replacement*backlog*later*

•  Use*the*above*findings*–*notably*the*idenAficaAon*of*such*a*large*backlog*and*reserve*fund*balance*(i.e.,*potenAal*windfall)**`*to*secure*management*support*for*modernizing*the*fleet*and*replacing*fleet*assets*in*a*more*Amely*manner*in*the*future*


Making*the*Case*for*Fleet*ModernizaAon*


Strategies*for*securing*support*for*increased*replacement*spending*

•  Empirically*determine*opAmal*vehicle*replacement*cycles*

•  Develop*a*replacement*plan*that*quanAfies*future*fleet*replacement*costs*

•  QuanAfy*the*costs*of,*and*(presumably)*savings*from,*modernizing*the*fleet*

•  QuanAfy*the*financial*(e.g.,*cash*flow)*impacts*of*alternaAve*capital*financing*approaches**

15*

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QuanAfy*Cost*of*and*Savings*from*Modernizing*the*Fleet*

Define*and*compare*fleet*TCO*under*two*scenarios:*•  Status*Quo*Replacement*

– Maintain*current/recent*replacement*spending*level*≈*$10M*per*year*

•  Fleet*ModernizaAon*and*Timely*Ongoing*Replacement*–  Increase*replacement*spending*level*to*≈*$29M*per*year*in*order*to*eliminate*backlog*and*replace*vehicles,*on*average,*every*8*years*

•  Remember,*TCO*is*not*the*same*in*economic*as*in*financial*(e.g.,*cash*flow)*terms*


Status*Quo*versus*ModernizaAon*Future*Fleet*Replacement*Purchases*

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Costs"(millions)"

Fiscal"Year"Status"Quo"Fleet"Replacement"

Fleet"Renewal"


Status*Quo*versus*ModernizaAon*Average*Vehicle*Age*

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hicle"Ag

e"(years)"

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Status"Quo"Fleet"Replacement"


Status*Quo*versus*ModernizaAon*Fleet*Total*Cost*of*Ownership**

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illions)"

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Status"Quo"Fleet"Replacement"

* Both scenarios assume reserve fund financing of fleet capital costs


Status*Quo*versus*ModernizaAon*TCO*`*Reserve*Fund*versus*Loan*Financing**

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nditu

res"(millions)"

Fiscal"Year"Fleet"Renewal,"Loan"Financing"

Status"Quo"Replacement,"Reserve"Fund"Financing"

* Cost comparison excludes elimination of current $50M reserve fund balance under loan financing approach


Capital*Costs*of*Fleet*ModernizaAon*Reserve*Fund*versus*Loan*Financing*

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Fleet*TCO*under*ModernizaAon*Cash*Outlay*ProjecAons,*2013`22*

22*

Fiscal Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Total

Fleet Modernization Using Reserve Fund Financing (millions)

Reserve Fund Payments $ 9.9 $ 14.8 $ 17.0 $ 18.5 $ 20.5 $ 22.4 $ 24.4 $ 26.5 $ 28.4 $ 28.3 $ 210.7

M&R Costs $ 27.5 $ 25.5 $ 24.6 $ 22.9 $ 21.9 $ 21.7 $ 21.8 $ 22.2 $ 22.9 $ 23.9 $ 234.9

Fuel Costs $ 12.4 $ 11.5 $ 11.4 $ 11.0 $ 10.7 $ 10.6 $ 10.5 $ 10.5 $ 10.4 $ 10.4 $ 109.5

Total $ 49.8 $ 51.8 $ 53.0 $ 52.5 $ 53.1 $ 54.7 $ 56.7 $ 59.2 $ 61.8 $ 62.6 $ 555.1

Fleet Modernization Using Loan Financing (millions)

Net Loan Payments $ 1.3 $ 4.2 $ 7.8 $ 11.6 $ 13.9 $ 18.4 $ 22.5 $ 26.2 $ 28.3 $ 30.4 $ 164.5

M&R Costs $ 27.5 $ 25.5 $ 24.6 $ 22.9 $ 21.9 $ 21.7 $ 21.8 $ 22.2 $ 22.9 $ 23.9 $ 234.9

Fuel Costs $ 12.4 $ 11.5 $ 11.4 $ 11.0 $ 10.7 $ 10.6 $ 10.5 $ 10.5 $ 10.4 $ 10.4 $ 109.5

Total $ 41.2 $ 41.3 $ 43.8 $ 45.5 $ 46.5 $ 50.7 $ 54.8 $ 58.9 $ 61.6 $ 64.7 $ 508.9

2012 Costs @ 2% Inflation $ 52.7 $ 53.7 $ 54.8 $ 55.9 $ 57.0 $ 58.1 $ 59.3 $ 60.5 $ 61.7 $ 62.9 $ 576.6

* Cost comparison excludes elimination of current $50M reserve fund balance under loan financing approach


ModernizaAon*Plan*


Status*Quo*Plan*


ImplemenAng*the*Fleet*ModernizaAon*Plan:*The*Story*so*Far*


Accomplishments*to*Date*•  Decided*to*move*from*reserve*fund*to*loan*(taxèxempt*“lease`purchase”)*financing*with*Grant*Capital*Management*

•  Secured*approval*for*≈ $30M*in*replacement*purchases*in*each7of*FY*2014*and*FY*2015*(versus*$11*M*in*purchases*for*prior*five*years*combined)*

•  Debt*service*costs*were*$2.6M*in*FY*2014*and*$3.9M*in*FY*2015*

•  Delivery*taken*on*≈ 700*new*vehicles*and*pieces*of*equipment*so*far*

•  $29M*taken*from*MEF*for*infrastructure*improvements*(roads,*bridges,*public*faciliAes)*


Challenges*of*Fleet*ModernizaAon*

•  ImplementaAon*of*completely*new*financing*and*accounAng*processes*

•  LogisAcal*challenges*for*FMD*from*three`fold*increase*in*replacement*purchases*

•  Heightened*management*expectaAons*•  Changes*in*customer*(fleet*user*organizaAon)*collaboraAon*and*behavior*

•  Increased*pressure*on*FMD*to*manage*finances*properly*


Finance*&*AccounAng*Demands*

•  MulAple*Stakeholders*– Finance*Department*– User*organizaAons*– Suppliers*

•  CombinaAon*of*simultaneous*planning*processes*

•  Adherence*to*budget*cycle*Amelines*


LogisAcal*Challenges**•  Asset*specificaAon*and*selecAon*•  Rapid*deployment*of*upfirng*teams*•  Tag*&*Atle*(acquisiAon*and*disposal)*workload*distribuAon*

•  Vehicle*disposal/remarkeAng*–*increased*used*vehicle*storage*needs*

•  StandardizaAon*vs*procurement*rules*–  Increased*training*needs:*operator*and*technician*

•  Procurement*processes*and*prioriAzaAon*•  CollaboraAve*challenges*of*tracking*


FMD*Employee*Behavior*

•  Maintenance*technician*engagement*and*training*

•  Maintenance*technician*producAvity*•  Parts*procurement*and*storage*


Management*ExpectaAons*

•  Immediate*impact*on*fleet*size*•  Instantaneous*operaAng*and*maintenance*savings*

•  “Easy*Money”*•  Insufficient*appreciaAon*of*impact*of*customer*behavior*


Customer*Behavior*

•  OperaAonal*–  Culture*change*to*reduce*hoarding/fleet*creep*–  Increased*push*for*PM*compliance*– Operator*engagement*and*discipline*

•  Fiscal*–  “Easy*Money”*– Data`driven*replacement*decision*making*– Need*to*involve*Fleet*in*operaAonal*changes*impacAng*customer*budgets*

–  Budget*gap*closure*through*fleet*reducAon*


Financial*Management*Pressures*

•  Loss*of*“safety*net”*of*excess*replacement*reserves*to*cover*any*FMD*operaAng*losses*

•  PoliAcal*resistance*to*increasing*operaAng*cost*charge`back*rates*to*recover*full*cost*of*services*provided*


Lessons*Learned*


Lessons*Learned*•  Data`based*business*case*for*modernizaAon*was*crucial*

•  Buyìn,*understanding,*and*advocacy*from*City*Hall*

•  Replacement*plan*annual*adjustments*•  ConAnuous*process*improvements*•  Customer*involvement*/transparency**•  RealisAc*expectaAons*regarding*realizaAon*of*savings*


QuesAons*


For*More*InformaAon*

Paul*Lauria*Mercury*Associates,*Inc.*

Rockville,*MD*301*519*0535*

plauria@mercuryàssoc.com**

Chichi*Nyagah`Nash**Fleet*Management*Division*

BalAmore*Department*of*General*Services*410*396*2791*

Chichi.Nyagah`[email protected]*** 37*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*

Tackling the Challenges of Fleet Modernization: A Case Studymercury-assoc.com/wp-content/uploads/Tackling_the... · City*of*BalAmore*Fleet*in*2012* • Fleet*Size* –...

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Tackling the Challenges of Fleet Modernization: A Case Studymercury-assoc.com/wp-content/uploads/Tackling_the... · CityofBalAmoreFleetin2012 • FleetSize –...