The Cost of Not Replacing Vehicles

By Steve Saltzgiver

It's always baffled me how decision-makers (especially those with financial backgrounds) never seem to understand the cause and effect relationship of not replacing vehicles in a timely fashion. In simple terms, vehicles are just a tool used accomplish an organization's various mission tasks. When vehicles are not replaced timely this action sets several unintended consequences in motion throughout an organization.

First, vehicle breakdown frequency increases vehicle unreliability and decreases driver/employee productivity, raising the organizations' indirect costs of operation. Unfortunately, these indirect costs often amount to more budget dollars than the organization is trying to save by postponing vehicle replacement. This usually happens because a divide exists by which organizations budget for replacement expenses. Most organizations purchase vehicles using capital appropriation funds (which can become extremely political) versus the use of an ongoing replacement (or sinking) fund. When separate funds are set aside such as appropriated replacement dollars they become easy targets for politicians and company executives to use for what they deem more important projects. This happens generally because everyone owns and operates a vehicle and believes they can simply replace the vehicle at the next budget cycle. However, the problem is they don’t operate the vehicles they are postponing for replacement and when the next budget cycle arrives it has been forgotten. What they don't realize is they are sending a message of fiscal frivolity to their employees. This manifests itself in the form of idle vehicles and agencies engaging in hoarding behaviors to hang onto vehicles for spares. Both unwise practices leading to increased fleet size and decreased residual values.

In my travels, I often encounter those who justify keeping idle vehicles used only a few miles a year because they rationalize they are not costing them anything to retain. One such agency told me they keep their idle vehicle because it is cheaper to run errands a few times a month than pay someone mileage reimbursement. Unfortunately they are not making their decision based on total costs or they would realize that paying insurance, real estate for parking, and employee time to monitor the vehicle cost more than the actual use.

So what is the remedy to correct this situation?

The answer is simple and comes down to employing the best practice of setting up a cost center, capturing the total vehicle costs and employing a charge back system to recover these expenses to replenish a replacement fund. This practice ensures the organization tracks all direct and indirect, and fixed and variable costs which can lead to better replacement decision-making.

Additionally, the added benefit of using this preferred methodology is its unique cause and effect relationship on controlling driver (and organization) behavior. For example, most people paying car payments understand when life changes occur and the car is no longer necessary, the only logical decision is to discontinue paying a car payment. This is because we innately know that a vehicle is worth more today than tomorrow and we can recoup some of its remaining residual value if we act quickly and sell the vehicle. Thus, we are all motivated to look at other transportation options which generally include using less costly options (e.g., mass transit, short-term rentals, reimbursement, etc.) to avoid paying for an idle vehicles or indirect costs (e.g., parking space, insurance, etc.). This happens because by nature most of us are accountable and when we see waste we generally act decisively to correct the situation.

In summary, when organizations continue to make poor financial decisions related to vehicles, it is generally due to leadership failing to recognize the total cost of the operation. The answer is simple, organizations should manage their vehicle operations like individuals manage their vehicle operations which is to budget for a vehicle and when it's no longer needed, get rid of it!