In the fast-moving and increasingly competitive landscape of the transport industry, maintaining a robust fleet is paramount. Some businesses may adopt a policy of running fleets into the ground, replacing vehicles only when they break down or when it seems like the right time for a replacement. While on the surface this approach may seem to extract the full value from fleet investments, it can instead pose significant challenges. Where breakdowns occur at inopportune times, there can be a knock-on effect on cash flow and business reputation from costly disruptions to service.
Businesses are already grappling with the impacts of recent challenges, including supply chain disruptions, increased operational costs and wider regulatory uncertainty. To avoid further difficulty, a more intelligent and data-driven approach to fleet replacement is crucial.
Depreciation of fleets often takes a back seat in discussions about operational expenses, with a keener focus on earnings before interest, tax, depreciation, and amortization (EBITDA). It should be looked at as much more than just an accounting entry: it is a genuine cost of doing business in the transport and logistics sector, and overlooking the long-term impact of depreciation can lead to severe financial and operational challenges. A lack of a concrete fleet replacement policy leads to a haphazard decision-making process or a highly reactive approach, where vehicles are replaced only when they break down.
The pandemic, with its disruptions to supply chains and increased lead times for purchasing new vehicles, further complicated fleet management decisions and made life difficult for those making them. The unpredictability of workflow highs and lows also meant that even when new vehicles eventually arrived, they might not have been needed immediately. Moreover, during the peak of the pandemic, the retail values in the second-hand vehicle market soared, disrupting the ‘rules’ of conventional vehicle depreciation. While modest profits or losses should generally be the case with vehicle disposal, businesses found themselves making unexpected windfalls due to inflated market prices. This upending of the traditional rules made determining the true cost of depreciation more challenging than ever. Fortunately, some recent stabilisation in both supply chain lead times and second-hand vehicle values has alleviated this somewhat, providing a more predictable environment for those tasked with fleet purchase responsibilities.
To truly understand the cost of depreciation, businesses need to take a more holistic approach, considering the expected ownership period, residual value, and wear and tear. There will be a natural tipping point, where costs escalate due to vehicle wear and breakdowns, and this information can inform a better-thought-out replacement policy that avoids the disruption that may occur if multiple vehicles happen to break down and need replacing at once. The ripple effects of such disruption can extend far beyond the cost of repairs. The business interruption that follows may mean that businesses need to subcontract work out, bringing the consequences of lower margins and potential threats to the quality of service.
To mitigate the risks associated with reactive fleet management, businesses need a proactive and data-driven approach. A comprehensive lookahead that considers key indicators – the fleet’s net market value, debt status, and current cash flow against each vehicle – and that can inform ideal replacement timelines for each vehicle is essential. This involves integrating fleet management into a three-way forecasting model, encompassing monthly profit and loss account, monthly cash flow, and monthly balance sheet. Quality assumptions about replacement programs, funding strategies, and potential impacts on performance must be part of this strategic planning. In summary, a proactive fleet replacement strategy not only prevents financial strains but also ensures smoother business operations for the long term.
Increasingly, businesses are compelled to think beyond financial considerations when managing their fleet. Policies like Ultra-Low Emission Zones (ULEZ) and Euro 6 compliance require strategic thinking around when and how to transition to greener vehicles, and indeed whether it is practical to do so. Here, many have been calling out for Government support, particularly for SME businesses, to make the transition feasible and equitable.
The perennial issue of driver shortages, which has been exacerbated by Brexit and a wider struggle to recruit young people into the sector, has further complicated fleet management. Planning for the workforce will undoubtedly become an integral component of fleet forecasting. Businesses will need to anticipate not only the expected volume of work for the coming months and years, but also the availability of a skilled workforce to operate the fleet efficiently.
Now, effectively planning, tracking, and managing fleets means leveraging data and technology. Transport management systems offer many valuable tools, yet many businesses are not using them to their full potential. Industry data, such as statistics published by bodies like the Road Haulage Association (RHA), can serve as benchmarks for fleet performance, but it’s important that leaders also take time to regularly review the assumptions and data that they are basing their decisions on as well as involving multiple perspectives within any decision-making process.
It’s clear that the era of reactive fleet management is fading, making way for a more intelligent, data-driven, and proactive approach. A comprehensive replacement program, aligned with the cash flow profile of the business, is essential for sustainable fleet management. And only by embracing a data-driven strategy can businesses intelligently anticipate challenges and ensure the longevity and efficiency of their fleets.
Author: Mark Perrin, Business Advisory Partner and Transport & Logistics sector specialist at Menzies LLP
