rightsizing)strategies) for)u1lity)fleets)

Rightsizing Strategies for U1lity Fleets

Louisville, KY September 29, 2015

Paul Lauria 0

What do we mean when we use the term “rightsizing?”

●  Reducing the size of (i.e., downsizing) the fleet? ●  Op+mizing (i.e., reducing and/or increasing) the size of the fleet?

●  Op1mizing the composi+on of (i.e., right typing) the fleet?

●  All of the above?

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Whose responsibility is it to ensure that a fleet is rightsized, right typed, op1mized, etc.?

●  Fleet manager? ●  Fleet users (business units)? ●  Someone else?


Benefits of Fleet Manager Being Responsible

●  Knowledge of and exper1se in asset alloca1on and fleet u1liza1on management principles, techniques, and industry trends and best prac1ces

●  Ability to develop and apply enterprise-‐wide informa1on

●  Objec1vity ●  Single focal point for accountability


Drawbacks of Fleet Manager Being Responsible

●  Lack of in-‐depth knowledge of fleet user organiza1ons’ opera1ng requirements and prac1ces

●  Lack of accountability for user organiza1ons’ performance and/or costs

●  Inherent conflict between roles of service provider and regulator of fleet user decisions and behavior


Benefits of Fleet Users Being Responsible

●  In-‐depth knowledge of opera1ng requirements and prac1ces

●  Accountability for business unit performance and costs


Drawbacks of Fleet Users Being Responsible

●  Lack of exper1se in, and informa1on to support use of, asset alloca1on and u1liza1on management best prac1ces

●  Lack of enterprise-‐wide knowledge of asset alloca1on and u1liza1on prac1ces and improvement opportuni1es

●  Lack of objec1vity about own resource requirements

●  Lack of accountability for enterprise-‐wide fleet costs and u1liza1on levels


Given these pros and cons, responsibility for fleet rightsizing should be… ●  Formally defined ●  Shared between fleet managers and fleet users ●  Generally deferen1al to fleet users’ wishes


Effec1ve rightsizing strategies recognize the different ways in which fleet assets are used

●  Movement of people ●  Movement of goods ●  Movement of tools and equipment ●  Performance of work tasks that require a mobile office, tool box, or work plaeorm


Effec1ve rightsizing strategies recognize that the use of some types of assets is inherently more difficult to manage than are others

●  Assets whose use is variable (e.g., seasonal) and/or unpredictable (e.g., emergency response)

●  Assets domiciled/used in remote loca1ons ●  Assets assigned to (“owned”) by specific business units and/or employees

●  Old assets ●  Assets whose maintenance and repair is outsourced

●  “Free” or easily acquired assets

9 Copyright © 2015 Mercury Associates, Inc. All rights reserved.

Effec1ve rightsizing strategies recognize that it is more important to effec1vely manage the use of some types of assets than of others

●  Expensive assets ●  Specialized/unique assets for which commercial rental or other subs1tutes are not available


Fleet Rightsizing Processes, Techniques, and Strategies

●  Fleet U1liza1on Management Policy ●  Asset Alloca1on Process ●  Fleet U1liza1on Monitoring Process ●  Internal Cost Charge-‐Back System ●  Ad Hoc Fleet Rightsizing Study ●  Fleet Moderniza1on and Replacement Program


Fleet U1liza1on Management Policy Objec1ves ●  Define goals and objec1ves associated with managing asset alloca1on and

u1liza1on. Examples include: w  Ensuring acceptable level of asset availability and performance (reliability, suitability,

etc.) w  Promo1ng employee produc1vity and safety w  Suppor1ng mutual aid capabili1es and commitments w  Minimizing fleet total cost of ownership w  Leveraging financial incen1ves to promote sound decision making

●  Assign responsibili1es, accountabili1es, and authority to manage alloca1on and u1liza1on

●  Employ structured decision making methods that ensure objec1ve considera1on of all appropriate factors, perspec1ves, and informa1on

●  Depoli1cize decision making


Asset Alloca1on Process ●  Objec1ve:

w  Iden1fy the most cost-‐effec1ve way to meet an organiza1on’s need for specific vehicles and pieces of equipment before they are acquired

●  When: w  When planning to add assets to the fleet w  When earmarking low-‐use assets for replacement during the annual capital budge1ng

process

●  Pros w  Saves money w  Proac1vely engages fleet users in examining and jus1fying the costs of asset

acquisi1on and ongoing availability w  Reduces pressure on fleet managers to jus1fy fleet size, composi1on, and u1liza1on

levels

●  Cons: w  Does not address the impact of changing opera1onal needs on the suitability of

current fleet size and composi1on


Vehicle Alloca1on Process ●  How

w Define the business need that an asset is intended to fulfill w Define the associated asset usage and acquisi1on-‐related func1onal requirements

w  Es1mate the costs of acquiring the asset under viable alterna1ve provision methods •  Buy/lease •  Rent (commercially or from internal pool) •  Reimburse

w Compare costs and other factors to iden1fy the most cost-‐effec1ve method of mee1ng the need


Sample Defini1ons of Asset Func1onal and Usage-‐Related Requirements

●  General requirements w  Type of asset (passenger vehicle, pickup truck, cargo van, aerial, digger derrick, crane, etc.)

w  Typical number and types of passengers/users w Cri1cality to the user’s job performance of the asset’s availability and reliability

●  Frequency and <ming of the asset’s use w  Typical 1mes of use, including evening and weekend hours w  Seasonality of use w Ability to predict and manage when the asset is used


Sample Defini1ons of Asset Func1onal and Usage-‐Related Requirements

●  Special characteris<cs of the asset’s usage requirements w  Need to respond to emergency calls and frequency and 1ming of such calls w  Vehicle appearance (e.g., color, presence of company decals and other

markings, etc.) w  Need for auxiliary equipment (e.g., light bar, radio, tool box, security cage, etc.) w  Need to transport materials, tools, and/or equipment that are not easily

removed from the asset so that someone else can use it

●  Loca<on of the asset’s use w  Proximity of the asset user to other employees with whom the asset might be

shared w  Proximity of the user to a poten1al internal motor pool loca1on or a

commercial vehicle/equipment rental facility w  Variability in the user’s work place loca1ons and travel des1na1ons (i.e.,

predictability as to where and when the asset would be available for use by others)


Vehicle Alloca1on Process: Sample Rent v Own Decision Tree

1. Can the asset be rented locally? No: STOP HERE. Buy or borrow. Yes: Continue 2. Are there or will there be sufficient funds to purchase the asset? No: STOP HERE. Rent or borrow. Yes: Continue 3. Can the asset (or an acceptable substitute) be borrowed from another facility whenever it is needed? No: Continue. Yes: STOP HERE. Borrow as needed. 4. Does the manager expect to use the asset more than once? No: STOP HERE. Rent. Yes: Continue. 5. Does the manager expect to use the asset on a regular basis for more than six months? No: STOP HERE. Rent Yes: Continue. 6. What is the estimated cost of purchasing the asset? A. $ _________________ 7. What is the expected value of the asset at the end of its useful life? B. $ _________________ 8. What is the estimated net capital cost of the asset? (A minus B) C. $ _________________ 9. What is the life expectancy in years of the asset? D. ____________ years


Vehicle Alloca1on Process: Sample Rent v Own Decision Tree

1. What is the average annual capital cost of owning the asset? (C divided by D)

E. $ __________ per year 2. What is the estimated number of days per year that the asset will be used?

F. _____________ days 3. What is the average capital cost per day to own the asset (E divided by F)

G. $ __________ per day 4. What is the average cost per day to rent or lease the asset? (Be sure to include taxes,

transportation, insurance, and any other applicable charges or costs, other than fuel.) H. $ __________ per day

5. Is G less than or equal to H? No: STOP HERE. Rent Yes: Continue. 6. What is the average capital and operating cost per day to own the asset?

(In the absence of actual data, multiply G by 2) I. $ ___________ per day 7. Is I less than or equal to G? No: BUY. Yes: RENT.

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Table of Equipment ●  Objec1ve

w  Standardize the alloca1on of commonly used vehicles and equipment to organiza1onal units (OUs) using fixed ra1os of assets to employees

●  When w  One-‐1me development with ongoing refinement as needed

●  Pros w  Depoli1cizes vehicle alloca1on decision making w  Promotes fleet standardiza1on which lowers fleet TCO

●  Cons w  Generally only works for organiza1onal units with highly regimented

organiza1onal structures and fleet-‐related opera1ng prac1ces w  May oversimplify the challenges of alloca1ng vehicles effec1vely given

varia1ons in OU fleet needs (e.g., due to differences in service area characteris1cs)


Fleet U1liza1on Monitoring Process ●  Objec1ve:

w  Monitor asset usage on a con1nuous basis and alert users, analysts, and decision makers to cost savings opportuni1es

●  When: w  Varies but usually no more oken than quarterly

●  Pros: w  Measurement facilitates ongoing awareness of, and promotes accountability for, asset usage levels

w  Repor1ng can create peer pressure among business units managers to ac1vely manage asset use

●  Cons: w  Dependent on availability, accessibility, and quality of data – and of someone to convert the data into ac1onable informa1on


U1liza1on Monitoring Process ●  How

w Define appropriate measures of asset u1liza1on w Establish appropriate guidelines or benchmarks for interpre1ng u1liza1on sta1s1cs

w Collect data w Produce excep1on reports that iden1fy specific assets whose u1liza1on deviates from guidelines

w Follow up with owners/users of poten1ally underu1lized assets to determine if more cost-‐effec1ve means of mee1ng their needs can be employed


Appropriate Measures of Asset U1liza1on Can Vary by Industry, Asset Type, and Business Applica1on

●  Usage rate: miles/engine hours per day/week/ month/year

●  Capacity u1liza1on rate (load factor) w Revenue passenger miles as a percentage of total bus miles

w Revenue miles per seated truck per week ●  Unavailability rate: percentage of 1me asset is not available for use by others


Establishing Asset U1liza1on Guidelines Asset Type Meter

Type Annual Utilization

Guideline Sedans Miles 6,000 to 10,000 SUV Miles 6,000 to 10,000 Vans, Passenger Miles 6,000 to 10,000 Vans, Cargo Miles 4,000 to 10,000 Trucks, Light Miles 5,000 to 7,000 Trucks, Utility, 1 Ton & Up Miles 4,000 Trucks, Specialty Miles 3,000 Truck Tractors Miles 8,000 to 10,000 Truck Tractors SW Miles 10,000 Dump Trucks Miles 4,000 Dump Trucks Flatbed Miles 4,000 Ambulances Miles 10,000 Construction Equipment Hours 250 Mowing Equip/Agricultural

Tractors Hours 100


U1liza1on Monitoring Process ●  Where do the data for measuring u1liza1on come from?

w  Odometer and hour meter readings •  During maintenance and repair transac1ons

•  During fueling transac1ons

w  Driver logs w  Dispatching systems w  Telema1cs systems w  Geofencing systems w  RFID tracking systems


U1liza1on Monitoring Process ●  Telema1cs Systems

w  Numerous applica1ons but some have nothing to do with fleet u1liza1on management per se

w  Capture data on various aspects of vehicle u+liza+on in real 1me and/or retrospec1vely (e.g., routes traveled, loca1ons visited, distances traveled, fuel consumed, hours of vehicle opera1on, # of trips per day, average miles per trip)

w  Capture data on various aspects of vehicle opera+on (e.g., number of vehicle startups and shutdowns, vehicle idle 1me, hard breaking and accelera1on, vehicle speed

w  Key ques1ons to consider: •  Do you have the ability to develop and use informa1on from the data? •  Do the benefits of such use exceed the costs of obtaining this informa1on?


Fleet Cost Charge-‐Back System ●  Objec1ve:

w  Create economic incen1ves for efficient asset alloca1on and use ●  When:

w  Con1nuously ●  Pros:

w  Draws anen1on to, and requires users to manage, costs of asset availability

w  Places onus on fleet users to jus1fy u1liza1on levels and costs ●  Cons:

w  Rate design can undermine incen1ves associated with charging costs back to users – rates for ac1vity-‐based cos1ng versus asset cost control

w  Centralized budge1ng and cost control can undermine user mo1va1on to manage and reduce costs


Fleet Cost Charge-‐Back System ●  How

w Decide how to distribute costs of asset availability to asset users – 1me-‐based charges are best

w Group fleet assets by type w  Iden1fy annual direct and indirect capital costs of all assets in each asset class

w Determine total annual units (e.g., months) of availability w Calculate rates w U1lize budge1ng and internal billing process that requires fleet users to budget and pay for the assets at their disposal (i.e., whether they use them or not)


Ad Hoc Rightsizing Study ●  Objec1ve:

w  Iden1fy under-‐u1lized assets through periodic, targeted studies ●  When:

w  Every five years or so ●  Pros:

w  Yields immediate savings by uncovering and ini1a1ng the disposal of unneeded assets (5-‐20 percent)

w  Reinforces the importance of making sound resource management decisions

●  Cons: w  Expensive and 1me consuming to perform properly w  Results may be disappoin1ng depending on effec1veness of other prac1ces

w  Conten1ous and intrusive


Ad Hoc Rightsizing Study ●  How

w  Define objec1ves (downsizing versus rightsizing) w  Screen assets based on current u1liza1on levels

•  Usage thresholds by asset types and user •  Vehicle downsizing poten1al

w  Survey users (operators) of poten+ally underu1lized assets w  Analyze survey data and develop asset-‐specific recommenda1ons (retain, monitor, reassign, eliminate)

w  Nego1ate changes with users w  Find the “spoon full of sugar” – e.g., fleet moderniza1on – that will help the “medicine” of rightsizing go down

w  Quan1fy cost savings (i.e., avoidable costs)


Fleet Moderniza1on and Ongoing Replacement Plan

●  Objec1ve: w  Ensure high degree of asset availability and reliability, thereby reducing the

number of assets required to provide a given level opera1onal readiness/support

●  When: w  Con1nuously

●  Pros: w  Effec1ve replacement prac1ces produce a wide array of benefits in addi1on

to reduced need for spare assets, ranging from lower asset and fleet TCO to reduced fleet maintenance resource requirements and management costs

w  Increased operator performance and sa1sfac1on ●  Cons:

w  Moderniza1on can be costly in the short term, depending on the methods used to finance asset acquisi1on costs


Developing a Fleet Replacement Plan ●  Develop fleet inventory ●  Categorize assets by type, purchase price, and unique opera1ng characteris1cs (if any)

●  Establish planning parameters for each asset category w Recommended replacement cycle w Purchase price (in today’s dollars) w Purchase price infla1on rate

●  Apply parameters to fleet inventory to project future replacement dates and costs for each asset in the fleet


Sample Replacement Cycles


Vehicle Type Replacement

Cycle (Months)

Auto, Compact, 4 Door 84 Light Truck, Pickup 96 Truck, Med Duty, Utility Body 120 Excavator 144 Backhoe / Loader 144 Truck, Dump, CC 120 Truck, Dump, 12-14 Cubic Yard 120 Van, 1 Ton, TV Inspection 120 Truck, Catch Basin, Vacuum Jet 120

Sample Purchase Prices


Vehicle Type Current Purchase Price

Auto, Compact, 4 Door $ 15,000 Light Truck, Pickup $ 17,000 Truck, Med Duty, U1lity Body $ 49,000 Excavator $ 63,000 Backhoe / Loader $100,000 Truck, Dump, CC $120,000 Truck, Dump, 12-‐14 Cubic Yard $122,000 Van, 1 Ton, TV Inspec1on $153,000 Truck, Catch Basin, Vacuum Jet $304,000

Baseline Fleet Replacement Plan

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2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033

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Gross Replacement Costs

Copyright © 2015 Mercury Associates, Inc. All rights reserved.

Fleet Replacement Sta1s1cs

35

Total number of units in the fleet 906

Number of asset types 180

Average asset age (years) 9.2

Average recommended replacement cycle (years) 10.0

Average current asset purchase price $ 53,607

Gross fleet replacement cost (today’s dollars) $ 44.9 M

Average annual fleet replacement cost (today’s dollars) $ 4.5 M

Average annual replacement expenditures (2008-12) $ 2.7 M

Current replacement backlog $ 22.2 M

Number of assets that exceed recommended replacement age 466

Percentage of assets that exceed recommended age 51.4%


Smoothed Replacement Plan

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2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033

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Gross Replacement Costs


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Fiscal YearReplacement Expenditures Less Used Vehicle Sale Proceeds

Reserve Fund Financing

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Debt Financing


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Gross Replacement Expenditures LOAN PAYMENTS

Net Fleet Replacement Costs by Capital Financing Approach


Fiscal Year Costs/Funding Requirements/Savings 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total

Gross Asset Replacement Costs $5.5 $5.6 $5.6 $5.5 $5.5 $5.5 $5.5 $5.5 $5.5 $5.5 $55.2 Replcmt Purchases Less Used Veh Sale Proceeds $5.4 $5.4 $5.4 $5.3 $5.3 $5.1 $5.2 $5.1 $5.1 $5.0 $52.4 Reserve Fund Charges (Inc Veh Sale Proceeds) $5.6 $5.8 $5.8 $5.9 $4.1 $5.1 $5.4 $4.7 $5.0 $5.2 $52.7 Loan Payments Less Veh Sale Proceeds $0.6 $1.1 $1.7 $2.3 $2.8 $3.3 $4.1 $4.6 $5.4 $5.7 $31.5

Fiscal Year Costs/Funding Requirements/Savings 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Total

Gross Asset Replacement Costs $3.9 $6.6 $5.6 $6.6 $4.1 $9.5 $9.5 $7.8 $6.8 $8.1 $68.4 Replcmt Purchases Less Used Veh Sale Proceeds $3.4 $5.9 $5.0 $6.0 $3.6 $8.7 $8.6 $7.0 $6.2 $7.2 $61.7 Reserve Fund Charges (Inc Veh Sale Proceeds) $5.3 $5.7 $5.9 $6.2 $6.3 $6.5 $6.8 $6.9 $7.2 $7.3 $64.1 Loan Payments Less Veh Sale Proceeds $5.7 $5.6 $5.4 $5.5 $5.5 $5.6 $5.6 $6.5 $6.8 $7.0 $59.3

Recap ●  Recognize that fleet rightsizing and u1liza1on management is not equally important or difficult for all types of fleet assets and business applica1ons

●  Figure out who does and who should “own the problem” of managing fleet size and composi1on in your organiza1on – fleet users or the fleet manager(s)?

●  Develop and u1lize an integrated set of asset alloca1on and ongoing u1liza1on management policies, processes, and ad hoc studies

●  Keep in mind the interrela1onship between fleet size and composi1on, fleet replacement and capital financing prac1ces, and fleet cost transparency


For Further Informa1on Paul Lauria

Mercury Associates, Inc. plauria@mercury-‐assoc.com

301 519 0535

Presenta1on available for download at www.mercury-‐assoc.com (click on Resources tab)


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