The Intangibles of Fleet Average Age

Analysis will go only so far in determining how long to keep a machine; managers must also set and follow a style and philosophy

Construction Equipment - November 1, 2005

Mike Vorster
Contributing Editor

"How long do I keep it" is a question that equipment managers ask every day. They know that replacing machines at a relatively young age reduces repair costs, shop labor and downtime, but it increases fleet investment capital. They also know that if they increase fleet age, capital expenditure comes down, repair parts and labor go up, and efficient repair facilities become critical for success. Striking a balance between a capital-intensive young fleet and a repair-intensive old fleet is more art than science. There are some analytical tools to help, but success comes from knowing the implications of fleet average age and finding a balance that suits your organization.

Calculating a machine's theoretical economic life is not difficult. Although this provides a good starting point, it does not take into account intangible factors that cause practice to deviate from theory.

One factor is, of course, the nature of the industry. Careful analysis may show that it is time to replace two of the four twin-engine scrapers you own, but you do not have any scraper work scheduled after the current six-month project is complete. So, you keep the two older machines for another 1,000 hours and wait until you have more confidence about future work. Another equally important factor is the organization's financial situation. You may have ample work on the horizon, but capital budgets are spent and you cannot invest in new scrapers for a year or two. So, you replace a few key components and give the machines a thorough overhaul.

A third intangible is the equipment manager's style and personal philosophy on fleet. Some managers believe that the fleet should be "young and good," as this is an important part of the image they wish to project and an essential ingredient for success on the high-tempo, high-production jobs the company undertakes. Other managers believe that machines are built to last and can be kept forever if looked after with care and affection. They believe that appearance is not an issue as long as the job is done and that availability and downtime are not important if an extra machine or two is on standby.

The principal advantage of keeping the fleet average age young is that you will have lots of good iron that will work long hours on high-tempo jobs without delays and disruptions due to equipment failure. Reliability and uptime will be good, frequent replacements will make it possible for you to keep pace with the latest advances in technology, and every machine will be a billboard for the high standards set by your company. You will not need to establish large and complex repair facilities; the infrastructure you need to keep your fleet up and running will be small, simple and manageable.

On the other hand, the amount of capital tied up in your fleet will be high, and financial metrics such as return on investment will be difficult to achieve. High levels of capital expenditure together with the loans and leases needed to leverage equity will demand high annual financial costs. The fleet will have to work long hours to bring these down to reasonable levels, and weather and other factors will threaten your ability to maximize the investment you have in your fleet.

There are three things you must be good at if you want to keep your fleet average age low. First, you must understand equipment finance and have access to the funds necessary to maintain a healthy capital expenditure budget. Second, you must have the infrastructure needed to obtain and perform work at a high tempo. It is unlikely that the organization will make money if you do not utilize a strong, young fleet to the fullest extent possible. Third, you must have excellent dealer relationships and effective warranty administration in order to provide the support the fleet will need.

The advantages of letting average age increase are almost exactly the opposite to those of a young fleet. The capital invested will be lower, the annual cost of finance will not drive the organization, and it will not be critical to work long hours and undertake high-tempo jobs. Some of your fleet will be paid off, and you will not be as severely affected by periods of low utilization due to weather or work-load fluctuations.

There certainly are disadvantages associated with an old fleet. Reliability and availability can easily reach a stage where they impact operations, and you will need to own and operate substantial repair facilities. Shop facilities and other infrastructure will require investment, and you will need to manage the fixed costs associated with the facilities, labor and overhead. Long machine lives may cause the organization to fall behind the technology curve and become exposed to the risk of parts availability and cost.

Success at this philosophy also hinges on three things. First, running effective and efficient shops must become a core competency. The facilities must be first class, mechanic training must keep pace with turnover, and technology and capacity must be sufficient to support demand without compromising quality. Second, equipment selection is critical because you are buying for the long term. Parts and rebuilt components must be available, and total life-cycle cost is more important than purchase price. Third, operational planning will have to be flexible enough to accommodate the reality of downtime. Field crews will need to understand that availability will be less than perfect.

Clear understanding of these differing fleet philosophies will guide average-age decisions as much as will analyticals. Know where you want to be and develop a policy or style that suits your business and each group of machines in your fleet. It would seem appropriate, for example, that key production machines be kept young and reliable. It would also seem appropriate for highly stressed self-destructive vibrating equipment to be replaced on the early side while stable, simple and inherently reliable machines such as rigid-frame trucks can be kept for longer.

Once the philosophy is set, stick with it. Changing your policy or your style can be difficult, time-consuming and expensive.

Weigh the Pros and Cons
	Young fleet average age	Old fleet average age
Advantages weighed against disadvantages will enable managers to make a clear decision on fleet average age, basing it on philosophic as well as analytic thought.
Advantages	- Able to work long hours on high-tempo jobs without delays and disruptions.	- Not critical to work long hours and undertake high-tempo jobs.
	- Good reliability and uptime.	- Not severely affected by periods of low utilization.
	- Machines are company billboards.
	- No need for complex repair facilities.	- Low capital investment in the fleet.
	- Focus is on preventive maintenance, not on rebuilds.	- Annual cost of finance does not drive the organization.
Disadvantages	- High amount of capital tied up in the fleet.	- Lack of reliability and availability can adversely impact operations.
	- Financial metrics are difficult to achieve.
	- Annual financial costs are high.	- Substantial repair facilities are required.
	- High utilization is necessary to cover annual financial costs.	- Fixed costs associated with repair must be managed.
		- Machines could fall behind the technology curve.