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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*
Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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)*
Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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*
4*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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*year`over`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*
5*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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**
6*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
City*of*BalAmore*Fleet*Replacement*PracAces*c.*2012*
Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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*MEF`owned;*56*percent*agency`owned*
8*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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
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Fiscal Year
Gross Replacement Costs
Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
2012*Replacement*StaAsAcs7
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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%
Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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
Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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)*
12*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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*
13*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
Making*the*Case*for*Fleet*ModernizaAon*
Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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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Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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*
16*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
Status*Quo*versus*ModernizaAon*Future*Fleet*Replacement*Purchases*
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Costs"(millions)"
Fiscal"Year"Status"Quo"Fleet"Replacement"
Fleet"Renewal"
Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
Status*Quo*versus*ModernizaAon*Average*Vehicle*Age*
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hicle"Ag
e"(years)"
Fiscal"Year"Fleet"Renewal"
Status"Quo"Fleet"Replacement"
Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
Status*Quo*versus*ModernizaAon*Fleet*Total*Cost*of*Ownership**
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Fiscal"Year"Fleet"Renewal"
Status"Quo"Fleet"Replacement"
* Both scenarios assume reserve fund financing of fleet capital costs
Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
Status*Quo*versus*ModernizaAon*TCO*`*Reserve*Fund*versus*Loan*Financing**
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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
Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
Capital*Costs*of*Fleet*ModernizaAon*Reserve*Fund*versus*Loan*Financing*
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Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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
Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
ImplemenAng*the*Fleet*ModernizaAon*Plan:*The*Story*so*Far*
Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
Accomplishments*to*Date*• Decided*to*move*from*reserve*fund*to*loan*(tax`exempt*“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)*
26*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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*
27*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
Finance*&*AccounAng*Demands*
• MulAple*Stakeholders*– Finance*Department*– User*organizaAons*– Suppliers*
• CombinaAon*of*simultaneous*planning*processes*
• Adherence*to*budget*cycle*Amelines*
28*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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*
29*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
FMD*Employee*Behavior*
• Maintenance*technician*engagement*and*training*
• Maintenance*technician*producAvity*• Parts*procurement*and*storage*
30*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
Management*ExpectaAons*
• Immediate*impact*on*fleet*size*• Instantaneous*operaAng*and*maintenance*savings*
• “Easy*Money”*• Insufficient*appreciaAon*of*impact*of*customer*behavior*
31*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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*
32*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
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*
33*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
Lessons*Learned*• Data`based*business*case*for*modernizaAon*was*crucial*
• Buy`in,*understanding,*and*advocacy*from*City*Hall*
• Replacement*plan*annual*adjustments*• ConAnuous*process*improvements*• Customer*involvement*/transparency**• RealisAc*expectaAons*regarding*realizaAon*of*savings*
35*Copyright*(C)*2015*Mercury*Associates,*Inc.*All*Rights*Reserved*
For*More*InformaAon*
Paul*Lauria*Mercury*Associates,*Inc.*
Rockville,*MD*301*519*0535*
plauria@mercury`assoc.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*