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Strategic fleet management: Navigating depreciation with a data-driven approach

In the evolving and increasingly competitive landscape of the transport industry, fleet management is important. Some businesses may adopt a policy of running fleets into the ground, replacing vehicles only when they break down, become unusable, or when it seems like an opportune moment for a replacement. While initially appearing to maximise the full value from fleet investments, this approach can instead present considerable challenges. Untimely breakdowns can adversely affect cash flow and tarnish business reputation due to costly service disruptions.

With businesses already facing recent challenges like supply chain disruptions, heightened operational costs, and broader regulatory ambiguity, companies are grappling with the need for a more intelligent, data-centric approach to fleet replacement.

The oversight of depreciation

The depreciation of fleets often takes a back seat in discussions concerning operational expenses, with a stronger emphasis on earnings before interest, tax, depreciation, and amortisation (EBITDA). Considering depreciation as more than just an accounting entry is crucial in the transport and logistics industry. 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 neglecting the long-term impact of depreciation can result in severe financial and operational difficulties. Without a robust fleet replacement policy, decision-making can become disorganised or overly reactive, leading to a scenario where vehicles are replaced only when they break down.

Navigating unpredictability

The pandemic, with its disruptions to supply chains and prolonged lead times for procuring new vehicles, further complicated fleet management decisions. The unpredictability of workflow patterns meant that even upon arrival of new vehicles, they might not have been immediately necessary. Furthermore, during the peak of the pandemic, the retail values in the second-hand vehicle market skyrocketed, disrupting conventional vehicle depreciation norms.

Typically, businesses should expect to see modest profits or losses. However, due to inflated market prices, some businesses unexpectedly found themselves making significant profits. This departure from traditional rules made calculating the true cost of depreciation more challenging than ever. Thankfully, recent stabilisation in both supply chain lead times and second-hand vehicle values has helped to mitigate this issue to an extent, creating a more predictable environment for those responsible for fleet purchases.

Taking a comprehensive approach to depreciation

To truly understand depreciation costs, businesses must adopt a more holistic approach, considering the expected ownership period, residual value, and wear and tear of vehicles. At some point, vehicle wear and tear and breakdowns will lead to escalating costs. However, this insight can help develop a considered and well-planned replacement policy that avoids potential disruptions that may arise if multiple vehicles require replacing simultaneously. The ripple effects of such disruption can go beyond the cost of repairs. The resulting business interruption may force companies to outsource work, leading to lower profit margins and potential risks to the quality of service.

Proactive management solutions

In order to minimise the potential hazards that stem from reactive fleet management, it is important for businesses to adopt a proactive and data-driven approach. Comprehensive foresight that considers key indicators, such as the fleet’s net market value, debt status, and current cash flow against each vehicle, is imperative when considering fleet replacement timelines. To ensure long-term success in business operations, it is crucial to integrate fleet management into a three-way forecasting model that includes monthly profit and loss account, monthly cash flow, and monthly balance sheet.

Quality assumptions regarding replacement programs, funding strategies, and potential impacts on performance must form part of this strategic planning. By implementing a proactive fleet replacement strategy, financial strains can be prevented, and business operations can run more smoothly.

Looking beyond financial considerations

Managing a fleet of vehicles requires businesses to consider factors beyond financial considerations. Policies like Ultra-Low Emission Zones (ULEZ) and Euro 6 compliance demand strategic thinking regarding the transition to greener vehicles, and whether it is practical to do so. Many have been calling out for Government support, particularly for SME businesses, to ensure a viable and equitable transition.

Addressing workforce challenges

The ongoing issue of driver shortages, which has been exacerbated by Brexit and difficulty in attracting young people into the sector, has added to the challenges of managing a fleet. Workforce planning will undoubtedly become integral to fleet forecasting, necessitating anticipation of both expected work volume and the availability of skilled personnel to efficiently operate the fleet.

Embracing data and technology

Effective fleet planning, tracking, and fleet management entail leveraging data and technology. While transport management systems offer many valuable tools, many businesses underutilise them. Fleet performance benchmarks can be established by referring to industry data, such as statistics published by bodies, such as the Road Haulage Association (RHA). However, it’s crucial for leaders to regularly review assumptions and data driving decisions, incorporating diverse perspectives in the decision-making process.

In conclusion

It’s clear that the era of reactive fleet management is giving way to a more intelligent, data-driven, and proactive approach. For fleet management to be sustainable, it is important to have a replacement program that aligns with the cash flow profile of the business. By adopting a data-driven strategy, businesses can anticipate challenges and ensure the longevity and efficiency of their fleets.

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