Rethink Your Replacement Strategy

July 26, 2013

Last October, Construction Equipment surveyed its subscribers and published the “Top 3 Challenges Facing Equipment Managers.”  No. 1 was “Not able to replace equipment as needed,” and No. 3 was “Lack of skilled technicians.” Since these two challenges are certainly front and center for today’s fleet manager, it seems appropriate to rethink the machine replacement question, which directly affects both issues.

First, let’s review the current situation:

Most fleets have been downsized during the 2008-2012 recession, thus their core fleets are smaller and the average age has been extended. End-user shops and technician headcounts are correspondingly smaller.

Except for some sectors (some hotter; some colder), company work backlogs today and near-term expectations are better, but most new jobs are smaller and of shorter duration than in years past. Extremely large jobs are out there, but usually only available to very large contractors and may be bid by joint ventures that assemble and then disassemble their fleets at the end of the JV.

Rentals, rental-purchase-options (RPOs), leases, and total maintenance and repair (TM&R) programs are all readily available at reasonable rates.

New technologies abound: telematics, hybrids, fuel systems, alternative fuels (CNG/LNG/electrics), emissions, joystick controls, grade controls, etc. All require more training and more changes to the fleet’s preventive maintenance programs.

Every fleet manager needs to rethink their machine replacement strategy in light of the above. The situation is quite different than any time in our past. The strategies from the past (typically more and bigger for everything; fleet size, fleet budget, bigger shops, etc.) likely do not fit the next five years.

To begin the strategy process, the fleet manager must ask and answer questions such as:

  • Who will repair my Tier 4-Final equipment?
  • Since we are still in an evolutionary state for Tier 4 engines, what resale prices can I expect?
  • Do I adopt a strategy to own equipment for its full economic design life (which requires more management, including an improved preventive maintenance program and high-tech repairs), or turn the piece at its midlife and virtually eliminate the downtime risk?
  • Do I have the local dealer and rental house network to support an expanded dependency on outside suppliers?
  • Does the company have the cash or credit lines to buy equipment that will have high utilization and will be much cheaper to own?
  • What pieces or classes are critical to operations and require owned spares or backup dealer spares?
  • For on-road vehicles, what fuel sources fit the next five to 10 years?

Next, the fleet manager should sit down with his best equipment minds and the company CFO and work through the fleet class by class to define a strategy for equipment replacement. It probably will take several meetings, will require several rounds of research and pricing information from suppliers, and likely will take the company into paths that have never been tried before. I would expect that you will find several classes of previously owned equipment that are now more economical to rent than to own. A typical example might look like this.

Small excavators (<15 tons): Rent most for 12-month periods.

Medium excavators (15-35 tons): Own core on TM&R program to 7,000 hours from Brand X and Brand Y. Rent balance.

Large excavators (>35 tons): Own core from Brand Y and Brand Z. Replace all <50 tons @ 12,000 hours. Replace all >50 tons @ 16,000 hours.

Each company should tailor their replacement program to their specific needs. The key is to do the research to have a clear plan in writing, define and circulate the plans internally to all key managers, and be prepared to re-examine the strategy plan every 18 to 24 months.

Think about it.