What is the sweet spot? When discussing equipment trade cycles, it is the point in time when it is more cost effective to buy a new asset and dispose of the current used asset.
The real trick is how to determine that specific point in time and the factors that need to be considered.
If you are defining your sweet spot as a fixed point in time or a predetermined number of miles, you are going to leave money on the table every time. This “old school” way of thinking just doesn’t work in today’s economy or for today’s equipment. The replacement sweet spot is a moving target and the math that defines the sweet spot is complex and needs to be updated every 90 days.
Consider this, if the OEMs developed a reliable new technology that gave us a new tractor that yielded 11mpg, do you think this would extend or shorten your current replacement cycle? The answer is, “it depends.” The following questions must also be considered:
- What is the cost of the new asset?
- What is the current cost of fuel?
- What is the current interest rate on borrowed money?
- What is the sale price for my current truck?
- How many miles do I operate a truck each year?
So, you can see that there is not just one piece of data that can influence the sweet spot equation.
Technology is going to play a very important role in determining the sweet spot in the years to come. Safety devices and electrification are changing so rapidly it is becoming more and more difficult to identify the correct path forward. The 90-day evaluation period will force us to constantly evaluate all our sweet spot influencers. It will also force us to make three- and five-year plans to ensure we have access to equipment when needed.
Over the past six months I have seen many fleets caught flat-footed on their replacement cycles, not being able to take delivery of new units due to manufacturing delays. This same situation has occurred in the past. Now is the time to truly learn. Capex should be submitted and approved years in advance. Every time you miss the replacement sweet spot it will have a negative impact on your bottom line.
Having a long-term plan is the key to projecting cost savings, where the rubber meets the road and savings are realized, is when you perform a truck- by-truck run cost analysis. This is where you determine the total cost of ownership (TCO) of your current assets and project the TCO of a new asset based on historical trends. Now you can rank your assets from worst to first and schedule your new asset deliveries accordingly. This will give you and the company visibility into tangible cost savings.
Perform a sweet spot replacement analysis to determine, based on today’s market conditions, what is the optimum point in time to replace your assets. Develop your three-to-five-year plan, present it to finance and treasury, and get a preliminary capex approval. Determine OEM lead times and begin the ordering process, keeping in mind that you will need to make minor adjustments. Then start you ongoing run cost analysis. You will see the savings.