The development of a fleet vehicle replacement policy for a federal government contractor.
Maheshwari, Sharad ; Credle, Sid Howard
CASE DESCRIPTION
This case presents a scenario to develop an equipment replacement
policy for a large federal government contractor. This contractor serves
as a facility maintenance manager for a federal government research and
development organization. The maintenance company has a medium size
fleet of cars, vans, pickup trucks and specialty vehicles. Currently,
there is no vehicle replacement policy in the company. However, the
company keeps some maintenance records of the vehicles that can be used
in the development of a vehicle replacement policy. The objective of
this case is to illustrate the basics of equipment replacement decision
making and the practical application of the probability and statistics.
The case is appropriate for use in a production/operations management,
engineering, economics, business statistics or managerial accounting
courses. The case should take no more than one hour of class lecture and
two hours of preparation and research time from students. Total student
time should not be more than four hours including research time.
CASE SYNOPSIS
The case is a simple but realistic application of business
statistics models in the area of operations management and managerial
accounting. It is an ideal case at the undergraduate level where
students need practical application of statistical concepts. It
superimposes generally difficult subject matter of statistics with easy
to understand concepts of the operating cost of a small vehicle fleet.
It will allow students to integrate simple regression, expected value
and probability distribution concepts into vehicle replacement modeling.
BACKGROUND
A large federal government research facility is located in
Southeastern part of Virginia. This facility is located on 810 acres of
land. It has over 250 office and laboratory buildings including very
large hangers, turbines and tunnels. The annual budget of the research
facility is approximate $650 million of which 40 percent is operating
budget. The research facility has about 2,000 direct employees and 2,500
contract/indirect personnel on the site. The maintenance budget is
approximately 10 percent of the operating budget of the research
facility. The facility management functions for this federal government
research organization are contracted out to a private company. The
private maintenance company is responsible for all repair and
maintenance of facilities other than specific scientific equipment
repair. The current maintenance contractor was awarded the maintenance
contract in 2003. This contractor took over all office space, equipment,
vehicles and repair part inventory from the previous facility management
contractor. The company has an on-site office, workshop and other
necessary facilities needed for building and equipment maintenance. It
employs approximately 150 repairmen, supervisors and support staff. The
repair job varies from simple light bulb replacement to complex turbine
engine repair. The company maintains inventory of necessary tools and
some repair parts on the site.
Typically, a repairman responds to a service call according to a
pre-determined priority scheme. A repairman completes a service call in
one or more trips to the location of service call. Generally, the first
trip involves assessment of the fault and determination of required
parts for the repair, if it needs any parts. If repairman does not have
the necessary parts with him, he would return to the shop. He will
either to back to the repair site with necessary parts if parts are
available in the part storage area. Otherwise, he will place an order of
the part necessary to make repair in the future. Some repair jobs may
require more than two trips. The service request completion time is one
of the most important customer satisfaction measures in the
organization.
To deliver the repair services, the company maintains a fleet of
trucks, vans, cars, and specialty vehicles. Typically a repair van or
truck is assigned to a specific repairman. The assigned vehicle serves
as a small mobile workshop for the repairman. The cars are usually used
by the supervisors for site visits. The specialty vehicles are called
into service as the need arises. The mobility of repairmen and
supervisor depends on the availability of the required type of vehicle
at the right time. During the time when a vehicle is unavailable due to
failure or other maintenance need, the assigned repairman's
productivity is reduced and the repair work is delayed. Therefore, it is
important that the vehicle down-time is as low as possible. The company
desires a comprehensive vehicle usage policy, including a vehicle
replacement policy so vehicle downtime and associated cost can be
reduced. The objective of this case is to require consultant teams an
opportunity to analyze and recommend a repair vehicle policy for the
company.
DESCRIPTION OF FLEET TYPE
The company's repair vehicles are categorized in three areas.
General vehicles- are driven by maintenance repairmen to perform the
daily tasks. These vehicles include vans or pick-up trucks. Tasks that
do not require specialty vehicle are performed with general vehicles.
These vehicles also store repairman's tools and parts. Specialty
vehicles-are used when the repair task is of a routine nature. Specialty
vehicles include bucket trucks, cranes, flatbeds, etc.
Supervisory vehicles--include cars, fully enclosed golf carts, etc
that are used by supervisors and management personnel for on-site
inspections and general mobility. Supervisory vehicles provide a safe
environment for transporting paper work, computers and other materials
to the work sites.
DESCRIPTION OF FLEET MAINTENANCE
Regular Preventive Maintenance--Normal annual preventive
maintenance tasks for each vehicle include state inspection as required
by the law; oil changes as stated by the manufacturer of the vehicle;
tune-ups, as stated by the manufacturer of the vehicle; and minor
maintenance and safety items performed as needed, such as wiper or
headlight bulb replacement, etc.,.
Oil changes and minor repairs are carried out in a timely fashion
at the specified vehicle maintenance facility. The federal facility
contractor has selected a vehicle repair sub-contractor close to the
research facility. Estimated time for most of these services is
approximately one and a half hours including travel time.
Major maintenance--any vehicle failure not covered under regular
preventive maintenance is defined as a major failure event. Currently
there are no established assessment policies for major maintenance.
Estimated repair time for major maintenance work is, on average, 8
hours. During this down time repairmen are constrained in carrying out
the repair task. The company wishes to examine this policy to reduce
this exposure.
Catastrophic failure--any vehicle placed out of commission with an
estimated repair cost that could possibly exceed the future benefits
from the usage of the vehicle in question. There is no formal system in
place for estimating the future value of the vehicle. However, if in the
opinion of the vehicle supervisor that the cost of repairs is "too
high", it is considered catastrophic failure and such an event
triggers an automatic vehicle replacement process.
FLEET DATA
The available vehicle data includes make, model and type of
vehicle, age of vehicle, years in service at the company, type of use,
and assignment of vehicle. The available fleet financial data includes
purchase price, book value, and the depreciation schedule used. The
maintenance data on each vehicle is available including type and cost of
maintenance of each vehicle each year. A total of 84 vehicles'
records are included in the following report. Table 1 indicates the
number of vehicles and the distribution of the type of vehicles
currently employed.
The age of the three main categories of vehicles, cars, vans and
pickup trucks is shown in the Table 2. Specialty vehicles are ignored
since an analysis of each is unique. The average age of the current
fleet of cars, vans, and pick-up trucks is 9.95 years with a range of
2-24 years.
Table 3 presents the distribution of the vehicles by the year of
manufacture.
The total repair and maintenance cost due to major breakdowns for
each vehicle over the last three years is presented the Table 4 which
appears below. The table includes the number of major breakdown per
vehicle. The year of make of the vehicle is included to determine age at
2007, the year of this study. As expected the oldest vehicles failed
frequently and are more expensive to maintain.
VEHICLE REPLACEMENT POLICY
The major consideration in the construction of the vehicle
replacement model for this company is that the policy (or model) should
be user friendly and can be easily applied. For example: Advanced
mathematical programming models such as dynamic programming though an
appropriate tool should not be used as a driver in this case. The
appropriate model should be n easily automated into a basic spreadsheet
structure such as EXCEL. Furthermore, the company is interested in
having one policy for all non-specialty vehicles. In other words,
differences in maintenance pattern of the three vehicle types, car,
pick-up trucks and vans, should be ignored. The vehicle replacement
policy/model should consider the purchase, capital, major repair,
opportunity and salvage costs.
Assumptions:
1. Cost of insurance, fuel, supervisory personnel are ignored.
2. Tax implications are not considered.
3. Vehicle is fully depreciated in three years
4. Vehicle acquired is kept at least for three years (until book
value is zero.) Once book value is zero, the company's overhead
cost is reduced to maintenance related cost only.
5. Total vehicle requirement is not decreasing.
6. Vehicle retirement age is normally distributed with mean of 16
years and standard deviation of 1.5 years. These numbers are adjusted
upwards here as vehicles have much lower mileage compared to national
average.
7. Regular maintenance cost is ignored as those will roughly be
similar in all vehicles.
8. It was given that each major maintenance incident results in
slow down of two workers (50% efficiency.) Overall average cost of
worker is assumed to be $40 per hour (including pay, benefits, and other
associated costs.).
9. Due to lack of data available for each breakdown, it is assumed
that the vehicle would be out of service for on an average for one day
(8-hours).
10. Catastrophic failure results in average of $1,000 opportunity
loss including supervisory time, loss to worker efficiency, time to
remove tools, inventory from old vehicle restock, and refitting new
vehicle.
11. Cost of capital and discount rate are 10%.
12. The year of assessment is 2007.
CASE QUESTION
Develop a replacement model for fleet vehicles where the total cost
is minimized for each vehicle over a three-year period.
Sharad Maheshwari, Hampton University
Sid Howard Credle, Hampton University
Table 1: Vehicle Type Distribution
Type Number Percent
Car 13 15%
Pickup Truck 11 13%
Van 48 57%
Specialty Vehicle 12 15%
Total 84 100%
Table 2: Age of the Fleet by
the Vehicle Type
Type Age-Years
Car 8.77
Pick-up 6.91
Van 10.98
Table 3: Year of Make of the
Fleet Vehicles
Year of Number of
Make Vehicles
1983 1
1986 2
1989 23
1993 8
1995 1
2001 1
2003 1
2004 33
2005 2
Total 72
Table 4: Maintenance data of the Vehicle Fleet
No. Type Year Total Major Total
Maint. Cost Number of
2004-06 Major
Maint Cost
2004-2006
1 Van 1989 $2,689.40 13
2 Van 1989 $2,495.85 14
3 Van 1989 $3,687.24 9
4 Van 1989 $2,371.43 8
5 Van 1989 $4,356.82 11
6 Van 1989 $2,620.97 9
7 Van 1989 $1,860.95 7
8 Van 1989 $1,698.37 9
9 Van 1989 $1,986.08 7
10 Van 1989 $1,982.37 7
11 Van 1989 $1,682.85 6
12 Van 1989 $813.30 8
13 Car 1993 $1,819.53 7
14 Van 1989 $3,534.95 5
15 Van 1989 $1,676.48 4
16 Van 1989 $1,134.96 6
17 Van 1989 $1,179.16 6
18 Car 1993 $1,299.30 7
19 Van 1989 $1,207.88 6
20 Van 1989 $1,255.35 3
21 Car 1993 $2,115.64 6
22 Pick-up 1993 $1,042.85 6
23 Van 1989 $920.76 5
24 Van 1989 $2,303.21 4
25 Van 1989 $437.33 4
26 Car 1993 $1,553.55 7
27 Van 1989 $892.17 4
28 Van 1986 $1,359.55 5
29 Car 1993 $2,416.77 5
30 Van 1986 $1,159.41 4
31 Pick-up 1993 $459.93 4
32 Van 2004 $835.05 2
33 Van 1989 $573.47 2
34 Pick-up 2004 $589.84 2
35 Pick-up 2004 $791.17 3
36 Van 2004 $431.58 2
37 Van 2004 $643.80 3
38 Pick-up 2004 $359.03 2
39 Pick-up 1983 $1,553.84 3
40 Pick-up 2004 $375.00 1
41 Van 2004 $263.55 1
42 Van 2004 $240.74 1
43 Van 2004 $232.85 1
44 Van 2004 $202.24 1
45 Pick-up 2004 $196.04 1
46 Van 2004 $35.00 2
47 Van 2004 $359.88 0
48 Car 1993 $0.00 0
49 Car 1995 $0.00 0
50 Van 2001 $353.42 1
51 Car 2003 $0.00 0
52 Van 2004 $448.32 1
53 Pick-up 2004 $262.25 1
54 Van 2004 $180.15 1
55 Van 2004 $103.31 1
56 Van 2004 $0.00 0
57 Pick-up 2004 $0.00 0
58 Van 2004 $0.00 0
59 Van 2004 $0.00 0
60 Van 2004 $0.00 0
61 Van 2004 $0.00 0
62 Van 2004 $0.00 0
63 Van 2004 $0.00 0
64 Van 2004 $0.00 0
65 Van 2004 $0.00 0
66 Pick-up 2004 $0.00 0
67 Car 2004 $0.00 0
68 Car 2004 $0.00 0
69 Car 2004 $0.00 0
70 Car 2004 $0.00 0
71 Van 2005 $0.00 0
72 Car 2005 $0.00 0
