The Replacement Mystery
In managing a fleet of forklifts, the decision about when to replace equipment is probably the most mysterious. It is usually based on intuition. Some managers believe in replacing forklifts every four or five years. Other managers believe in running a forklift until it falls apart. Managers tend to approach the issue the same way as a personal car
buying decision. They replace their forklifts when it feels right, not based on numbers.
In truth, when to replace your material handling equipment (forklifts) is a tough analytical question. First, developing an analytical model requires years of historical data. The data needs to be tracked for each individual forklift. Few companies maintain records that are detailed enough to support a mathematical answer. If data is available, it is confusing. Some expenses, like depreciation, start high and get lower across time.
Other expenses, like forklift maintenance, start low and increase with time. Assuming you have all the data on your forklifts, or can estimate it, how do you put it all together in an analytical model? Whether you have great data, or estimate and make assumptions, the attempt to really understand this large expense will help improve the bottom line.
The forklift replacement analysis starts by determining all relevant cost categories. Typical expenses include: equipment depreciation, equipment interest expense, property taxes, insurance, equipment maintenance and fuel. You can include opportunity costs like lost productivity during forklift maintenance. This expense goes up as equipment ages. All expenses must be trended annually for approximately ten years. The best trends are based on actual data from a fleet of similar forklifts being used in the same material handling application. In the absence of historical data, other methods can be used. For example, one year of data on lift trucks of varying ages can be used to approximate a single aging lift truck.
Once expenses have been calculated in annual buckets, annual hours of equipment operation are added. Finally, an iterative calculation is performed for each year. Total life-to-date expenses are divided by total life-to-date hours of forklift operation. The result is cost per hour of lift truck operation. The cost per hour of operation will be high in year one because depreciation is high in the early years. It will begin to drop as depreciation decreases while equipment maintenance costs are still relatively low. Finally, cost per hour of operation will reach a low point (optimal replacement point) and will begin to rise as maintenance costs continue to increase with age.
Good analytical models expand our understanding of how our material handling equipment business works, but management judgment is still required. If a replacement model indicates that on average, replacement should happen when a forklift is 6-7 years old, other factors still need to be considered. Is the lift truck in unusually good condition? Is there an alternative material handling application? Etc… Analytical models are very helpful at indicating a strategy. If the forklift replacement model says replace in seven years, then 14% of the forklift fleet should be replaced every year (100% / Seven Years). This lift truck replacement model assumes you are already in the habit of rotating a portion of the forklift fleet each year. Steady replacement of your lift trucks creates the most level equipment expense structure. Replacing large portions of a fleet at one time will result in sizable annual fluctuations in fleet expense. The early and late years of a forklifts life are the most expensive. If a very large percent of a forklift fleet is old or new, expense will be very high. In the middle years lift truck expense will be very low.
When to replace material handling equipment should not be a mystery. The effort to better understand this important question will not only reduce the cost of managing your fleet of forklifts, but it will shed light on all material handling equipment replacement decisions. CMH Services uses this same approach to manage our own fleet of cargo vans. When we plan replacements we do it with confidence.
In business since 1968, CMH Services’ mission is to actively partner with our customers to provide the best performing material handling equipment at the lowest total cost of ownership. If you would like our assistance in creating a forklift replacement model for your material handling equipment application, please do not hesitate to contact us.