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10 Research Approach and Findings NCHRP 13-04 was conducted in two phases. Phase I con- sisted of a comprehensive literature search to identify cur- rent replacement practices relevant to the project scope. In Phase II, the findings from the literature search were evalu- ated, equipment data from public and private sources were gathered and analyzed, and promising practices were synthe- sized and adapted to develop processes and tools for practical application in a highway operations environment. 2.1 Literature Search The research found a large volume of literature on equip- ment LCCA methodologies and replacement practices. Most of the LCCA methodologies were similar in concept but tended to have slight variations in their approach and the factors used in the cost analysis. The aim of the literature search was to identify current promising practices, methods, and tools and to evaluate their applicability to highway operations equipment. A wide variety of sources including academia, state, federal highway and other government agencies, professional associa- tions, research institutions, and equipment industry periodi- cals were researched through the internet, libraries, personal contacts, and bibliography reviews. These sources included TRB; NCHRP; FHWA; AASHTO; International Road Federa- tion; International Bridge, Tunnel and Turnpike Association; professional fleet management associations (e.g., National Association of Fleet Administrators, Municipal Fleet Manag- ers Association, Association of Equipment Management Pro- fessionals, and American Public Works Association); the U.S. military, equipment manufacturers; and private contractors. In addition to published material and manuscripts, relevant information from fleet management conferences conducted by AASHTO, TRB, Rocky Mountain Fleet Management Asso- ciation, academia, and others were identified and reviewed. More than 80 potential documents were examined to identify their relevance to the project scope based on the following criteria: â¢ Replacement factors. Does the literature identify factors for performing replacement analysis? Does it define how the factors should be measured? Do the factors appear to be applicable to highway operations equipment? â¢ Process. Does the literature discuss how to structure replacement programs? Does it describe replacement decision-making processes applicable to highway opera- tions equipment? Does the literature represent current industry appropriate practices? â¢ Tools. Does the literature describe software or automated tools that support LCCA and equipment replacement processes? With these criteria, the most relevant literature was selected and reviewed in detail. The literature search also identified and reviewed several software products and tools used in replacement analysis. How- ever, access to commercial products dealing with asset manage- ment in general and equipment replacement in particular was not available to allow a detailed evaluation of their methodolo- gies but literature describing the product features provided a general understanding of their replacement approaches. 2.2 Data Collection and Analysis Data were collected from public and private sources for use in analyzing equipment replacement factors and developing and testing the optimization tool. Several state departments of transportation (DOTs) provided valuable information and data including â¢ Original equipment purchase costs; â¢ Equipment disposal data on age, miles/hours at sale, and salvage values; â¢ Data sets containing equipment history on utilization, operating cost, and downtime; â¢ Classification and equipment numbering conventions; C H A P T E R 2
11 â¢ Hourly rental rates; and â¢ Age and utilization replacement targets. Information was also obtained from several other govern- ment agency and private sources to help analyze replacement factors related to depreciation, fuel costs, and hourly operating costs. 2.3 Prevailing Practices The literature search on equipment replacement found that replacement practices vary widely between private and public agencies. Three general approaches emerged as those most commonly used: â¢ Replacement based on target age or utilization, â¢ Replacement based on maintenance and repair thresholds, and â¢ Replacement based on formal LCCA. An agencyâs replacement practices seldom fit neatly into any one approach. Rather, the prevailing practices seemed to combine parts of all three. NCHRP Synthesis 452 (1) presented the findings of fleet replacement practices in state DOTs. Table 1 presents the respondentsâ answers to the questions most pertinent to this project. Of the 38 states that responded, 32 had some form of LCCA, multi-year planning, methodology to prioritize replace- ments, or repair versus replace analysis. Five DOTs reported that LCCA was the most important tool used for replacement decisions. Most agencies indicated that they used either criteria- based methods (miles or hours) or thumb rules based on past practices and judgment. 2.3.1 Replacement Based on Target Age or Utilization In this approach, replacement targets are established for each major equipment class. The targets establish thresholds for age and utilization (miles or hours). When a vehicle is at or near the replacement target, it is evaluated for replacement. This replacement practice has the advantage of simplicity, but it may not result in the optimal economic cost. 2.3.2 Replacement Based on Maintenance and Repair Thresholds This approach compares an equipment unitâs maintenance and repair (M&R) cost with established thresholds to deter- mine when replacement is warranted. The thresholds are established at two levels: â¢ When the M&R LTD costs exceed a specified threshold or â¢ When a major overhaul or rebuild exceeds a specified threshold. In the first method, M&R costs are tracked throughout the life of the vehicle. When M&R costs reach the specified threshold, they are targeted for replacement. Dolce suggests targeting a unit for replacement when (a) the cumulative M&R costs reach the original purchase price of the unit or (b) when annual M&R costs reach 30% of a unitâs residual value (2). Flagship Fleet Management, LLC suggests that the optimal replacement point is that where cumulative maintenance cost starts to out run the market value of the asset (3). The second method targets a vehicle for replacement if a major repair or rebuild is required in which the cost exceeds a given percentage of the unitâs original cost. Figure 2 illustrates the concept adopted by the Naval Facilities Command for its civil engineering equipment (4). It establishes the maximum one-time repair cost based on three factors: original purchase price, expected life (target replacement), and actual age. 2.3.3 Life Cycle Cost Analysis The literature suggests that LCCA is the best method for determining optimal replacement cycles because it uses eco- nomic analyses to determine the time in a unitâs life at which its total cost is at a minimum (see Figure 1 in the Summary). In concept, LCCA is rather straightforward and, when per- formed effectively, it provides data-driven results for deter- mining optimal life cycles. However, LCCA is difficult and time consuming and many agencies have not committed to its application. The difficulty arises not in the modelâs complexity but rather in the time and resources required to capture complete and accurate data and then to incorporate LCCA into a robust equipment replacement process. Plotting the life cycle cost of an individual unit is not likely to yield the stylized smooth curve depicted in Figure 1. Bibona noted that establishing replacement cycles is both an art and a science (5). It involves judgment, prediction, fore- casts, and assumptions on one hand and analysis of available data on the other hand. The findings from the literature search were used in deter- mining how to treat LCCA and develop a realistic approach for highway operations equipment.
12 Most Important Tool? How Often Used? Within last 10 Years? Available to Public? AL Yes LCCA Always Yes Don't Know AK Yes Yes Yes Yes Yes AR Yes Yes Yes AZ Yes Yes Yes Yes CA Yes Yes Don't Know CT Yes Yes DE Yes Yes Yes LCCA Most times FL Yes Yes GA Yes Yes Yes HI Yes Yes Yes Yes IA Yes ID Yes IL Yes Yes No IN KY Yes Yes MD ME Yes Yes Yes Yes Yes Don't Know MI Yes Yes Yes Yes MN Yes Don't Know MS Yes MT Yes Yes NC Yes Yes Don't Know NE NH Yes NJ Yes Yes Yes Yes LCCA Always NM Yes Yes Yes Yes LCCA Always Yes Don't Know NY Yes Yes Yes OH Yes Yes Yes Yes Yes OR Yes Yes Yes Yes PA Yes Yes Yes Yes No SC Yes Yes Yes LCCA Seldom Yes Yes SD Yes Yes Yes Yes Yes Don't Know TN Yes Yes TX Yes Yes Yes Yes UT Yes VT VA Yes WY Yes LCCA Most Important Tool for Replacement? Fleet Replacement Studies State Formal Life- Cycle Cost Analysis? Multi-Year Fleet Plan? Methodology to Prioritize Assets When Budget not Sufficient? Repair vs. Replace Policy or Tools? Table 1. Prevailing DOT practices.
13 Maximum Economic Repair Cost as a Percent of Purchase Price ACTUAL AGE - YEARS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 EX PE CT ED LI FE - YE AR S 75 48 20 75 57 38 20 75 61 47 33 20 75 64 53 42 31 20 75 65 56 47 38 29 20 75 67 59 51 43 35 27 20 75 68 61 54 47 40 33 26 20 75 69 63 57 51 45 39 33 24 20 75 70 65 60 55 50 44 36 32 26 20 75 70 65 60 55 50 45 40 35 30 25 20 75 70 65 60 55 50 45 40 36 32 28 24 20 75 71 67 63 59 55 51 47 43 38 32 28 24 20 75 71 67 63 59 55 51 47 43 39 35 31 26 23 20 75 71 67 63 59 55 51 47 43 39 35 32 29 26 23 20 75 71 67 63 59 55 51 47 44 41 38 35 32 29 26 23 20 75 72 67 63 59 56 53 50 47 44 41 38 35 32 29 26 23 20 75 72 69 66 63 60 57 54 51 48 45 42 35 36 33 30 27 24 20 3 YR 4 YR 5 YR 6 YR 7 YR 8 YR 9 YR 10 YR 11 YR 12 YR 13 YR 14 YR 15 YR 16 YR 17 YR 18 YR 19 YR 20 YR 75 72 69 66 63 60 57 54 51 48 45 42 39 36 33 30 27 24 22 20 Figure 2. Repair cost thresholds (4).