School districts are known for making purchasing decisions based on the lowest bid. Sometimes this philosophy comes back to haunt them. That’s why in August 2012, when Elk Island Catholic Schools in Alberta, Canada, needed to replace two school buses that were having mechanical issues, Transportation Director Lynne Lambert decided to do her homework.
She asked her counterparts in other school districts if they were having similar problems. She also checked with several school bus manufacturers to get their perspective. Based on the intelligence she gathered, the district purchased two 72-passenger replacement buses — and not from the lowest bid.
The district did consider the purchase price but made its final decision based on the total cost of ownership, or TCO, a concept that weighs the operational efficiency over the life of the bus against a higher purchase price brought about by technological advancements in student transportation.
“The purchase price reflects the immediate cash layout,” Lambert said. “We realize, however, the true costs are spread over the years of service. “(The winning bid) came in a little higher, but when we look at it over 15 years, there will be a substantial savings.”
Lambert estimated that the district will save from $49,000 to $57,000 during the 15-year life spans of both buses. She said the buses have performed well so far.
“We’re over-the-top happy with them,” Lambert said. “They have very little down time and we’re very pleased. There have been no major issues yet.”
Industry experts say while the TCO concept has been around a while in the commercial trucking industry, school districts have only become acquainted with the concept over the past several years. Paul Start, market growth development manager for Thomas Built Buses, said looking at the total cost of a school bus through the TCO lens may be new for school districts, but the industry is starting to see a shift in how school bus purchases are made.
“We have a long way to go,” he said. “Many districts are still low-bid, and TCO is unfortunately not part of that equation. A lower purchase price doesn’t necessarily mean the lowest total cost of ownership, so we hope to continue to educate districts across the country on how to best use TCO to make better purchasing decisions.”
Start is referring to technological advancements that have made school buses safer, more fuel efficient, durable and environmentally friendly. That same technology increases the purchase price. The TCO concept lessens the sticker shock by demonstrating how the new technology will actually save money over the life of the school bus by reducing maintenance costs with telematics and other technologies that keep buses running longer and more efficiently. The goal of the newer buses is to identify potential problems in the earliest stages. This keeps the buses out of the shop, or there for less time, and on the road in service.
Carl Webb, vice president and general manager for IC Bus, said the company has been using the TCO concept for “a long time,” and today they look at all costs, not just the purchase price.
“Our beyond-the-bus approach focuses on uptime,” Webb said. “By leveraging our dealer network, parts distribution, after sales, service support and training, we keep our buses up and running for the expected 15-year lifecycle.”
Ron Behrman, procurement executive with FirstGroup North America, agreed. He said the TCO concept has been employed in numerous procurement-based decisions for years. FirstGroup is the parent company of student transportation contractor First Student.
“TCO is a significant component in our selection process,” Behrman said. “We believe there is more to the purchase process than the price.”
Thomas Bus is specified as the preferred vendor for First Student unless otherwise requested by the client. Behrman said that though price was a significant component of that partnership, other factors significantly impacted the decision including financials, warranty, projected maintenance costs, fuel performance, environmental considerations and long-term strategic vision and plans for the school bus industry from a manufacturer’s perspective.
Key Components of TCO
Start said the four primary metrics of TCO are fuel economy, maintenance costs, capital costs and financing, although many other factors can come into play. “When looking at the big picture, fuel economy is the most important component of TCO,” he said. “It is the largest expense that fleets will have over the life of the vehicle.”
Start advised TCO be considered an additional key performance indicator that fleet managers use to lower their total costs because it is more than just recording metrics. He said managers must take note of their costs and work to make changes in purchasing decisions, fuel usage and maintenance processes.
“For some fleet managers, that means using vehicle maintenance recording systems to keep track of their fleet’s maintenance trends,” he said. “The better fleet managers are at keeping maintenance records and analyzing them for trends, the smarter they can be at lowering their TCO.”
Industry experts also agreed that alternative fuels such as CNG and propane autogas will lower a fleet’s TCO by reducing overall fuel costs. As the Diesel Technology Forum published last spring, today’s diesel can also save owners $2,000 to $5,000 over gasoline. Just know that the initial sticker price will be more.
Kirk Lacko, senior product marketing manager for Blue Bird, said he encourages customers interested in propane to look at the total cost over the bus’ life to influence their decision.
“With alternative-fuel buses you will realize savings over time through decreased fuel costs,” Lacko said. “A propane bus may cost more up front, but after several years, you begin to realize your savings overall. That’s when the TCO concept really begins to pay dividends.”
Behrman said inquiries about alternative-fuel vehicles have increased in the past couple of years. He noted that while environmental considerations and EPA emissions requirements are always important, discussions about the financial benefits have increased significantly.
“We ensure our customers are aware of the difference between up-front vehicle and fueling infrastructure costs versus the TCO savings model associated with alternative-fuel vehicles,” Behrman said. “Alternative-fuel vehicle solutions, when viewed strictly from an initial price perspective, may not appear as attractive as traditional fueling solutions until the TCO concept is applied.”
Start added that alternative fuels can decrease a fleet’s TCO by lowering overall fuel costs, and their clean-burning properties can reduce maintenance costs. However, he warned that fleet managers switching over to alternative fuels should consider start-up costs.
“The cost of fueling stations, maintenance equipment, technician training and the initial cost of an alternative-fuel bus are all part of the TCO equation that should be considered,” he said.
There is also agreement that TCO is dependent upon school bus technology, which will only increase. Lacko said that the more familiar school districts become with the TCO concept and with the way bids are written because of technology, the lowest-bid mentality will eventually go away.
“Some of the bid items are weighted so that comes into play in the bid process,” Lacko said. “There is so much focus on the acquisition cost that it is short-sighted. Advocates in the districts are technicians that actually work on buses and can see where money can be saved. There is a growing trend among the technicians to embrace technology.”
Lambert agreed. “It makes sense. “It’s not always the purchase price that makes a difference,” she concluded.
