What’s the Real Cost of Total Cost of Ownership?

Experts emphasize the value of technology, data and newer equipment to rein in total cost of vehicle ownership.

The Cypress-Fairbanks ISD transportation department uses in-depth measurements of its vehicles and operations to justify budget requests.
The Cypress-Fairbanks ISD transportation department uses in-depth measurements of its vehicles and operations to justify budget requests.

In the daily hustle and grind of keeping a fleet of vehicles on the road, and tracking where they’re supposed to be when they’re supposed to be there, it can be easy to put thoughts about the total cost of ownership, or TCO, on the back burner. A fleet management consultant said the rewards of keeping it front and center are well worth the effort and more important than ever.

“Being an effective transportation director doesn’t mean just understanding routing, scheduling, dispatching, driver management, and a modicum of vehicle maintenance or repair management,” said Paul Lauria, president and co-founder of Mercury Associates, Inc., a fleet management consultant in Rockville, Maryland. “You need to understand the financial and economic dimensions of owning and operating a fleet of vehicles.”

Lauria, whose firm works with fleet owners across a broad spectrum of industries, including student transportation, warned of a perfect storm that faces fleet owners. Advances in information and vehicle technologies, as well as changes in workforce skills and employment practices, threaten to make the already complicated transportation industry even more daunting over the next decade.

“Mastering these challenges will require changing many of the principles and business practices school districts have relied on for decades. In particular, they will require increasing the use of objective, quantitative data to inform forecasting, planning and day-to-day decision making,” explained Lauria, who spoke on this topic during the STN EXPO Transportation Directors Summit held in July at Lake Tahoe. “The time to prepare for these changes is now, while the economy is in relatively good shape.”

One such challenge is the accelerating transition from first-hand, experienced-based fleet management to data-driven fleet management. There is what he termed a tremendous loss of institutional knowledge and practical experience underway that represents a sea change for many organizations.

Lauria noted that the emerging generation is more comfortable than traditional industry leaders in employing data-driven approaches to forecasting, planning and decision making. But he pointed out that many new leaders have never sat behind the wheel of a bus or worked on a shop floor.

“At Mercury, we’re seeing more and more fleet managers, for example, coming out of budget, finance or supply chain backgrounds,” he continued. “They understand that KPI stands for key performance indicators. But they haven’t necessarily been on the front lines, like a lot of transportation directors who started out as drivers or mechanics and are going to be retiring in the next 10 years. They don’t know if a mechanic is [misleading them] when he gives excuses about why a critical vehicle has been out of service for five days.”

Many school districts have invested heavily in the latest scheduling and fleet management software over the last decade. But Lauria remarked that their decision-making practices often remained stuck in the 1980s, relying too much on subjective judgment and personal experience. One way to navigate the perfect storm, he suggested, is to pair veteran transportation directors with young data analysts who like to “crunch numbers.”

They tend to intuitively grasp how analytics and social networking are fundamentally changing not only the way people make decisions, but also how they think and communicate.

He also observed that there needs to first and foremost be the recognition that investment in information technology is a must-have. At the same time, investments in the workforce are necessary to leverage the capabilities of that technology.

“Expecting a transportation director, who is consumed with the day-to-day demands of getting drivers behind the wheels of buses and students safely to and from school, to understand the finer points of performance measurement and benchmarking or long- term cost modeling and planning, without both training and staff support, is simply not realistic,” he added.

Tackling TCO and other challenges requires new ways of looking at old problems. Until now, the best solutions have been hard to come by, because districts haven’t had the capability to synthesize multiples streams of information, such as vehicle loading and speeds, traffic patterns, staffing, vehicle operating costs and other factors. Lauria cited the example of a 72-passenger bus making 15 stops on a given route, year in and year out, to pick up children each day.

“Why? Because you’re trying to fill up that bus and be as efficient as possible. But, maybe there’s a more efficient way to get kids to school than putting them on the biggest bus available,” he explained. “It is in areas like these that data from connected vehicle solutions and other information technology is beginning to permit more nuanced analysis and understanding of the efficiency with which we transport kids to school.”

Lauria advised that it’s time for transportation professionals to move beyond simply calculating the per-year cost of operating a vehicle to calculating what it costs to transport each student.

“A lot of districts don’t have a good understanding of what their cost of getting a child to school is. What do the numbers look like when you put kids into a large or medium or small bus?” he asked. “Wouldn’t that be more meaningful?”

With regard to controlling the vehicle as opposed to transportation costs, Lauria pointed out what he called “basic truths about fleet management,” which he said all transportation directors and their bosses should be familiar with:

A fleet of properly replaced vehicles is cheaper than one with improperly replaced vehicles.
If an organization can afford to operate an old fleet, it can afford to operate a less old one.
Avoiding spending money on fleet replacement does not save a school district money or help it better fulfill its mission of student education—except, perhaps, in the short term. Over the long term, poor fleet replacement practices take money away from the mission of student education.

Among the factors that lead districts to under-spend on fleet replacement, he noted, are a failure to understand vehicle life-cycle cost principles, a lack of visibility of direct and indirect vehicle operating costs, and a lack of understanding about how the method of paying for replacement vehicles affects replacement decisions and funding levels.

To this last point, Lauria urged debt-averse districts to weigh the pros and cons of leasing and debt financing against the upfront purchase of buses with cash. Having helped organizations develop detailed fleet replacement strategies and plans for more than 30 years, Lauria said he is convinced that these alternative financing methods allow many owners to modernize their fleets when they otherwise might not do so.

“It has been particularly unfortunate to see so many organizations … that have not taken advantage of historically low-interest rates to modernize their fleets in the last decade,” Lauria said. “Think about the type of house you would live in if the only way you could buy it was to pay for it with cash upfront. It’s safe to say most of us would live in a very different type of home than the ones we live in. What leasing and debt financing allow school districts to do is pay for buses while they’re using them, not before they use them.”

Real-Life Determinations of TCO

Kayne Smith, director of transportation for the Cypress-Fairbanks Independent School District in Houston, oversees a system that transports more than 80,000 students every day on approximately 750 routes. “We’re the third-largest district in Texas, but we’re actually the largest student transporter in the state—larger than the Houston and Dallas districts combined, in terms of numbers transported,” said Smith, who attended Lauria’s presentation over the summer.

Smith said TCO is continually at the top of his mind. “We have multiple KPIs,” he shared. “We have different types of buses, we run different types of fuel—gas, propane and diesel. Right now, we’re assessing what our fuel mileage is. We’re tracking the cost of ownership of those vehicles to see what we’re going to buy in the future. I want to make sure I’m looking at the data to see what has been the most cost-efficient and cost-effective, so that I have an educated, quantifiably defensible decision when I go to the board and say, ‘This is what I want to buy.’”

One example of the value of gathering data is Cy-Fair’s tracking of bus idle time, which revealed a daily cost of $600 to $800 across the district. Drivers were informed and coached to reduce that unnecessary expense.

It’s that kind of detailed information that created public support this past spring to approve the district’s $1.7 billion bonds that included funding for 480 new buses.

“I’m a huge proponent of the technology that’s on these buses. There’s a lot of exciting new technology on the horizon,” Smith said. “Whatever we can do to keep our kids safe is first and foremost. But where it can also find ways to reduce costs is just icing on the cake.”

Smith’s advice is to keep track of your data. “My primary recommendation is [to] just look at the numbers, gather them and really be able to decipher if what you’re doing is costing you more than what you’re spending, or whether it’s costing more than what it would cost to buy new buses,” he said. “There are so many data points that directors can gather when it comes to the cost of ownership of their vehicle. If you don’t have [them], start now. By clocking in over a period of time, you’ll be able to show to your staff, administration and community what it means. If you’re going out for a bond package, it’ll show why you need what you’re asking for.”

Just 278 miles north on Interstate 45, at Frisco Independent School District outside of Dallas, Director of Transportation Doug Becker touts a regular vehicle-replacement cycle that he said not only keeps the bus fleet current but also keeps costs down. He said he values the growing role that data-generating technology plays in determining vehicle ownership costs.

“When we talk about efficiencies and trying to identify ways to reduce costs, a lot of the technologies that are out there will help you do that. It not only helps you with the operational cost, in my estimation, but it also helps in service,” Becker said, noting the safety benefits of monitoring the real-time locations of students and vehicles.

Becker and his staff also dissect demographic data for one of the fastest-growing districts in the country, to help forecast future operating needs and costs. “We’re looking to improve on that technology to help give us the information we need to make smart decisions, keep our focus on efficiency and keep our students safe,” he added.

Editor’s Note: Reprinted from the October 2019 issue of School Transportation News.