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June 01, 2006  |   Comments (0)   |   Post a comment

A closer look at lifecycle costs


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Pupil transportation operations are facing the same challenges — escalating fuel costs, greater demands from parents and schools and crunched budgets. Everyone is doing what’s necessary to save a buck here and there, but at what cost?

Are we saving as much as possible through old-fashioned penny pinching? Can more be done to reduce costs without compromising quality? Responding proactively as opposed to reactively to high costs can make all the difference in the world.

Ron Lamparter, CEO and founder of Transpec Worldwide, offers two techniques to help operations reduce costs and improve quality, performance and reliability of the entire school bus fleet.

Lifecycle cost analysis
Lifecycle cost analysis, or cradle-to-grave analysis, involves calculating the cost of a system, unit or product over its entire life span.

Accordingly, lifecycle analysis of a system may include costs for planning, research and development, production, operation and maintenance.

Lifecycle cost analysis can also involve analysis of failure rates, cost of spares, repair times, component costs and warranty coverage.

Transportation managers may find this technique useful when requesting capital expenditures. It can provide the numbers and analysis to support why buying the lowest-priced system may not be the cheapest.

The following examples provide an illustration of how lifecycle cost analysis can give you the total cost of owning and operating equipment over the time period you expect to own it.

Sample cost analysis
You need a new bus. You expect to keep the bus for approximately 10 years and estimate that it will travel 15,000 miles per year. You solicit bids, and based on manufacturer specifications, industry averages and your own experiences, you estimate fuel, maintenance and all other costs for each bus:

 

  • Bus A will cost $35,000, $3,000 per year to maintain and will get 10 mpg.
  • Bus B will cost $37,000, $2,000 per year to maintain and will get 15 mpg.
  • Bus C will cost $40,000, $1,000 per year to maintain and will get 20 mpg.

    Department policy requires you to purchase the least expensive bus. Which do you purchase? (See chart.)

    Bus A is the cheapest to purchase. However, it turns out to be the most expensive to own and operate. Bus C is the least expensive to own and operate, even though it costs more in the beginning to purchase.

    This is a very simple example of how lifecycle cost analysis can be applied. There are many other variables you might want to consider, depending upon specific circumstances.

    Fleet defect analysis
    You purchase a fleet of new buses and, during the warranty period, you experience problems with a certain component on more than 10 percent of your buses. This is often an indication of a design flaw or other defect in the component and is likely to cost you money in extra repairs, maintenance and downtime.

    You should establish a fleet defect clause in your bid documents. Having such a clause will give you the right to declare a troublesome component “unacceptable” and to require a supplier to either replace that component across the board or work out some agreement for an extended warranty.

    Sometimes lifecycle cost analysis and fleet defect clauses are combined to encourage bus manufacturers and component suppliers to focus on “value engineering,” which puts less emphasis on cheapest selling price.

    These two techniques may be adapted to any large-scale purchase of equipment. The key is purchasing for cost-effectiveness versus the cheapest price.

     



    Lifecycle Costs Over 10 Years

    Analysis Example....................................Bus A...........Bus B...........Bus C

    Initial Purchase Price................................$35,000.........$37,000........$40,000

    Cost of Funds Invested
    (Assume 10 percent per year for 10 years)....$35,000........$37,000.........$40,000

    Fuel costs @ $3/gallon
    A. 150,000 miles / 10 mpg = 15,000 gallons....$45,000
    B. 150,000 miles / 15 mpg = 10,000 gallons......................$30,000
    C. 150,000 miles / 20 mpg = 7,500 gallons...........................................$22,500

    Projected maintenance costs over 10 years....$30,000........$20,000........$10,000

    Total Costs Over 10 Years......................$145,000......$124,000.....$112,500


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