Keeping School Bus Supply Lines Open

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Large vehicle manufacturers discuss the state of the industry and how rising costs are affecting supply chains, ongoing relationships with those vendors and solutions for customers in this economy.

By mid-June, commercial truck manufacturers including Daimler Trucks North America and Navistar were forecasting major ramp-ups in production after several years of decreased output. With manufacturing lines speeding up, the result on school bus production could be affected, especially when it comes to supply chains. That can be challenging to say the least when it comes to customer service.

“The increase in production rates across the heavy-duty trucking manufacturing segment is having an impact on suppliers that school bus manufacturers share with the trucking industry,” said Kelley Platt, president and CEO of Thomas Built Buses. “[Thomas] has identified suppliers which historically have had difficulty meeting parts orders, and has made arrangements to ensure component availability will not affect on-time delivery of bus orders.”

It’s nothing new for the school bus manufacturing industry to deal with these types of shortages, as there can be about 15,000 different parts on a school bus that are supplied by dozens and dozens of different vendors. The tens of thousands of school bus models that roll out of the factories each year are built to order, requiring the leanest of lean manufacturing processes. Further complicating matters for the entire automotive industry is the double whammy of an economic downturn and ever-increasing costs of raw materials such as copper, steel, plastics and glass, which have increased by more than 20 percent over the last several years. Also, everyone has felt the pain from the increased cost of petroleum-based products.

Efforts by the large school bus manufacturers to keep costs down invariably include utilization of a wide network of partners and increased purchasing power. As a subsidiary of Navistar, IC Bus can rely on economies of scale fostered by the International Truck and Parts groups as well as the company’s own line of diesel engines, the MaxxForce. Similarly, Thomas Built Buses utilizes large supply chains tied to the global family of parent Daimler Trucks North America. Additionally, Blue Bird Corporation has the Cerberus Capital Management network of approximately 40 different portfolio companies on which to fall back.

These relationships can allow large bus OEMs to make the necessary arrangements to ensure component availability will not affect on-time delivery of bus orders.

“Thomas Built Buses has access to the resources, support and staying power of its global parent company. With the investments in efficiency made in recent years, leveraging Daimler’s global purchasing strength, and the outstanding efforts made by our employees and dealers, Thomas’ customers can expect continued leadership from the company despite economic pressures,” said Platt.

Just as important is the strength of contracts with those suppliers, especially for Blue Bird, which last month with partners Ford and ROUSH CleanTech unveiled the next-generation, propane Vision that promises increased fuel economy, horsepower and torque.

“We have pretty strong contracts with all of our suppliers — I mean, very solid,” said Phil Horlock, president and CEO of Blue Bird. “We make sure we do so that we can have uninterrupted supply. I would say that even though we recognize that things are tighter than they certainly were a good six, nine months ago, certainly a year ago, we’ve got those agreements with our suppliers.”

“When we talk about suppliers, we do talk about supplier partnerships. We look at our suppliers as someone we want long-term relationships with.”

Phil Horlock, President & CEO of Blue Bird Corporation

The large bus manufacturers generally look for long-term supply partners and tend to hand-pick vendors closer to home. In fact, many suppliers locate their own manufacturing facilities or main distribution hubs near an OEM’s plant. Platt said Thomas has identified suppliers that historically have had difficulty in meeting parts orders and has made arrangements to ensure component availability will not affect on-time delivery of buses. But those efforts could be undermined if rising costs continue to shrink the number of supplier options.

“A shrinking market will affect everyone in the school bus supply chain. It could severely slow the development of new designs, components and technologies,” she added. “Without a certain market volume, some component suppliers may not remain in the school bus market. Reduced competition could eventually increase component prices.”

“Historical highs” in commodity costs are the last thing manufacturers or customers need in this economic environment. Starting Sept. 15, IC Bus will add a surcharge of up to $1,495 per bus to address current market conditions and increasing global demand. For example, IC Bus said steel and its derivatives account for more than 41 percent of the material value of the company’s buses, and those prices have increased between 60 percent and 116 percent since 2009. Platinum, which makes up almost 11 percent of a bus’s material value, has gone up 46 percent in that same period. Meanwhile, the cost of rubber, which accounts for 5 percent of the material value of a bus, has increased by 183 percent. Also, the cost of lead is 64 percent higher than it was two years ago.

“Our efforts to mitigate price increases through manufacturing efficiencies have allowed for us to absorb some of the increases, but we could not absorb them all,” said John McKinney, president of IC Bus. “Global commodity increases are affecting all manufacturing, and unfortunately, they are beyond our control, leaving us no choice but to share those additional costs with the customer.”

A couple of weeks later, Blue Bird announced its own price increase, a $1,400 commodity surcharge on all new orders placed after Aug. 4.

This entails keeping an eye on any anticipated supply shortages and seeking additional, alternative sources around the world. Blue Bird’s Horlock has already made two trips this year to China to investigate potential opportunities with vendors there. He added that Blue Bird expects to begin importing steel wheels from a Chinese vendor by later this year.

“It’s a long validation process. You have to make sure the quality is where you want it to be,” he added. “We’ve got a company out there that we’ve found; we validated the supply. They have exceptional quality; we’re seeing to that. We’ll move slowly and progressively, but we’re always looking at alternative sources all around the world.”

But securing global partners can further lengthen the already fragile supply chain, as parts can take several additional weeks to get to the manufacturing plant. In Blue Bird’s case, the company is entering into a partnership with a third-party logistics center located near the Fort Valley, Ga., plant to work with overseas vendors. Horlock explained that this company will take on the carrying costs of storing parts for Blue Bird for up to a few weeks and will deliver the parts directly to the manufacturing line “just in time.”

“That’s a pretty powerful tool to have for us, and it really gives us real confidence in having a supply chain where the vendor is quite away from our plant,” he added.

The brass tacks come down to contracts.

“When we talk about suppliers, we do talk about supplier partnerships,” Horlock said. “I mean, we look at our suppliers as someone we want long-term relationships with, particularly our major suppliers. Obviously, it’s not surprising who are the big ones that have become the power train side of the business, and so we want to make sure that we’re well protected. I keep coming back to having a good contract to make sure we always get constant supply, and I thought we’ve done a really nice job of ensuring that.”

“Without a certain market volume, some component suppliers may not remain in the school bus market. Reduced competition could eventually increase component prices.”

Kelley Platt, president & CEO, Thomas Built Buses

Meanwhile, the playing field figures to level even more with the announcement of the new Lion Bus Type C conventional. Starcraft Bus representatives said it was still “too early to tell” how a partnership with Hino Trucks on a new Type C conventional could help alleviate supply challenge in the aftermath of the magnitude 9.0 earthquake that hit Japan in March. Starcraft originally expected to go into production with the new model this spring, but that has been delayed.

“No doubt, prices have been rising steadily, and if it continues through the fall, it will be a serious issue for our industry,” said David Wright, GM of Starcraft Bus, declining to comment on any specific supply-chain issues arising from the Japan earthquake and resulting tsunami. “If it levels off in the next few months, it is manageable.”

Reprinted from the August 2011 edition of School Transportation News. All rights reserved.