Guidebook for Considering Life-Cycle Costs in Airport Asset Procurement (2017)

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14 Guidebook for Considering Life-Cycle Costs in airport asset procurement personnel were asked to rate the success of implementing TCO as part of their procurement process if they learned that considering and implementing life-cycle costs in airport asset pro- curement would improve asset management, increase system reliability, reduce downtime, extend asset life, and reduce costs. The majority of the airports gave a score of 7 or higher (on a scale of 1 to 10, where 1 is not very successful and 10 is very successful). The results are presented in Figure 3-5. • Develop a list of prequalified vendors (quality of work, on-time delivery, communication, cost). This list should allow the buyers to communicate directly with these vendors, since they have been screened and evaluated by the organization. Prequalified vendors reduce risk and aid in building collaborative working relationships. • Utilize available data to become more efficient and save time and money. The available data about the vendors and the assets should help the buyer in procuring assets (or parts) without the need to conduct additional market research. • Have clear and thorough bid specifications that define the expectations from a bid. This should ensure accountability and reduce risk for the organization. Utilities—Power Generation Utilities, especially power generation, have extensive experiences in procurement and have many best practices (Frost & Sullivan 2014). Table 3-1 summarizes these best practices. Many power utilities have benefited from implementing procurement best practices. For example, before the 1990s, power utilities saw procurement as a standalone business function. Recently, GA = general aviation; NH NP = non-hub non-primary; NH P = non-hub primary Airport Type N um be r o f A irp or ts Su cce ss Ra n g Figure 3-5. Potential success of considering the implementation of TCO as part of procurement process at airports.

procurement Best practices and tCO Implementation at airports 15 however, utilities have worked to integrate these activities across the enterprise and align them with the business strategy. This integration and alignment has increased the efficiency and effectiveness of procurement. The Case for Using Total Cost of Ownership in Procurement As stated earlier, the airport industry is shifting toward active management of TCO in an attempt to improve procurement decision making and the use of both capital and operating funds. TCO is a leading methodology that looks beyond the procurement value/cost of the asset and attempts to take into consideration the actual “true” cost of that asset throughout its life cycle (i.e., planning and design, commissioning, O&M, decommissioning, and replacement). There have been advancements in the aviation industry, especially in the United States, toward a greater understanding of TCO that have paved the way for the new operating realities demonstrated by recent ACRP research including the following: • Theory, practice, and technology for asset and infrastructure management established in ACRP Report 69: Asset and Infrastructure Management for Airports: Primer and Guidebook and ACRP Project 09-05, “Guidance on Successful Computer Maintenance Management Systems (CMMS) Selection and Practices” • Sustainable O&M guidance established with ACRP Report 110: Evaluating Impacts of Sus- tainability Practices on Airport Operations and Maintenance • Critical milestones for maintenance input on infrastructure projects established in ACRP Project 09-07, “Airport Maintenance Roles in Planning, Design, Construction, Commissioning, and Activation” The Chartered Institute of Procurement and Supply (CIPS) document titled Whole Life Costing: The CIPS Position, and What the Buyer Needs to Know (2013) lists views in support of using TCO as a best practice for evaluating procurement alternatives. The highlights of these views are as follows: • All procurement and supply management professionals should be knowledgeable about TCO. • Procurement professionals should be the ones taking the lead in implementing and involving other business units in using TCO. Facet Best Practices Central Procurement Team – Clear procurement policies and guidelines – Single-point vendor management Procurement Automation – Implement e-procurement services (registration, bidding, procurement) – Implement maintenance, repair, and operation program to manage spare parts Vendor Relationship Management – Produce list of reliable vendors – Document vendor capabilities Business Integration – Procurement team is integrated within the organization’s internal teams – Data analysis is available to procurement team – Coordination between different supply chain teams through a procurement leader Strategic Sourcing and Capacity Management – Value-based rather than cost-based procurement – Other parameters in addition to cost should include quality, warranties, lead time, and technology – Procurement to be a long-term plan Global Sourcing – Identify multiple sources to procure from Source: Summarized from Frost & Sullivan (2014). Table 3-1. Utilities procurement best practices.

16 Guidebook for Considering Life-Cycle Costs in airport asset procurement • Procurement professionals should involve vendors in TCO implementation. • Procurement and supply management professionals are obligated toward making sure that high-value / high-risk decisions are not based on price alone. • TCO can be implemented on low-value purchases as well. Through TCO, airports will be able to make better financial decisions when it comes to the procurement of assets and the financial allocation requirements to these assets over their life cycle. It would be a true/close representation of the actual cost of that asset. Additionally, through TCO financial forecasting, risks can be managed and significantly reduced. Benefits and Limitations of TCO According to research and industry publications (CIPS 2013, FHWA 2010), implementing TCO has many benefits for organizations of all types: • Better communication internally and externally • Ability to clearly evaluate competing alternatives • Awareness of total cost and holistic asset management • Better budgeting and prioritization of funds • Capability to complete financial analysis such as trade-offs, budget forecasting, and cost allocation • Ability to provide stakeholders with sound decision justification • Better services provided by vendors • Robust and better asset specifications detailed in the project bidding documents • Reduced risk of provided services’ quality There are also limitations to TCO (CIPS 2013): • Future costs have uncertainty in them since they are projected values. • Staff hours are necessary to attain information for completing the analysis. • It is dependent on the quality of historical data as an input into the analysis. • Maintenance and operational costs are not readily available. • State procurement policies may exist that deter from using methods other than low bid. • There may be a lack of resources to support and maintain TCO. TCO Impact on Procurement TCO is a comprehensive and inclusive process that extends across the organization. This pro- cess garners input from various sources within the organization to determine the life-cycle cost of the asset. To identify the requirements that would most impact the cost of an asset, the research team asked a sample of airport personnel to score typical organizational/strategic requirements, based on the impact they would have on TCO. The results are presented in Figure 3-6. The top three parameters that those interviewed believed would most impact procurement are: • Design/engineering decisions • Quality improvement • Service-level agreements As a follow-up question to the scoring of these parameters, the participants were asked “How would implementing TCO impact the procurement process?” The summary of the responses is presented in Table 3-2. Implementing TCO at airports would have a positive impact on the quality of the services pro- vided by the airport to the stakeholders, because better material and services would be procured

procurement Best practices and tCO Implementation at airports 17 from vendors. Additionally, capital and operational budgets would be better managed and allo- cated strategically toward growth and better services. TCO Impact on Maintenance and Capital Improvement Projects Implementing TCO at airports should, in effect, create a reliable and effective asset life-cycle maintenance plan and budget. For example, the manufacturer’s maintenance requirements should be incorporated into the computerized maintenance management system (CMMS) at startup so that there are preventive maintenance plans in place to ensure higher equipment availability and longer life leading to an optimized TCO. In addition, having a TCO in place will allow an airport to understand its short-/long-term budget forecast needs, which can also be helpful in prioritizing capital improvement projects. TCO analysis and documentation will provide a more robust, clear, and defensible process for Opex and Capex budget development. Project managers can also use this information in the business case process and as part of their project submittal for approval. Based on more com- prehensive TCO data, decision makers can then see how a capital project will affect the long-term budget to help in prioritizing investments. Figure 3-6. Impacts on TCO (average scores). Parameter TCO Impact Design/engineering decisions Longer schedule and changes to procedures Specification development process Minimal to no impact Negotiating prices (reduce rates and charges) Leverage product pricing Supplier selection List of reliable suppliers Procurement process Higher upfront cost for better deliverables is insignificant if distributed over the assets’ life cycle Quality improvement Longer life cycle, reliability, and lower O&M costs Terms and conditions Minimal to no impact Warranties Better products with longer warranties Delivery Consistent delivery of services from different locations Service-level agreements Better agreements with vendors due to better products and services over the life cycle Manage supplier performance Minimal to no impact Table 3-2. TCO implementation impact on procurement parameters.

18 Guidebook for Considering Life-Cycle Costs in airport asset procurement A study conducted by Swift and Brown (2003) showed that, through implementing TCO for a capital project at the conceptual and planning phases, there is a higher chance of creating savings over the project’s life cycle. Once the project goes into the next phases of design, implementation, commissioning, and operation, these TCO savings would diminish. Figure 3-7 illustrates these savings. Furthermore, the Society of Automotive Engineers conducted a study that compared the life- cycle costs of two similar projects, one using a traditional asset management approach and the other using TCO. The results showed that, although additional resources were expended during the conceptual and design phases of TCO, the overall cost savings through the asset’s life cycle were greater than when not using TCO. The savings for the project were around 14 percent over its life cycle. Figure 3-8 shows this comparison. Source: Swift and Brown (2003). Figure 3-7. Opportunities for cost savings throughout the project’s life cycle. Source: Reliabilityweb.com (2015). % T ot al C os ts Figure 3-8. Cost savings comparison for a similar project if TCO is not utilized (left) and if TCO is utilized (right).

procurement Best practices and tCO Implementation at airports 19 Implementing Total Cost of Ownership To conclude, TCO presents many benefits to the different business units at the airport in terms of managing and reporting the condition of existing and future assets. Additionally, it will assist the airport leadership in their decision making on capital and operational investments. TCO will have the most significant impact on the development of specifications and pro- curement processes. To successfully implement TCO, airport leadership will need to play a key role by getting on board early in the process and providing the business units with the needed support. Additionally, business units’ management should develop the business case and com- municate the TCO message to its employees. The adoption and implementation will take time and resources to obtain buy-in at all levels (Fortin 2016) in order to support a top-level vision with bottom-up operationalization. The following techniques can be considered to encourage the incorporation of TCO: • Develop a procurement strategy • Have policies in place to encourage TCO implementation • Include representatives from different business units in pre-bid meetings and communications • Compare an asset’s true cost over its life, rather than with a similar asset without considering TCO, by identifying the cost savings, productivity gains, and risk mitigation