Blue Bird School Buses

Blue Bird Corporation, which became publicly traded on the NASDAQ in February 2015 (ticker: BLBD), has an operating and business model that are aligned effectively. Blue Bird’s alignment has resulted in Blue Bird gaining 7 points of market share since 2010, with 30% market share.

Blue Bird’s mission is to “to design, build, sell and service the world’s finest school bus”. Blue Bird designs and manufactures school and specialty buses as well as aftermarket parts, accounting for 94% and 6% of its fiscal 2014 sales, respectively. The buses are sold primarily through Blue Bird’s U.S. and Canadian dealer network to school districts. The gross operating margin is 12.8%, comprised of 11.1% for buses and 37.2% for parts. Blue Bird creates value by providing school buses with market-leading safety ratings, a high degree of quality, reliability, and durability, low operating costs, and good driving performance.

Blue Bird’s business model differentiates from that of its competitors by being the world’s only pure-play school bus manufacturer and manufactures purpose-built school bus chassis. Blue Bird only has two competitors, Thomas Bus and IC Bus, which are small subsidiaries of significantly larger parent companies whose focus is the heavy truck market. The competitors’ school bus business primarily exists to use excess truck chassis and to increase the purchasing efficiency of engines and other related third-party sourced components (and, in the case of IC, an additional use of their internally manufactured diesel engines).

In terms of its operations strategy, Blue Bird harnesses its culture of continuous improvement to drive productivity growth, product innovation, and sales expansion.

First, on the productivity front, Blue Bird’s operating model allows it to have flexible labor and to only manufacture when orders are in hand. The timing of school bus sales is highly seasonal, with most buyers demanding delivery just prior to school commencement. Blue Bird employs non-union workers, while its competitors use unionized labor. This allows Blue Bird to flex its labor force to demand (i.e. manufacturing to firm orders), while its competitors must maintain consistent production and hold inventory. Due to the inflexibility of Blue Bird’s competitors’ labor force, they are highly focused on volume and typically sell their buses to the three large school transportation contractors which control about 50% of the market, and due to their significant purchasing power offer very slim margins to the OEMs. Blue Bird, on the other hand, primarily sells through the dealer network to school districts and small to mid-sized fleets. Blue Bird’s manufacturing plant in Fort Valley, Georgia houses two assembly lines to produce chassis, a single line that assembles the bus body and attaches it to the chassis, and a paint shop. Each product that moves down the line has a unique product specification sheet; nearly every school bus produced is customized. The high level of customization common for school buses minimizes the ability for automation and requires skilled labor, giving Blue Bird a competitive advantage for labor productivity. During the first quarter of each year, its slowest quarter, Blue Bird typically has planned shutdowns; this is something that its competitors are unable to do due to unionized labor. Due to the high variable cost structure, Blue Bird only builds buses when it has a firm order in hand, reducing the risk of holding inventory. Orders are firm ten weeks prior to production. Blue Bird orders components and parts on a build-to-order basis and purchases steel one quarter in advance.

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Second, Blue Bird is a market leader in alternative fuel applications to school buses. While school buses are traditionally diesel operated, Blue Bird has designed two new power trains– propane- and all gasoline-powered – each serving the opposite end of customer preferences. Propane-powered buses are most attractive to buyers interested in environmental benefits, operational reliability during cold weather, and cost savings. The pricing of propane buses enables the customer to break even on the incremental purchase price over that of a diesel-powered bus in less than two years, and the customer can pay for the entire purchase price of the bus in fuel and cost savings over the average lifetime ownership of fifteen years. Gasoline-powered buses is the optimal product for purchasers focused more on upfront acquisition cost than on total cost of ownership, resulting in substantial upfront acquisition cost savings even over low-cost diesels.

Lastly, through sales expansion, Blue Bird has increased its sales in the higher margin school bus parts segment of its business and has strengthened its dealer network. School buses are primarily sold through the dealer network, and over the past several years, Blue Bird has replaced underperforming dealers with significantly stronger performing dealers.

In conclusion, the business and operating model go hand-in-hand, allowing for efficient revenue generation and focus on growth through innovation. Blue Bird’s business model is singularly focused on school buses, and this focus allows for production efficiencies.

Sources:
https://www.blue-bird.com/blue-bird/Home.aspx
http://www.sec.gov/Archives/edgar/data/1589526/000119312515015053/d786391ddefm14a.htm#toc786391_60
http://investors.blue-bird.com/file.aspx?IID=4042668&FID=1500073002
http://investors.blue-bird.com/file.aspx?IID=4042668&FID=1500078106