Contracting Strategies for Logistics Outcomes

CONTRACTING STRATEGIES FOR LOGISTICS OUTCOMES



DLA Director, Lt. Gen. Robert T. Dail shares his views on privatization, PBLs, long term contracts and more.

by Lieutenant General Robert T. Dail, Director, DLA

For more than six years, the United States of America has been fighting a global war on terror. The Department of Defense (DoD) has successfully executed military operations in multiple theaters, as well as on multiple sub-unified fronts within a major theater of operations in U.S. Central Command (USCENTCOM). The dispersed and asymmetric nature of our enemy has caused our military to adapt in performing its mission. We are operating today in locations that, from sheer distance and dispersion, place an enormous demand on the logistics infrastructure, capabilities and professional network of our nation. Collectively, America’s military logisticians have been successful in supporting our fighting forces, largely due to the tremendous relationship they have forged between government and industry, improved methods of obtaining support from our industrial partners, and new methods of measuring supply chain effectiveness and delivering capability with precision. The output of this effort has been a level of reliable support never before achieved in warfare history, the emergence of the DoD national enterprise, and the extension of the enterprise through contracting excellence.

THE NATIONAL ENTERPRISE

The major improvement in the execution of DoD logistics has been the emergence of a mature national enterprise. This enterprise has been forged by industrial partners and government professionals from the Defense Logistics Agency (DLA), United States Transportation Command (USTRANSCOM), and the respective military service materiel commands. These three DoD entities have combined efforts with the combatant commands (COCOMs) in delivering improved performance in terms of readiness, responsiveness and reliability. Moreover, the three have partnered to provide improved output with fewer requirements for deployed military force. Joint Deployment and Distribution Operations Centers (JDDOCs) have been created in every COCOM to better synchronize the enterprise output and to define the handoff points from national enterprise partners to component and numbered fighting forces operating in their theaters. Today, due to improvements in information technology and the leveraging of government skills with contracting instruments that lever industry partner networks, it is common for commodities to arrive at destination directly from vendors for immediate consumption by troops and contractors, from multiple lines of communications and through multiple modes of transportation. This change has been accomplished while the requirement for large service theater logistics headquarters has diminished.

Early this decade, USTRANSCOM observed how the employment of the C-17 aircraft had revolutionized airlift support to forces in the field. The C-17’s capability to take off from strategic bases and land in forward airfields such as Balad and Bagram blurred the lines of responsibilities between strategic and operational war. Much as the C-17 changed our view and concept of operations, the improved capabilities and information technology from an “extended enterprise” has blurred the lines of responsibilities in strategic and operational logistics. Today, fuel is delivered directly to Army, Navy and Air Force bulk fuel storage facilities and ships around the world; food to dining facilities and galleys; lumber directly to contractors. Even repair parts have begun to be privatized with delivery by contractors to troop maintenance facilities with unprecedented performance. COCOMs, troops, and leaders have been the beneficiaries of this new logistics construct. Much of the execution of this extended enterprise is performed by U.S. commercial carriers, vendors and suppliers. For the first time, we have linked supply with warfighter demand. “Extending the enterprise” has depended on a well-planned and flexible contracting strategy.

CONTRACTING EXCELLENCE—KEY TO AN EXTENDED NATIONAL ENTERPRISE

Clearly, contracting as a means to achieve logistics outcomes has grown significantly in the DoD over the past decade. It has become a key function of the overall DoD logistics strategy. When Rear Admiral Henry Eccles published his insightful book Logistics in the National Defense in 1959, (the first modern review of operational and strategic level logistics) he hardly mentioned contracting as a key instrument of logistics outcomes. In fact, if you check the book’s index, you will find that “contracting” is not even listed. While not much changes in the nature of warfare, technologic and economic business models have changed, greatly impacting DoD logistics. Today, as the cost of a highly competitive personnel pool increases the challenges of maintaining an all-volunteer military force, the military services have focused their manpower requirements and recruiting efforts on positions in deployable fighting formations (corps, MEFs, air forces, and fleets). Contracting, and the support provided through contracting, is a critical enabler to force projection and sustainment. It has proven paramount in keeping the logistics footprint light and agile. A quick review of contracting capabilities and initiatives will underscore how it has become a reliable means to an end.

PRIME VENDOR PROGRAM

Many of these initiatives were born in the early to mid 1990s as lessons learned during the first Gulf War. DLA’s Defense Supply Center Philadelphia (DSCP) initiated prime vendor (PV) contracts for commercial products such as pharmaceuticals, medical supplies and subsistence. The underlying premise for PV was to reduce inventories, rely on robust commercial distribution networks and reap the cost reductions from commercial industry practices to manage and source DoD’s requirements for highly commercialized products. The success of the pharmaceutical and medical supply PV led to the establishment of subsistence PV in the mid 1990s. Today, these two PV programs have revolutionized the manner in which troops subsist and receive medical supplies at sea, on shore, in combat. Overhead costs have been reduced while effectiveness has increased. A by-product of the PV program has been the huge savings in management and systems overhead in the various services. Moreover, over the past few years, PV programs have been “extended” forward and expanded to link with troops at Baghdad, Balad and Bagram with equal effectiveness.

EXPANSION OF PRIME VENDOR PROGRAM

The success of the PV Program generated additional programs to deliver commodity to troops and artisans. With inelastic demand for fuel and little theater logistics footprint, DLA began two years ago to establish multiple prime vendors in Afghanistan with striking results. The multiple vendors, sources, and lines of communications have mitigated risks and provided greater reliability in supply chains without introduction of theater uniformed overhead to manage commodities.

The Industrial Prime Vendor (IPV) program has also “extended the enterprise” down to the hands of the artisans working at service industrial locations (depots, logistics centers, etc). IPV was established as a service by DLA to the military services to better support production and lower overall inventory of small consumable items. Further, DLA IPVs provide kitting support for various production line requirements, providing artisans with complete and customized kits of items to support their specific maintenance station operation. For example, Air Force air logistics centers have recently reported that bin fill rates have exceeded 99.8 percent across Air Force Materiel Command while production line stoppages have been nearly eliminated. The overall success of these PV programs underscored the growing importance of contract management both at home and in overseas locations to ensure vendors met performance objectives.

THIRD-PARTY LOGISTICS PROVIDERS

A key enabler to the readiness that our services provide to corps, MEF, fleets and air forces has been contracted support for maintenance and production control. Many operational air and ground fleets are being maintained by contractors both abroad and at homestation. Service materiel commands have employed these commercial capabilities to maintain readiness while conserving military personnel for service in tactical and operational units. Thirdparty logistics providers (3PLs) have been employed by the services, DLA, and recently, by USTRANSCOM, in accomplishing the logistics mission. More and more, DoD is tapping commercial capabilities to increase the availability of weapons systems while driving down sustainment costs. Just as DLA procured better operational outcomes through PVs, the services are procuring operational outcomes for the critical maneuver, intelligence and communications equipment they procure and employ. Stryker, C-17 and a host of intelligence and surveillance capabilities are recent examples of this strategy to provide operational capability into the hands of the troops. The F-22 and F-35 loom on the horizon.

USTRANSCOM partnered with DLA and the military services to design a capability to increase the effectiveness and efficiency of DoD freight movements throughout the continental United States. The Defense Transportation Coordination Initiative (DTCI) streamlines transportation services by establishing a long-term relationship with a 3PL, who operates as a singletouch transportation coordinator for DTCI cargo. DTCI 3PL now consolidates government freight movements with other commercial customers providing a centralized, uniform approach for CONUS shipments; improving visibility and operational outcomes while achieving efficiencies (already demonstrating 15 percent savings to DLA in FY08).

PRIVATIZATION

Other recent innovations have focused on contracting for entire commodity supply chains to companies with the integration capabilities and resources required to provide the breadth and depth of services to sustain forces globally. DLA recently privatized aircraft and ground tires; commercial and industrial gases and chemicals and packaged petroleum products. As this article goes to press, all three contracts have been executed and two are delivering support at unprecedented levels to DoD members around the world. A side benefit of this privatization has been the capture of total life cycle costs for these items for the service materiel commands which heretofore spread the costs across a wider range of other repair parts. As the savings potential to DoD are enormous, DLA has asked the services to recommend additional candidate commodities for privatization.

HYBRID SOLUTIONS

Recently, service materiel commands have partnered with DLA to form integrated logistics partnerships (ILPs) to better support readiness while reducing total costs. In this “hybrid contracting solution,” DLA contracts for the commercial integrator of a supply chain at a production site (e.g, depot). This contracted integrator then turns to DLA for sourcing of consumable spares based upon a business case competition (in the near future, DLA will provide the depot level reparables, as well). The integrator then delivers all the parts requirements for a specific end item production line using service materiel command labor, DLA supplies, and the integrator’s owned stock. The results have been impressive. The Defense Supply Center Columbus (DSCC) executed a contract with AM General two years ago for supply support of the HMMWV repair and rebuild at army depots and National Guard maintenance facilities. Costs have decreased by 7.7 percent while line stoppages have been eliminated. DLA has canvassed the services for additional ILP initiatives that could provide further savings.

CONTINGENCY CONTRACTING

Born in the early 1990s as a lesson from Operation Desert Storm, these contracts, known as Capability Augmentation Program (CAP) contracts, began out of a need to provide initial sustainment to forces executing during a contingency operation. First introduced in the Balkans and rapidly expanded by all the services in the 1990s, CAP contracts have evolved and have now become the primary source of initial and sustained logistics in Iraq and Afghanistan. The COCOMs have benefited from the capabilities that m the Army Logistics Civilian Augmentation Program (LOGCAP), Air Force Capability Augmentation Program (AFCAP), and Navy Construction Capabilities Augmentation Program (CONCAP) provide them. Reduced logistics force structure, improved responsiveness from commercial capability, and shared risk have been outcomes that the services have come to rely and count upon as they look to the future. The challenge for service components of COCOMs is to properly balance and transition from the CAP (higher prices and premiums) to the follow-on sustainment contracts provided by other service organizations or DLA. This transition planning and execution is recognized as an area requiring improvement.

JOINT CONTINGENCY ACQUISITION SUPPORT OFFICE

The initiatives above have improved performance and outcomes for the troops. However, as the enterprise capabilities have improved through contracting, the requirement for oversight and contract administration has increased. To meet this growing requirement, OSD recently responded to congressional language aimed at better oversight by establishing the Joint Contingency Acquisition Support Office (JCASO). The JCASO program management initiative will extend contract administration capability forward into COCOM theaters. The JCASO provides a trained, technically competent, deployable cadre of contracting experts who remain operationally focused and ready to “chop to a COCOM” upon order by OSD. The element will serve as the head of contingency contracting reporting to the supported COCOM. The JCASO will provide program management and contract administration of contingency contracting during expeditionary, combat and post conflict/stabilization operations. It will provide synchronization of initial service contracting, coordinating across LOGCAP, AFCAP and CONCAP capabilities and, importantly, guide the transition from contingency to sustainment contracting as appropriate. The JCASO will remain viable and relevant by participating in COCOM sponsored exercises. JCASO is the most recent of several DoD-joint logistics capabilities that were designed to ”extend the enterprise” into the various theaters of operations.

All of these initiatives have produced better operational outcomes, smaller theater logistics footprint, and lower materiel costs. Even where PV, IPV, 3PL, ILP and contingency contracting capabilities have been successful, the requirement for solid transactional procurement remains in DoD. Professional contracting personnel have established bold goals for placement of large numbers of these contracts on long term instruments (LTCs). This initiative will save costs over the long haul and help stabilize the United States industrial base, costs, and stock positions. Finally, DLA recently positioned “enterprise buyers forward”; with operational and industrial clients to provide full range procurement and demand planning capability to support discreet logistics solutions. The recent success of the rapid fielding of the mine resistant, ambush protected (MRAP) vehicle involved the forward positioning and deployment of DLA cataloging, contracting, and supply/demand planners inside the Joint Program Manager Office. This has resulted in the smooth transition from initial production to life cycle support. In the future, we should demand that DLA procurement, cataloging, and supply/demand planners are embedded in service program manager shops to lever DoD Enterprise capabilities.

MATURATION OF SUPPLY CHAIN MANAGEMENT

For much of the past decade we measured performance in the supply chains by speed or logistics response time (LRT). LRT is defined as the time it takes from the customer order to the time the customer receives the item. This method evolved in the department as a means to reduce materiel inventories and take advantage of relatively inexpensive air transportation. Speed was the objective—the means to the end. Logistics officers followed the performance by “tracking a race track” that highlighted segments of a distribution system. Many organizations owned the performance of various segments of the process and the objective was for each segment owner to optimize segment performance to increase speed. Today the pull of using the old race track model is still strong. We must be careful not to optimize one segment, one geographic location, or one distribution lane without first gaining visibility and understanding over the entire inventory, the entire commercial capability to deliver, or the entire cost of an initiative. One important implication of this race track method was that materiel was owned by the government and delivered by the government. This singular focus drove specific behavior by individual players in the supply chain, causing each to focus on their own processes, hold redundant government-owned inventories in government facilities, and cannibalize systems. These singular actions to improve speed collectively pressure sub-optimal performance of the overall supply chain increasing overall inventories and costs.

Today, DoD focuses on performance of the entire supply chain with metrics tied to cost and readiness outcomes rather than speed and internal management of government-owned materiel because faster is not necessarily better. We use metrics such as operational availability (Ao) to provide a measure of time or probability that a system’s capabilities is available when needed, enabling program managers (PMs) to balance capabilities and total cost. For this reason, it is important to have DLA represented in the PM shop from the first stages of an acquisition program. In mature supply chain management, DLA and its partners develop a range of solutions for optimal performance across the supply chain that focuses on DoD costs. As depicted in the chart below, any number of contract solutions can be tailored to determine competitive advantage in logistics. Base Closure and Realignment Commission (BRAC), National Inventory Management Strategy (NIMS), and current warfighter requirements are driving us to further expand and extend the enterprise forward and downward. More and more, contracting is becoming the means to the logistics end.

ORGANIZATION FOR CONTRACTING EXCELLENCE

Two years ago, DLA was procuring and selling close to $35 billion in commodities and services in the DoD. Thousands of contracting employees in the agency were responsible to procure, and deliver the 5.2 million items DLA manages for the department. The total number of contracting professionals had grown in the agency. Yet, with this enormously important mission, DLA had only one full-time Senior Executive Service (SES) member responsible to supervise the contracting mission. Moreover, our agency headquarters and four commodity supply centers were not organized to lead and supervise this key core competency for DLA. We decided to focus responsibility and accountability for acquisition management into a single, standalone directorate at DLA. The creation of the Acquisition Management Directorate (J-7) underscored the importance of contracting and acquisition to the DLA work force in accomplishing its logistics mission. It essentially acknowledged that the agency has two core competencies: supply chain management and acquisition and contracting excellence. As depicted in the chart below, the new alignment is essential to ensuring an acquisition system that maintains integrity through a program of oversight, centralized policy and strategy, acquisition workforce development and continuous improvement.

INFORMATION TECHNOLOGY…THE GREAT ENABLER

Information technology has been the great enabler in DLA’s effort to measure performance of the entire supply chain and develop innovative contracting strategies to reduce logistics footprint and overhead while creating agility and flexibility.

Currently at full operational capacity and functioning similar to an enterprise resource program (ERP) in a Fortune 500 company, Enterprise Business Systems (EBS) enables DLA commanders, employees, and customers to have immediate, real-time access to critical asset information and performance indicators. Customers view automated product information and place orders; employees can customize and transmit demand signals into supply plans used by buyers to procure products. EBS enables all DLA employees, many of whom are deployed with the warfighter and service artisans, to have this visibility and capability. EBS continues to evolve at DLA, including expansion with enterprise procurement (EProcurement) in the next 18 months. The EProcurement module will replace a decades-old legacy system for contract writing. By providing a standard and ERP integrated process and module for receiving requirements, technical data, contract status and financial data from either service legacy or ERP systems, EProcurement will revolutionize contracting. EProcurement can be a strategic step forward for the department by providing DoD vendors a single way of conducting business for sustainment logistics. EProcurement will be a powerful tool, extending contracting capability, information and visibility to DLA and customer personnel.

SUMMARY

Logistics accomplishments have been historic over the past decade. Supply chain management practices in the department have changed and adapted dramatically. New and powerful contracting strategies introduced over the past decade have enabled DoD to support unprecedented deployment tempo and challenging sustainment missions. More and more, logistics and contracting are intertwined. Mature supply chain management requires contracting and acquisition excellence. Continued efforts to “extend the enterprise—linking supply and demand” will require the right balance in government and industry competencies and capabilities. With continued expansion of PBLs, it is crucial for DLA to be involved and engaged up front with PM. By embedding DLA capabilities in PM shops, DoD can better attack the large value streams from redundancies and inefficiencies over entire system life cycles. Balancing cost and readiness requires incorporation of contracting strategies early in the strategy and planning processes.

For the past two years at DLA, we have emphasized extending the enterprise. It means extending the competencies of skilled people, information systems, processes, and capabilities that are resident in our national level organizations— government and industry. The objective is for the national enterprise to satisfy as much of the requirement as possible and improve reliability and responsiveness while mitigating the footprint and risk of the forward deployed troops. This enterprise approach will impact the logistics organizations that operate at theater level today—transforming them into leaner, more flexible organizations that incorporate national level professionals. The objective of our collective work is not “cheaper, faster outcomes,” the objective is “better” outcomes. ♦