Performance Made to Order
Written by Peter Buxbaum
DoD IS RELYING INCREASINGLY ON
PERFORMANCE-BASED LOGISTICS TO REDUCE
COSTS AND IMPROVE OUTCOMES BUT STILL
FACES CHALLENGES SPECIFIC TO INDIVIDUAL
CONTRACT IMPLEMENTATION.
By 2001, DoD identified PBL as its preferred weapon system support strategy. “DoD defines PBL as the purchase of performance outcomes, such as the availability of functioning weapon systems, through long-term support arrangements rather than the purchase of individual elements of support—such as parts, repairs and engineering support,” noted a report released by the U.S. Government Accountability Office in January 2009.
While PBL was first applied to weapons system platforms, DoD now uses it to purchase support for subsystems and components as well. The Defense Logistics Agency, the Air Force, and other services and agencies throughout the U.S. military have entered into PBL arrangements in a variety of settings and participate in PBLs in a multiplicity of contexts. The military attributes the success of performance-based logistics to the establishment of robust relationships with prime contractors and to the identification of proper performance metrics, which vary with each contract.
What types of situations are best for PBLs? “They need to involve commodities that have some sort of velocity in terms of demand,” said Admiral Keith Lippert (Ret.), a managing director at Accenture, former director of the Defense Logistics Agency and commander of the Navy Inventory Control Point. “The services and DLA manage some low demand items, but the private sector is not interested in pursuing contracts for that type of demand pattern.” Accenture advises the services, the DLA and private organizations on the development of business cases for PBLs.
At the Defense Supply Center-Richmond (DSCR), a Defense Logistics Agency facility, performance-based logistics has become part of the landscape. “We participate in both internal and external PBL contracts,” said Cindy Lantz, chief of special projects for DSCR’s Strategic Material Sourcing Group. “We award PBL contracts, we partner with other contracting activities by adding their items to our current contracts, we add our items to their contracts, and we have also partnered with the PBL contractors given authority to order parts from DLA in support of other PBLs.”
A “PHILOSOPHY OF HOW WE BUY”
At the strategic level, PBL arrangements seek to improve weapons systems readiness by acquiring a desired level of operational performance and by capitalizing on integrated logistics chains and partnerships. “A properly structured PBL incentivizes system reliability and accelerates supply chain speed by transferring sustainment risk to the support provider,” said Lantz. “PBL is not looking to prescribe how-to but does seek to synchronize all integrated logistics elements to achieve specified performance outcomes. A PBL acquisition designed to enhance the support for a portion of a weapons system platform should be an affordable integrated package based on attaining output of measure such as weapons systems availability, rather than focusing on separate inputs of measures such as parts, training, maintenance and technical services.”
The contrast to PBL arrangements is the traditional way of procuring parts and maintenance support, sometimes referred to as “transactional.” “In a transactional setting, the contractor would be sent a component and asked to fix it in 45 days,” explained Gus Urzua, a Boeing vice president and its program manager for the Air Force’s C-17 global sustainment program.
Under that scenario, contractor performance would be deemed satisfactory so long as repaired parts were returned to service within the prescribed time. “PBL says the performance outcome is guaranteed,” added Urzua. “At a system-level PBL, the military tells the contractor to figure out how to make it happen and doesn’t micromanage performance. It’s like buying a car that is guaranteed to perform for a certain number of years and mileage. That is what you are paying for.”
The Air Force Materiel Command has entered into PBLs on every level, from the strategic to the commodity, said Ross Marshall, the command’s deputy director of logistics. “The basic approach is to buy outcomes as opposed to products or services,” he explained. The outcome the Air Force looks for, first and foremost, is increased reliability of the logistics system, followed by reduced costs and the shrinking of the Air Force logistics footprint in the form of inventory and storage space.
In a nutshell, PBL is a “philosophy of how we buy,” explained Kate Vitasek, managing partner at the consultancy Supply Chain Visions and lead researcher and faculty at the University of Tennessee’s performance-based logistics program. “The areas with the biggest opportunities for improvements are those that have a lot of inefficiencies. If the government and contractor are not happy with the current level of performance or cost structure and believe there is a more optimal solution, a performance-based approach can help unlock incentives to tap into that potential.”
Lippert agreed with Vitasek’s assessment. PBLs come to improve situations, he said, where “the traditional way of supporting weapons systems and commodities through DoD was not providing adequate readiness.” That led DoD to “look at ways to improve readiness and reduce costs.”
From a private industry perspective, PBLs allow contractors “to leverage the military supply chain requirements with our commercial integrated supply chain,” said Katell Thielemann, general manager, Platform Logistics at Honeywell Technology Solutions Inc. “That enables us to implement the same improvements we are making for our commercial customers on our products for our military customers. We provide a winning combination of results that increase reliability, durability and availability, as well as lower costs over the life of the contract.”
DLA’S INTERNAL AND EXTERNAL PBLS
Given the preference the Department of Defense has articulated in favor of PBLs, it is not surprising to find PBL arrangements in place for many different kinds of services. The Defense Supply Center-Richmond currently has a PBL arrangement with General Electric Aircraft Engines for the sustainment of the F404 engine. “The goal of this effort was to increase material availability, reduce inventory and backorders, and capture improvements for the F404 engine,” said Lantz. “There are 2,483 national stock numbers on this contract with a benefit to both DLA and the customer of streamlined procurement processes. Requisitions are processed and awarded within 24 hours. The program has averaged around 92 percent supply availability and has seen a decrease in inventory costs of roughly 21 percent.” Externally, DSCR also participates in the Navy’s F/A-18 E/F integrated readiness support team (FIRST) PBL with Boeing. In this case, DSCR is actually acting as a supplier of the prime contractor of the PBL and not as a direct party to the arrangement.
“This contract allows for customer direct support,” Lantz explained, “with delivery for priority items within four days and others within 16 days, allowing the program manager to continue to support the maintenance line. Some of the benefits derived from DLA’s participation in this PBL include better obsolescence management, reduced inventory requirements and reliability enhancements.” In the case of this participation in external PBLs, DSCR strives to become the exclusive source of supply for specific goods and services through nonbinding memoranda of understanding with its military customers, the armed services. “The goal is to be the best value source of supply for the PBL and to improve the performance of the PBL as a whole,” said Angela Curtis, a business development specialist at DSCR. The F-16 sustainment program with Lockheed Martin and the C-5 avionics modernization program with Boeing are other examples of how DLA participates in PBLs as a supplier.
PBL RESULTS
The enthusiasm of the U.S. military for performance- based logistics is backed up by some significant results. In 2007, the Air Force analyzed the business case for the PBL and determined it generated savings of $38 million, said Creamer, most of which has been reinvested in the program. Under the Northrop Grumman Aerospace Systems’ E-8C Joint STARS Total System Support Responsibility (TSSR) program Northrop Grumman Technical Services provides Program Depot Maintenance for the E-8C fleet at their Lake Charles, La. facility.
“They have established an outstanding programmed depot maintenance capability for the E-8C platform,” said Gary Hogarth, Northrop Grumman Aerospace Systems program director. “This capability was compared to other depot maintenance programs during a recent benchmarking initiative and NGTS met or exceeded productivity rates, concurrent modification/upgrades and workmanship criteria. Aircraft deliveries have been on or ahead of schedule and the quality has been excellent.”
The program uses two metrics to measure results: depot possessed aircraft and programmed depot maintenance aircraft quality. The first requirement “is to have no more than three jets average in PDM at a given time,” Hogarth explained. “NGTS has done better than the requirement since its inception.” PDM Aircraft Quality refers to having no more than an average of .8 major defects per delivered aircraft. NGTS has done better than the requirement since its inception.” The program is also measured based on subjective evaluations of program control, program management, and management effectiveness.
The Air Force’s F-22 PBL with Lockheed Martin is also considered to be highly successful. The program has “experienced a 40 percent reduction in costs and seen aircraft availability improved by nearly 20 percent, which is huge,” said Marshall.
The C-17 sustainment program, which is managed by Boeing, has saved the Air Force $700 million over 10 years, according to Boeing’s Urzua, thanks to a 20 percent reduction in cost per flight hour, which has been affected by the PBL. Aircraft availability was also increased from 72 percent to 75 percent.
“Two or three percentage points doesn’t sound huge,” Urzua noted, “but each percent is one more airplane available to be flown. At $200 million a piece, that adds true value.” In another metric used to measure the C-17 program effectiveness, depot schedule effectiveness was measured at 85 percent, while parts availability was greater than 90 percent.
CHOOSING THE RIGHT METRICS
A successful PBL begins with “doing a very rigorous business case analysis,” said Lippert. This involves measuring “what it currently costs DoD to provide support versus what it would cost the private sector. If it passes in terms of readiness and/or costs, you have a compelling case to go ahead and pursue the PBL.”
Another key to success, according to Creamer, is “measuring the right things,” a task that is easier said than done. An important element in getting performance metrics right, he said, is to continually re-evaluate and redefine them. “There is always an interactive aspect to this process,” he said.
“Performance in any contract, whether it is a PBL or other type contract, is based on our customer’s needs, wants and budget, and therefore varies between the services,” said DSCR’s Lantz. “We work together with our customers to understand and establish the goals and desired outcomes.
“The significant objective of a PBL initiative is to reduce total ownership costs,” she added. “Under a long-term contract for supplies and services, we should be able to realize cost savings in the areas of pricing levels, inventory holding costs, and infrastructure reductions, while also working to decrease MICAPs [mission impaired cause awaiting parts], increasing reliability, time on wing, and overall performance. Specific metrics for quality and responsiveness should be developed to measure and monitor performance.”
The Air Force Materiel Command utilizes different performance measures for varying situations. A PBL for sustainment of secondary power units on aircraft utilizes an incentive known as “power by the hour,” in which the contractor is paid based on the length of time the component remains in service.
Another PBL, which involves supplying landing gear components, had the objective of reducing the Air Force’s logistics footprint. “This involves eliminating a lot of space requirements for inventory storage,” said Marshall.
For PBLs to work, the contract must be structured to achieve its desired outcomes. “The military wants to optimize processes and the better the contractor achieves the specified outcomes the more money it makes,” said Vitasek. “Contractors are in business to make money. If the deal is structured to provide the contractor with the potential to make more money, it is rare that they don’t figure out a way to do that.”
But some thought has to be put into what outcomes to reward. “Perverse incentives,” such as rewarding speed without regard to quality, must be avoided, Vitasek noted. Nor is there any need to reward 100 percent performance if that is not required and cost-effective. The contract also has to be long enough to justify the contractor’s investments in infrastructure. Without certainty of a future revenue stream, a contractor might make investments that could suboptimize the process as a whole.
Above all, it is the big picture that must drive performance metrics. “If you have a weapons system that is not performing at an optimal level and you do a PBL that is based on parts availability, you’ve missed the picture,” said Vitasek.
PBL CHALLENGES
From the contractor’s standpoint, PBL success involves managing a cultural shift from a transactional to a performance mindset. “We ourselves were structured and had a mindset that was transactional,” said Boeing’s Urzua. “We were oriented toward turning parts around within a given number of days. What drives a performance-based approach is meeting customer expectations and getting the best bang for the buck. The king today is aircraft availability, and we are constantly thinking about this and looking at data for opportunities to improve our processes.”
For Urzua, the key feature of a PBL is the “single point of accountability for a weapons system.”
“In the past the Air Force was trying to figure who was accountable for any given part on an airplane,” he explained. “With the C-17 PBL, we at Boeing are accountable for all the work performed. We oversee performance levels and make sure that quality, schedule and costs are maintained. That keeps the PBL whole and not fragmented.”
Marshall attributes the success of PBLs to “robust public-private partnerships” while acknowledging that not all PBLs are created equal. “My overall impression is that PBLs have worked,” he said. “That is why the Air Force continues to pursue them as a mainstream strategy. But if you look closely you will see varying degrees of success.”
Still, Marshall refused to characterize any of the Air Force PBLs as failures. Instead, he maintained that a less successful PBL is one that merely met its performance goals rather than exceeding them. PBL contractors are provided with great incentives to meet and exceed performance goals, and most of them exceed expectations, he contended.
DSCR’s Lantz agreed with Marshall’s assessment. “A less than successful PBL contract?” she said. “I would not say we have had one.” Lippert also agreed that the vast majority of PBLs have succeeded and that those that failed to make their goals lacked a “business case analysis which was done properly and thoroughly.” That situation could create a disparity between “what could be achieved versus what business case said could be accomplished.”
But, Lantz added, “There is a continual challenge to cover the common items that cross weapon systems as each service’s needs, usage and desired outcomes are different. We are always working to develop joint metrics for improvement throughout the services. However, the need still exists to tailor those metrics to the specific activity. It is important to have a general agreement with the customer as to the goals and objectives that should be accomplished.”
Cases where military services use the same components and subsystems across different platforms is precisely where performance-based logistics is going in the future, according to Thielemann. “We believe adopting logistics outcomes for a class of components will not only leverage commercial best practices, but also strengthen buying power of the entire DoD,” Thielemann said. “The military services fight together as integrated units of action on the battlefield in ways never before envisioned, and collectively, we should continue to do the same for logistics.”
Marshall said he has found it interesting to watch the development of the variety and forms of PBLs from a systems level perspective like the B-2 and F-22 programs to the power by the hour program at the commodity level. “PBLs provide the opportunity to take a different approach to buying that reduces costs by focusing on performance,” he said. “What you find when you study PBLs is that no one size fits all. Each PBL is a little different and needs to be tailored and shaped to the performance required for that particular program.” ♦
