Why Performance Based Logistics For The Defense Industry is a Fake Trend

PBL2.jpg
Performance Based Logistics is a much discussed concept in the military and among defense contractors. However, this post questions whether it is an authentic trend based upon the incentive structures of the military and their suppliers.

PBL as a Trend

PBL has become a strong trend among the management class of companies in the A&D environment PBL. PBLbased upon a kernel of truth that may or may not spread from management conferences. This article discusses PBLand makes some educated guesses as to where PBL might be in 5 years from now.

Basis for PBLis introduced as a way to improve service levels and increase the responsibilities of supplier service parts management and in some cases service part service operations. In this way it may be viewed as a form of outsourcing where the part planning and management is moved from the client to the suppliers. In cases where the military is the customer, it can be seen as a light form of military privatization.

Supporting Case Studies

The outstanding case study for PBLin the A&D environment is Rolls Royce. While not called “PBL,” Rolls’ TotalCare engine service program is in fact a long term service contract where Rolls controls the engine service parts inventory and in a way goes beyond PBLby offering direct guidance and instruction when certain parts are due for maintenance. Rolls actively monitors over 3000 engines aggregating a strong level of service intelligence about engine maintenance. Rolls has, by most accounts, leveraged this capability to grow its market share, take business from larger competitors and reinforce the premium reputation of its industry leading engines.

Deviations Between the Strong Case Study and Other Projects PBLClients and Environments

It would be a mistake to assume that the success at Rolls can be duplicated to every A&D supplier or can be generalized to other areas outside of engines. By comparison there were certain organization differences between Toyota and US manufacturing firms as well as geographic differences between the locations of the suppliers that make up the supply base in Japan vs. the US that prevented other companies from ever duplicating Toyota’s success with JIT, regardless of decades of attempts acrossthousands of factories. What this means is that the case for PBLwith Rolls must be observed in terms of how Rolls as a company, and Rolls business is different than other companies that want to implement PBL type programs. Some of differences are listed below:

  1. Rolls is only managing a small proportion of the overall service
parts of an airplane. They are providing 100% of the parts for the
engines under the TotalCare program. This means that a 95%
availability actually does mean a 95% availability for the engine as
there are no other suppliers. However, this is not true with companies
that provide the entire airplane. Therefore it must be considered that
Rolls is solving a much more simple problem than a supplier that
supplies the entire airplane would be.
  2. Rolls appears to be on the outward edge of competence within the
industry. Secondly, this is not a new philosophy for Rolls. Their
”Power by the Hour” program, which is essentially similar to the
TotalCare program dates at least back to the 1930’s. This means that
Rolls has been organizationally oriented towards service for
generations. This is not necessarily the case for other A&D suppliers.

The Cultural and Business Model Changes Required

We have found several articles on how well this new concept fits into the existing culture of A&D suppliers. The consensus is that a great deal of cultural change will be required to move A&D suppliers to a PBLenvironment. However, less discussed is how PBLfits into A&D, and particularly defense contractor’s business models. There is probably good reason for this. The reality of the defense service partsbusiness model would not be very popular if it were generally known. Enough documentation is available to demonstrate a strong and lengthy line of continuity in service parts pricing.

Service parts are priced at the beginning of the program, and in subsequent years the service parts rise terrifically. This is true of so-called unique parts, but is also true of what appear to be commodity items. Many of the oversight bodies for regulating part increases were removed in past 6 years in particular, but have beeneven before then as the public furor over military contracting overcharging died down from a decade and a half ago. Therefore, the part price escalation continues.

If this is a strategy of defense contractors, and there is good evidence that it is, its difficult to see how they would want to move towards a PBLenvironment. The PBLcontract would certainly be for several years, and if defense contractors intend to continue their price increases, the PBLwould need to reflect that year-to-yearincrease. This would raise flags, so again its not something a defense contractor would want to do.

Power Dynamic

There is a hidden assumption in the discussion of PBLin relation to defense. It presumes the DLA is very powerful vis-à-vis its suppliers. Certainly as a monopsony (one buyer, many sellers) the DLA could be a powerful actor, if it wanted to be. However, there is a good deal of evidence that it does not want to be. The existence of strong relationship ties between the DLA and the defense contractors and the fact that at the decision making level many of the DLA and more broadly the procurement decision making apparatus in the armed forceslook to defense contractors for their next job results in the military being less willing to press their claims and hold defense contractors accountable. The evidence for this is the large year to year increases in service parts costs the military accepts, combined with the large cost over-runs in weapons systems they accept, and the well known policy they have for not going back to defense contractors and asking for refunds when parts break far before their stated expected lifetimes. If the military will not confront defense contractors on these more basic issues, its difficult to see how they intend to punish the contractors for missing service level targets that are part of enforcing a PBLcontract.

Coming Trends Limiting PBL’s Adoption for Defense

The US is at the high end of a cyclical spending upswing due to a highly pro-military administration and a war with two counties. However, there are a number of bills that are coming due for these wars that have not been fully funded.

There is great evidence that the veterans health care and long term care have been greatly under-funded. Secondly, a large amount of equipment which is neither service-able, nor economically repairable, has not been written off of the books. When these costs become apparent, the US military may move from strategy to having contractors provide “PBL” to continuing to do it themselves (in order to save money). Extended service contract is a luxury good, Rolls is considered an excellent provider of “PBL” type service, and however it is also widely recognized as expensive. This is to say that the US military may move away from PBLitself when it has less money to spend. For the reasons given above, PBL does not appear to be a trend with any staying power.

References

On the lack of funding for the war

http://www.cfr.org/publication/13418/cq.html

On the need for procurement reform

http://www.pogo.org/p/defense/do-990920-reform.htm


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Performance Based Logistics, Rolls Royce and Power by The Hour

PBL1.jpg

PBL and Alternatives

Performance Based Logistics is a strategy for system support. Instead of goods and services a supplier is paid for a guaranteed level of performance and system capability. The supplier often has to guaranty the performance at lesser costs but has more control over all logistics elements. The performance is declared in Performance Based Agreements.- Wikipedia

Performance Based Logistics can be in the commercial area of A and D or in the government/military. A quote from the 2006 Quadrennial Defense Review Report indicates the orientation of the Department of Defense regarding PBL.

There is a growing and deep concern in the Department of Defense’s senior leadership and in the Congress about the acquisition processes. This lack of confidence results from an inability to determine accurately the true state of major acquisition programs when measured by cost, schedule and performance. The unpredictable nature of Defense programs can be traced to instabilities in the broader acquisition system. Fundamentally reshaping that system should make the state of the Department’s major acquisition programs more predictable and result in better stewardship of the U.S. tax dollar.

PBL has become a strong trend among the management class of companies in the aerospace and defense environment. This paper discusses PBL and makes some educated guesses as to where PBL might be in 5 years from now.

Basis for PBL

PBL is introduced as a way to improve service levels and increase the responsibilities of supplier service parts management and in some cases service part service operations. In this way it may be viewed as a form of outsourcing where the part planning and management is moved from the client to the suppliers. In cases where the military is the customer, it can be seen as a light form of military privatization.

Supporting Case Studies

The outstanding case study for PBL in the aerospace and defense environment is Rolls Royce. While not called “PBL,” Rolls’ TotalCare engine service program is in fact a long term service contract where Rolls controls the engine service parts inventory and in a way goes beyond PBL by offering direct guidance and instruction when certain parts are due for maintenance. Rolls actively monitors over 3000 engines aggregating a strong level of service intelligence about engine maintenance. Rolls has by most accounts leveraged this capability to grow its market share, take business from larger competitors and reinforce the premium reputation of its industry leading engines.

Deviations Between the Strong Case Study and Other Projects PBL Clients and Environments

It would be a mistake to assume that the success at Rolls can be duplicated to every aerospace and defense supplier or can be generalized to other areas outside of engines. By comparison there were certain organization differences between Toyota and US manufacturing firms as well as geographic differences between the location of supplier base in Japan vs. the US that prevented other companies from ever duplicating Toyota’s success with JIT, regardless of decades of attempts across probably thousands of factories. What this means is that the case for PBL with Rolls must be observed in terms of how Rolls as a company, and Rolls business is different than other companies that want to implement PBL type programs. Some of differences are listed below:

  1. Rolls is only managing a small proportion of the overall service parts of an airplane. They are providing 100% of the parts for the engines under the TotalCare program. This means that a 95% availability actually does mean a 95% availability for the engine as there are no other suppliers. However, this is not true with companies that provide the entire airplane. Therefore it must be considered that Rolls is solving a much more simple problem than a supplier that supplies the entire airplane would be.
  2. Rolls appears to be on the outward edge of competence within the industry. Secondly, this is not a new philosophy for Rolls. Their “Power by the Hour” program, which is essentially similar to the TotalCare program dates at least back to the 1930’s. This means that Rolls has been organizationally oriented towards service for generations. This is not necessarily the case for other A&D suppliers.

The Expertise Required

Developing a PBL contract requires more than the capability to run an advanced service parts planning system like MCA or Servigistics. It also requires a way to cost the PBL contract. This is so the firm can determine the profitability of each contract and can use this information to adjust future contracts. SAP Project Systems is an SAP’s software solution to cost the transactions associated with a contract. The difficulty comes in tying the specific transaction to the specific contract in question. To understand SAP Project Systems more, see this post.

http://www.scmfocus.com/sapplanning/2009/05/03/planning-with-project-systems/

Service Parts and PBL

PBL.jpg
PBL and Alternatives

Performance Based Logistics is a strategy for system support. Instead of goods and services a supplier is paid for a guaranteed level of performance and system capability. The supplier often has to guaranty the performance at lesser costs but has more control over all logistics elements. The performance is declared in Performance Based Agreements.- Wikipedia

Performance Based Logistics can be in the commercial area of A&D or in the government/military. A quote from the 2006 Quadrennial Defense Review Report indicates the orientation of the Department of Defense regarding PBL.

There is a growing and deep concern in the Department of Defense’s senior leadership and in the Congress about the acquisition processes. This lack of confidence results from an inability to determine accurately the true state of major acquisition programs when measured by cost, schedule and performance. The unpredictable nature of Defense programs can be traced to instabilities in the broader acquisition system. Fundamentally reshaping that system should make the state of the Department’s major acquisition programs more predictable and result in better stewardship of the U.S. tax dollar.

PBL has become a new proposed way of doing business among the management class of companies in the A&D environment. This paper discusses PBL and makes some educated guesses as to where PBL might be in 5 years from now.

Basis for PBL

PBL is introduced as a way to improve service levels and increase the responsibilities of supplier service parts management and in some cases service part service operations. In this way it may be viewed as a form of outsourcing where the part planning and management is moved from the client to the suppliers. In cases where the military is the customer, it can be seen as a light form of military privatization.

Supporting Case Studies

The outstanding case study for PBL in the A&D environment is Rolls Royce. While not called “PBL,” Rolls’ TotalCare engine service program is in fact a long-term service contract where Rolls controls the engine service parts inventory and in a way goes beyond PBL by offering direct guidance and instruction when certain parts are due for maintenance. Rolls actively monitors over 3000 engines aggregating a strong level of service intelligence about engine maintenance. Rolls has by most accounts leveraged this capability to grow its market share, take business from larger competitors and reinforce the premium reputation of its industry leading engines.

Service Parts Planning and Project Costing

Developing a PBL contract requires more than the capability to run an advanced service parts planning system. It also requires a way to cost the PBL contract. This is so the firm can determine the profitability of each contract and can use this information to adjust future contracts. SAP Project Systems is an excellent way to cost the transactions associated with a contract. The difficulty comes in tying the specific transaction to the specific contract in question. Generally the SAP system must aggregate Stock Transport Orders, Service Orders and Purchase Orders to specific contracts and there are hierarchies to set up on the PS side in order to report properly on the contract.