Performance Based Logistics

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Performance Based Logistics

20 March 2007

• Capabilities for Delivery

Where Innovation Operates
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Questions to be answered

• What forces are driving the move to PBL in the
  Government and AD industry?
• Why have AD integrators struggled in capturing
  and delivering on PBL agreements?
• Where has the traditional supply chain fell
  short?
• What will drive success in PBL across the
  organization?
• Metrics
• Better ability to identify, articulate and
  quantify risk
• IT and business process alignment with
  sustainment
• Contracting/acquisition process

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Introduction to Presenters
Chris Kulp, Principal
Donald C. Miller, CDR, SC, USN (Ret)

• Leaders in developing strategies for Performance
  Based Logistics
• 15 years experience in commercial high-technology
  industry in product development and capturing
  after-market business
• PRTM co-authored with the DUSD-ATL the DoDs
  Performance Based Logistics Policy
• Worked with OEMs and integrators to help them
• Develop their PBL strategies
• Capture PBL opportunities
• Perform modeling, analysis and risk abatement to
  enable best-value delivery on PBL requirements

• 22-year Navy career in Supply Chain and
  Operations Research
• Modeling and Operations Analysis Team Lead
  Analyst for Logistics Command and Control
  projects, including ONRs Ground Logistics C2 and
  Naval Logistics C2
• Lead for LMs Operational Effectiveness
  Engineering IPT
• Technical Lead for development of the PBL
  strategy for Lockheed Martins Littoral Combat
  Ship (LCS) Program
• Manages the MS2 SCMTM supply chain APS

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The Driving Forces behind PBL
The rise of PBL and Performance Based
Partnerships are the direct result of fundamental
changes in government and the AD communities
Changes in the Government
Shifting emphasis from cutting edge weapon
performance to cost-efficient operational
effectiveness Fewer New Platforms and a move to
Commercial Off-the-Shelf Systems Challenges
overcoming parts obsolescence
Desire to extend weapon systems lifecycle Aging
workforce and focus on shifting to outsourcing
non-core activities High operations tempo
straining existing government supply chain and
repair capabilities
PBL and Performance Based Partnerships
Defense Industrial Base consolidation has
broadened support capabilities of AD
companies Drive to increase revenue and margins
from new lines of business like support and
sustainment
New Systems are more complex and highly
integrated requiring increase AD involvement
for optimum support Increasing expertise in
performance based relationship with commercial
customers
Changes in the AD Community
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We see AD companies struggling to treat PBL as a
product of similar importance to acquisition
programs
Flattening/declining acquisition budgets will
force companies to make this decision, and assess
their resolve to pursue the PBL market
Traditional AD approach to PBL Add-on to
acquisition program/opportunistic pursuit
New AD approach to PBL PBL as a product

• By tying PBL relationships to assets produced by
  the company, AD firms PBL business is limited
  by the acquisition cycle
• Stove-piped pursuits of PBL opportunities
  proliferates processes and IT systems, increasing
  cost and reducing margins
• Investment in PBL capabilities often occurs after
  contracts are awarded, not in preparation and
  positioning for award

• AD companies can create a differentiated,
  branded offering by treating PBL as they would a
  physical product, including
• Product lifecycle management
• Investment at the beginning of the product
  lifecycle
• Continual improvement based on emerging
  technologies and changing customer demands
• Leveraging investments across product lines to
  increase capability and reduce cost

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From a supply chain perspective, many AD
companies do not appreciate the differences
between Manufacturing and Sustainment

• While AD firms have deep experience with
  operating manufacturing supply chains, there are
  distinct differences between the two supply chain
  operating models

A SCOR-based assessment highlights that these are
highly integrated supply chains that compete on
different metrics
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From our in depth work with AD firms, we
recognize that key issues must be addressed to be
successful in the PBL arena
We measure PBL success in three categories
Internal-facing
Customer-facing
Margin ProfitMaximization
Competitive Differentiation
Risk Management
and have identified five key drivers of
successful PBL performance
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Metrics Benchmarking
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Risk Mitigation
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Process IT Integration
Process IT Integration
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PBL Contracting
Brand Management
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Success Driver 1 Metrics and
BenchmarkingEstablishing the metrics hierarchy
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Customers
Supply Chain Network
Vendors
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Success Driver 1 Metrics and BenchmarkingPBL
Benchmarking Value Proposition
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• Benchmarking works with performance metrics to
  drive value
• Capability to understand where individual
  programs can realize significant margin and/or
  performance gains, and what business practices
  are needed to realize these gains
• Return Bottom line margin growth for PBL
  programs
• Ability to understand, within a program and
  cross-program, the business process capabilities
  being utilized and their impact on
  cost/performance
• Return Ability to factually and quantifiably
  understand PBL capabilities and gaps, enabling
  meaningful investment decisions to drive PBL
  growth
• Capability to describe the program performance
  relative to competitors and an AD peer group
• Return Fact-based, referencable way to
  articulate company performance to current and
  emerging customers
• Capability to compare and contrast, in a
  meaningful way, the relative cost and delivery
  performance across programs
• Return Ability to identify which business
  practices are driving value and where they can be
  mirrored to fully leverage corporate
  capabilities

PRTM ability to go beyond the quantitative
benchmarks, linking gaps to the underlying
enabling practices drives competitive advantage
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Success Driver 2 Risk MitigationPBL
agreements expose providers to new risks
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• Delivering performance vs. products requires an
  integrated understanding of the greater set of
  risk drivers and the ability to make trade-offs
• Customer-facing Risks Customer interface and
  operating environment risks (e.g., OPTEMPO,
  surge, duty cycle, usage)
• Execution Risks Internal processes, data and
  tool alignment with the desired performance
  metrics (internal and external)
• Design Risks Complexity, reliability and
  sustainability of the design (e.g., obsolescence
  impact)
• Supplier Risk Industrys capability to meet the
  cost, speed, and reliability requirements and the
  inherent volatility of these capabilities
• Mitigation
• Develop an integrated framework to identify,
  quantify, mitigate and manage the
  cross-organizational PBL risks
• Enable PBL owners to make the cost, performance
  and risk tradeoffs required to drive margin and
  performance

Internal and External Metrics
Customer Risks
Execution Risks
Design Risks
Supplier Risks
PBL agreements introduce new elements of risk
which must be mitigated to ensure optimal program
performance
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Success Driver 2 Process IT IntegrationPBL
execution requires capabilities beyond
traditional SCM
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• While supply chain management is a key component
  of the PBL value chain, there are additional
  capabilities that also drive value for the
  customer and the provider

Sustainment Supply Chain Activities
Product Lifecycle Management
Failure Analysis
Multi-indenture, Multi-echelon Modeling
Strategic Sourcing
Work order Management
Higher Margin, Differentiated
Obsolescence Management/DMS
Configuration Management
Maintenance Planning Sourcing
Traditional Supply Chain Activities

• Order Management
• Inventory Management
• Forecasting and Planning

• Warehousing
• PHST
• Delivery
• Reverse Logistics

Lower Margin, Commoditized
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Success Driver 2 Process IT
IntegrationProcess is the foundation for
successful PBL execution
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• Customer requirements (encapsulated in use cases)
  must drive a set of detailed processes that
• Are common across the enterprise
• Embrace best practices
• Form the basis for IT investment/development
  decisions

Use Cases
Level 1 Processes
Level 2 Processes
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Our experience with AD firms has identified five
key capabilities for sustainment execution

• Just as an expanded view of processes is required
  to successfully execute PBLs, IT solutions must
  expand beyond supply chain management to
  successfully enable these processes
• Our experience with designing IT infrastructures
  for PBL execution has identified five key
  capabilities
• Work order and performance management
• Sustainment solution management
• Service management
• Materiel management
• Configuration management

Required Capabilities
Configuration Management
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Success Driver 2 Process IT
IntegrationCommon IT solutions drive business
and value
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Currently many programs develop a logistics
solution from the ground up to meet its
particular needs
A common solution reduces per-program costs for
implementation and maintenance
CostSavings
Program n Solution
Program n
Program 2
Program 2Solution
Total Cost Time to Market
Program 1
Savings realized in the form of increased bid
competitiveness and customer satisfaction
CommonSolution
Program 1Solution

• High cost per program (for development and
  maintenance)
• Less feature-complete due to time and budgetary
  restrictions
• Diminished ability to compete for new business
  due to cost structure

• Larger initial investment with low per-program
  cost
• Single code base reduces development and
  maintenance expenses, and increases functionality
• Ability to re-use developed functionalities
  across programs

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Success Driver 2 PBL ContractingContracting
as a make-or-break factor in PBL relationships
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• Industry must also overcome initial contractual
  hurdles
• Must overcome initial pricing and investment
  hurdles
• Internal BCA is key to success
• Pre RFP work establishes the playing field
• Engage small business partners early in the
  process
• Precision in terms and data feeds is a must

• Acing the BCA is a critical step to
  demonstrating PBL value to the contracting
  officer
• Most government entities tied to cookie-cutter
  BCAs
• Incentive structure must be clearly delineated
• Identify the high margin activities
• Determine how the contract can evolve
  dynamically
• Make the Case for the Platform

Growing PBL Maturity leads to improved
performance for the government and increased
profits for their industry partners
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Success Driver 2 PBL ContractingContracting
as a make-or-break factor in PBL relationships
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• The contractual process can be proactively
  governed
• Creates improvements in time certainty
• Yields measurable improvement in both performance
  and cost effectiveness
• Business Case Analysis is a two way street
• DoD BCA
• Industry BCA
• PBLs should place high margin opportunity and
  strategy at a premium
• Prioritize the opportunities for the biggest
  payoff
• Leverage PBLs as enablers for an organizations
  top strategic initiatives
• PBL growth is governed across a steadily paced
  maturity model
• Benchmarks and metrics identify maturity status
  and future potential
• PBLs can evolve into maturity if contractual
  agreements are appropriately drafted
• Properly drafted contracts design an agreement
  that ensures renewal making it sticky

Survey the Battlefield
Agree on Governance Process
ID High Value Targets
Understand the Price Risks
Bake in Next Award
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Success Driver 2 Brand ManagementThe PBL
market is characterized by confusion and
homogeneity
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• Customers are confused by those offering PBLs
• Who is the PBL market leader?
• Are they truly the best, or the best at creating
  perception?
• How do I distinguish the best PBL brand for my
  needs?
• Is your companys PBL a recognizable competitive
  advantage?
• Without Brand identification, PBL offerings are
  substitutable commodities
• No recognized PBL market leadership
• No standards to differentiate the offerings
• The same building blocks are offered by many
  Primes
• Each Program defines the brand up or down
• PBL pretenders make matters worse
• No Intellectual Property recognized
• PBL knock-offs are emerging
• Makes balancing Risk with Reward difficult

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Success Driver 2 Brand ManagementPBL
confusion creates an opportunity for
differentiation
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• PBL excellence drives sales and provides lift
• Success in sustainment will bleed over to new
  system competencies
• Leaders will exert economic pressure on followers
• Drives a growth in margin over time
• Brand management drives a richer customer set for
  each firm
• Drives repeat customers
• Attracts customers who a better match for the
  sustainment offerings
• A brand basis of competition allows leaders to
  create barriers to competition
• Allows the market to define the PBL offerings and
  companies to self-select
• Establishes market leadership position, or niche
  leadership

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Summary/QA