Material Management and

Cover Article Acquisitio of Property Through a Material Maagemet ad Accoutig System (MMAS) by Richard Culbertso, Three Rivers Chapter ad Waye Norma, CPPM, CF, Los Ageles Chapter Backgroud ad brief history of the clause: The MMAS clause is a sigificat clause for the property professioal. While very rich with cotet it is ot easily uderstood whe read out of cotext. The clause is from DFARS a DoD Supplemet of the Federal Acquisitio Regulatio (FAR) ad was first published i 1989 uder subpart 242.72--CONTRACTOR MATERIAL MANAGEMENT AND ACCOUNTING SYSTEM with a correspodig clause 252.242-7004. Prior to 1989, material maagemet requiremets uder multiple cost objectives were provided i FAR 45 Govermet Property, specifically paragraph FAR 45.505-3(f) Multicotract cost ad material cotrol. Essetially the requiremets of the cotractor s MMAS ad their property cotrol system were combied uder property maagemet ad the Govermet s property admiistrator, icludig fiacial ad associated audit fuctios. Whe the MMAS clause was published i 1989, the primary resposibility for material maagemet oversight for DoD cotracts was essetially withdraw from the govermet s property admiistrator (FAR 45) ad retaied by the admiistrative cotractig officer uder DFARS 242. 8 The Property Professioal Volume 26, Issue 1

The DFARS as writte; however, did ot explai how to recocile the coflictig directio betwee the FAR ad the DFARS. I practice the Multicotract cost ad material cotrol system was ever placed i operatio by the cotractor commuity ad was fially removed from FAR 45 whe the last major rewrite of the FAR 45 occurred i Jue, 2007. Whe dealig with material, practitioers must cosider ad recocile requiremets ad itet of both the FAR ad the DFARS. Also view ad uderstad variatios i the regulatios pre ad post chages prompted by the Busiess Systems Rule. Itet ad Requiremets The primary purposes of a MMAS is to have a system to acquire, maage ad accout for material to support the costs ad schedules of multiple cotracts awarded to a cotractor, but to particularly miimize the material ad admiistrative cost o cotracts. Uder DoD regulatios, cotracts that meet the simplified acquisitio threshold (i.e., $150,000 see FAR Part 2 Defiitios) -- for the acquisitio of ocommercial items ad are either Cost-reimbursemet cotracts; or Fixed-price cotracts with progress paymets. These cotracts must iclude the MMAS clause DFARS 252.242-7004. The cotactor s system must satisfy the criteria idetified paragraph (d) System criteria. The MMAS shall have adequate iteral cotrols (this is the desired outcome) to esure system ad data itegrity It is importat to have a good uderstadig of what iteral cotrols are. The iteral cotrols requiremet is ot oly preset i the MMAS clause but also the Govermet Property Clause FAR 52.245-1(b) Property maagemet. (1) The Cotractor shall have a system of iteral cotrols Iteral cotrols are importat ad go beyod protectig assets ad data itegrity. The term has broad meaig ad is required for publically traded etities ad Govermet etities ad is defied i geerally accepted auditig literature, such as the 1992 ad 2013 publicatios of the Committee of Sposorig Orgaizatios of the Treadway Commissio (COSO) -- Iteral Cotrol- Itegrated Framework ad the US Govermet s GAO Yellow Book. The fudametal requiremets have remaied cosistet over the years there are three major elemets. The short versio per the GAO Yellow Book a orgaizatio s system of iteral cotrol desiged to provide reasoable assurace of achievig effective ad efficiet operatios, reliable fiacial ad performace reportig, or compliace with applicable laws ad regulatios. [Emphasis added] I may compaies, MMAS is cotrolled by the procuremet/supply chai ad accoutig orgaizatios. Yet material is a property category, ad thus the property professioal should become kowledgeable, as it ca impact the property system ratig. If the asset maagemet property professioal is ot familiar with the cocept of iteral cotrols the time spet would be worthwhile, as ow cotracts ad laws require self assessmets ad these assessmets should be based upo the cocepts ad requiremets of iteral cotrols good sources iclude the two metioed above, iteral policy ad OMB Circular A-123 - Maagemet s Resposibility for Iteral Cotrol. From a iteral auditig poit of view, a good approach to look at systems-- processes, practices ad ifrastructure ad determie -- do they positively ad optimally cotribute to effective ad efficiet operatios? If so, do these processes, practices ad ifra-structure produce reliable iformatio it is relevat, timely ad useful for decisio makig purposes? Ad lastly, are the processes, practices, ifrastructure i compliace compay policy ad workig istructios, cotracts, regulatios ad laws? If the aswer is o to ay of these questios make ecessary ad appropriate disclosures ad prompt correctios. For exteral auditig, follow established audit guides. The itet to iclude the MMAS clause i cotracts is to drive the achievemet of the three elemets of the iteral cotrols. For this to work the cotractig, procuremet/supply chai, productio plaig, program offices, asset maagemet ad auditig commuities must have a commo uderstadig of the requiremet of iteral cotrols ad the cotractor s approach, as defied i the cotractor s procedures. Without uderstadig the cocepts ad requiremets of etity iteral cotrols www.pma.org 9

Commet: These documets should iclude the scope of the MMAS system (icludig does it iclude system itegratio or ot, for example the maufacturig system), processes, workigs of systems, cetralized operatios ad decetralized fuctios, product lies. Note: The iteral cotrol requiremet for compliace to the regulatios -- the FAR ad DFARS. Criteria (2) Esure that costs of purchased ad fabricated material charged or allocated to a cotract are based o valid time-phased requiremets as impacted by miimum/ecoomic order quatity restrictios. Commet: Valid time-phased requiremets ad ecoomic orders are ways to achieve effective ad efficiet operatios. particularly the requiremet to have effective ad efficiet operatios, the system ca be desiged to be systemically ieffective ad iefficiet. It is importat to remember the clause was writte i the 1989 timeframe ad some implicatios i the clause may be obsolete. Sice that time there have bee major chages i the way busiess is coducted icludig: iformatio techology, supply chai approaches e.g. just i time deliveries to the maufacturig floor, Lea/ Six Sigma e.g., miimizatio of storage, hadlig ad movemet of material, accoutig sice the Sarbaes Oxley law, e.g., miimize off balace sheet trasactios, etc. Curret compay material maagemet approaches should ot be welded to 1989 approaches. The te criteria listed i paragraph (d) of the clause are process related but also iclude the ways to achieve adequate iteral cotrols. Criteria (1) Have a adequate system descriptio icludig policies, procedures, ad operatig istructios that comply with the FAR ad Defese FAR Supplemet; (i) A 98 percet bill of material accuracy ad a 95 percet master productio schedule accuracy are desirable as a goal i order to esure that requiremets are both valid ad appropriately timephased. Commet: This requiremet traces back to effective ad efficiet operatios, reliable reportig, as well as compliace if the system orders the wrog parts, the associated cost may be ureasoable, therefore uallowable for recovery purposes uder FAR 31-- Cotract Cost Priciples ad Procedures. (ii) If systems have accuracy levels below these, the Cotractor shall provide adequate evidece that (A) There is o material harm to the Govermet due to lower accuracy levels; ad (B) The cost to meet the accuracy goals is excessive i relatio to the impact o the Govermet; Commet: This exceptio is icluded cosistetly with the cocepts of accoutig ad Federal regulatios that requiremets will provide et beefits. This a fudametal requiremet i FAR Part 1.102-2 -- Performace Stadards, (b) Miimize admiistrative operatig costs. (1) I order to esure that 10 The Property Professioal Volume 26, Issue 1

maximum efficiecy is obtaied, rules, regulatios, ad policies should be promulgated oly whe their beefits clearly exceed the costs of their developmet, implemetatio, admiistratio, ad eforcemet. This applies to iteral admiistra-tive processes, icludig reviews, ad to rules ad procedures applied to the cotractor commuity. [Emphasis added] The 98 ad 95 percetages eed to be recogized as arbitrary best value goals may be more or less. Criteria (3) Provide a mechaism to idetify, report, ad resolve system cotrol weakesses ad maual override. Systems should idetify operatioal exceptios, such as excess/residual, as soo as kow; Commet: Iteral cotrols require some sort of self assessmets ad systemically built i applicatios to facilitate good operatios ad efficiecy. What is ot metioed but still required i FAR 45 is that excess is the first source of supply ad whe worthwhile, excess material must be trasferred to other eedig cost objectives. We will review this later i this article. Criteria (4) Provide audit trails ad maitai records (maual ad those i machie- readable form) ecessary to evaluate system logic ad to verify through trasactio testig that the system is operatig as desired; Commet: This requiremet is part of reliable reportig. Is the iformatio provided from the system reasoably free from error or bias ad is it faithfully represeted? Criteria (5) Establish ad maitai adequate levels of record accuracy, ad iclude recociliatio of recorded ivetory quatities to physical ivetory by part umber o a periodic basis. A 95 percet accuracy level is desirable. If systems have a accuracy level below 95 percet, the Cotractor shall provide adequate evidece that (i) There is o material harm to the Govermet due to lower accuracy levels; ad (ii) The cost to meet the accuracy goal is excessive i relatio to the impact o the Govermet; Commet: See same commet as provided i (2)(i) above. Also, this is a good level to cosider establishig for material variace versus loss reportig. It is suggested that metrics ca be kept to track ivetory or cycle coutig performed for the material stock o had. If you maitai a ivetory accuracy level of 95%, oe will have met the criteria of this clause. Cosider what actios you will take or be triggered if your accuracy levels fall below 95%. Criteria (6) Provide detailed descriptios of circumstaces that will result i maual or system geerated trasfers of parts; Commet: This iformatio should be icluded ad available as part of the adequate system descriptio required i criteria (1). Cosistet directio ad detaied procedures miimize variatios thereby improvig reliability of reportig. Criteria (7) Maitai a cosistet, equitable, ad ubiased logic for costig of material trasactios as follows: (i) The Cotractor shall maitai ad disclose writte policies describig the trasfer methodology ad the loa/pay-back techique. (ii) The costig methodology may be stadard or actual cost, or ay of the ivetory costig methods i 48 CFR 9904.411-50(b). The Cotractor shall maitai cosistecy across all cotract ad customer types, ad from accoutig period to accoutig period for iitial chargig ad trasfer chargig. (iii) The system should trasfer parts ad associated costs withi the same billig period. I the few istaces where this may ot be appropriate, the Cotractor may accomplish the material trasactio usig a loa/payback techique. The loa/pay-back techique meas that the physical part is moved temporarily from the cotract, but the cost of the part remais o the cotract. The procedures for the loa/pay-back 12 The Property Professioal Volume 26, Issue 1

techique must be approved by the ACO. Whe the techique is used, the Cotractor shall have cotrols to esure (A) Parts are paid back expeditiously; (B) Procedures ad cotrols are i place to correct ay overbillig that might occur; (C) Mothly, at a miimum, idetificatio of the borrowig cotract ad the date the part was borrowed; ad (D) The cost of the replacemet part is charged to the borrowig cotract; Commet: The Clause states the MMAS, by defiitio, may be either maual or automated. The requiremet of cosistet, equitable ad ubiased logic decisios with maual decisio makig may be very difficult to prove. Maual systems i moder times are impractical ad the more the system is automatic, the greater capability to have a effective ad efficiet system. May compaies have deployed sophisticated MRPII (Maufacturig Resource Plaig) or ERP (Eterprise Resource Plaig) system solutios that allow for the plaig of requiremets, schedulig, cotrol, fiacial accoutig all i oe itegrated solutio. You eed to uderstad the costig methodology that your compay deploys i trasferrig parts betwee cotracts, which should be proceduralized ad cosistetly applied. There are may optios available icludig MAUC (movig average uit cost), FIFO (first i-first out), LIFO(last i first out). Use much cautio for material trasactios usig a loa/pay-back techique. Agai this clause was writte with 1989 thikig or old school. The loa/pay-back techique meas that the physical part is moved temporarily from the cotract, but the cost of the part remais o the cotract. [Emphasis added] I other words the borrow payback techique is a off book trasactio. Off book may also mea the techique is maual rather tha itegrated with the automated MMAS system -- usig off book trasactios greatly icreases audit risk. The cotractig officer caot approve processes that are couter to other laws a regulatios, particularly accoutig requiremets to properly recogize acquisitios ad dispositios. Criteria (8) Where allocatios from commo ivetory accouts are used, have cotrols (i additio to those i paragraphs (e)(2) ad (7) of this clause) to esure that (i) Reallocatios ad ay credit due are processed o less frequetly tha the routie billig cycle; (ii) Ivetories retaied for requiremets that are ot uder cotract are ot allocated to cotracts; ad (iii) Algorithms are maitaied based o valid ad curret data; Commet: This criterio drives the three elemets of iteral cotrols effective ad efficiet operatios, reliable reportig, ad compliace. This should be proceduralized. Criteria (9) Have adequate cotrols to esure that physically commigled ivetories that may iclude material for which costs are charged or allocated to fixed-price, cost-reimbursemet, ad commercial cotracts do ot compromise requiremets of ay of the stadards i paragraphs (e)(1) through (8) of this clause. Govermet-furished material shall ot be (i) Physically commigled with other material; or (ii) Used o commercial work; ad Commet: This criteria is somewhat differet from the other criteria i that commiglig caot be used if there is compromise to the other previous criteria. However, with a good SAP (Systems Applicatio Programmig)/ERP system, the idustry leadig practice is to stock commo parts together ad let the system maage the costs ad accoutable cotract assigmets. This has become a cost effective method of reducig stockroom space ad operatig costs. This criteria assumes commiglig of material items uder various cost objectives. Commiglig of material should be addressed i the etity s iteral procedures. Cetralized maufacturig for established products would cause a greater likelihood for the eed for a commigled stockroom eviromet. O the other had, i a a decetralized eviromet with diverse products there is a less likelihood for a commigled eviromet. The mai drivers, however, should be effective ad efficiet operatios alog with ay risk cosideratios. www.pma.org 13

Criteria (10) Be subjected to periodic iteral reviews to esure compliace with established policies ad procedures. Commet: The MMAS clause, as does the Govermet Property clause, requires some sort of self assessmet. The self assessmet should iclude a iteral cotrol or performace approach as well as a fiacial approach, similar to a customer audit. Notegovermet audit oversight is typically doe by the Defese Cotract Audit Agecy (DCAA). Acquirig Material/ Parts for a New Requiremet A good way to look at systems ad systems operatios that is useful ad also cosistet with the ASTM Capability Maturity Model is to first look at, evaluate ad improve ifrastructure the look at, evaluate ad improve throughput. Below is a high level summary of a typical throughput process through the MMAS. Step Oe The bill of material requiremet is established, which becomes a listig of all parts ad materials that will be required to complete the cotract deliverables. The requiremet (eed) for the item is the loaded i as the Maufacturig Bill of Material ito your system, icludig the quatities required. Note it is a acceptable practice, per 31.205-26 -- Material Costs, to allow reasoable quatities for expected or aticipated levels of attritio. This is typically determied by the requiremets plaer based o the commodity ad the historical performace if kow. Step Two The MMAS/MRP/ERP system should determie if the part umber has ay available quatity o had that ca be deployed to this effort. The MMAS system for a etity is a excellet way to look across all material requiremets o all cotracts, ad let the system maximize usage of available quatities o had that do ot have a firm demad/requiremet associated with them at this time. Oce idetified ad cofirmed, the item is the trasferred at cost, ad assiged to this effort. Note that i these istaces, the item remais cotractor acquired material o the ew cotract. Available o had ivetory ca occur for various reasos such as: Because a demad wet away o aother effor Mi/Max orderig created extra quatity o had Miimum lot size purchase requiremets from a supplier Lower tha forecasted attritio o aother demad If there is ay, the the item should be redirected ad trasferred to the ew demad at cost, usig a disclosed/ cosistet practice for movig material ad cost. Agai, oe of the primary purposes of a MMAS to is miimize the material cost o cotracts. Geerally, whe material eeds are met o a cotract there is some residual material the busiess rhythm of the product lie should be cosidered whe determiig the optimal legth that items should remai available withi the MMAS. Whe the optimal legth has passed, the available items should be evaluated to determie if those items should be idetified as excess ad take out of ivetory ad processed through the dispositio cycle. This available material represets real moey ad if the available material is trasferred to a eedig cotract the overall cotract cost is reduced this is very importat uder both cost plus ad fixed price arragemets. Cost versus beefit cosideratios should apply. The etity should determie how log to hold oto uassiged/ available material that is a commo part with possible aticipated eeds o aother effort. Durig the performace of a cotract it is commo practice to retai ay available quatities util all obligatios have bee met (all delivery orders completed). But this situatio ca particularly come ito play durig the cotract closeout process, where hard decisios have to be made. The resposible cotractig officer should be ivolved to balace the objectives of miimizig cotract cost through reutilizatio ad expeditig cotract closeout. Eve deployig compay owed stock or residual from a fixed price cotract will help reduce the total cost of operatio for that compay. Note-This is also a area where i some circum- 14 The Property Professioal Volume 26, Issue 1

staces the parties o a program joitly discuss the desire to move material from oe cotract to aother occasioally at o cost (leavig the cost suk o the curret cotract). Cautio should be deployed here. Movig accoutability of a part without costs requires cotractig officer approval ad cotract modificatio (zero cost trasfer). It also requires that the item be segregated (as it is ow govermet furished) ad be moved out of the MMAS/MRP/ERP groupig istace sice it o loger has a movig cost associated with it. This ca raise a flag from a audit perspective of accoutig practices if ot hadled correctly, as it is cotrary to customary cost objective rules. You still have to prove that the actios were take i a ubiased maer, meaig the items were truly over ad above the requiremets of the curret cotract ad both customers cocur with the o-cost trasfer actio. Step three If available excess stock is ot o had, it is the routed to a buyer for a ew procuremet. Note that the MRP/ERP system may be able to detect ew demads for like items to the buyer, ad the buyer may be able to get a better deal by orderig these items together o a sigle purchase order. I this case, the system ca maage the quatity ad cost assigmets to each differet cotractual demad. Step four Receive, ispect, verify quatities, ad eter the ew material i stock. Agai, if a commo commiglig stock room eviromet is deployed, the the labor ad stockrooms costs are miimized. Coclusio The asset maagemet property professioal is a vital part of the overall MMAS team, per regulatio ad Defese Cotract Maagemet Agecy (DCMA) istructio that is required to review a cotractor s Material Maagemet ad Accoutig System. O the compay s side, the asset maagemet property professioal is also a vital part i cotributig to the success of the system. The busiess system process is very complex, the elemetal rules of system are very complex ad sometimes obsolete ad coflictig, but still desired outcomes must be uderstood ad ot lost i the detail. You should uderstad how the rules ad processes are structured at your compay, so that you ca access it, ad cotribute to offerig solutios as part of the team, as situatios arise. To a large extet, each system is a work of art the built i iteral cotrols -- effectiveess ad efficiecy, reliable reportig ad compliace depeds o the kowledge, ivolvemet ad competece of idividuals ad the overall team. This is a challege ad big resposibility for you, the property professioal, ad should be treated as a duty. Ejoy the jourey. BIOGRAPHIES: Richard Culbertso recetly retired from Lockheed Marti ad was for may years their represetative to the Aerospace Idustries Associatio ad a resposible property maager at may Lockheed Marti sites. He is a expert at commetig o proposed Govermet regulatios, busiess operatios ad asset maagemet. He has a MBA from Pepperdie Uiversity; a graduate of GE s Fiacial Maagemet Program ad is a certified Lea/Six Sigma Black Belt. He ca be reached at Richard.c.culbertso@Gmail.com or 609-410-0108. Waye Norma, CPPM CF, is the Director of Property Maagemet at Northrop Grumma Aerospace Systems. I this role, he oversees ad is resposible for the etire property system ad processes. He serves as a votig leader o the Northrop Grumma Corporate Property coucil ad has previously served as chair ad vice chair of this coucil. He has bee a member of NPMA for 17 years, ad serves as the NPMA Co-Director of the Coferece & Semiar Plaig Committee. He is also a member of the AIA Govermet Property Committee, ad a votig member o the ASTM E-53 committee. Waye holds a B.S. Busiess Maagemet degree from Cal Poly Pomoa. He ca be reached at Waye.orma@gc.com Suggested readigs: - DFARS 242.72--CONTRACTOR MATERIAL MANAGEMENT AND ACCOUNTING SYSTEM with correspodig clause 252.242-7004 prior ad post the Busiess Systems Rule. - DCMA Iteral Istructios -- Material Maagemet ad Accoutig System (MMAS) Review Istructio Folder 44 - Committee of Sposorig Orgaizatios of the Treadway Commissio (COSO) -- Iteral Cotrol-Itegrated Framework - The GAO Yellow Book uder the topics of performace audits ad iteral cotrol. - OMB Circular A-123 - Maagemet s Resposibility for Iteral Cotrol - CAS 411 Cost Accoutig Stadard Accoutig for Acquisitio Costs of Material - Various articles available o the web cocerig GAAP ad acceptable methods of material costig - IFRS ad the acceptability of the last-i, first-out (LIFO) costig method www.pma.org 15