by Jim Beggs beggs_jim@bah.com Toy Kime kime_toy@bah.com Mike Joes joes_mike@bah.com Performace-Based Logistics Cosideratios for Commercial Participats
Performace-Based Logistics Cosideratios for Commercial Participats We are i a era of competig global priorities, reduced acquisitio budgets, ad thily stretched support resources affectig both commercial busiesses ad govermet agecies. I respose, the U.S. govermet cotiues to pursue ways to optimize costs for the procuremet of goods ad services. Oe area of focus has bee a shift from traditioal trasactio-based support to Performace-Based Logistics support (PBL). The govermet has traditioally purchased cotractor logistics support by the trasactio parts ad/or repair actios. Now, as part of their product-support pla, the govermet is usig PBL cotracts to purchase agreed-upo support levels based o eeds, usig cotract icetives to improve readiess support at optimal cost. PBL ca offer the govermet predictable costs for support ad ca trasfer some of the sustaimet maagemet risk to the commercial cotractor. The value of PBL to commercial participats is icreased share of the aftermarket work requiremets. This presets opportuity for icreased reveue ad profit. I order to participate i PBL cotracts, the commercial cotractor eeds a high level of operatioal, techological, ad ifrastructure competecies. Implemetig PBL i accordace with the origial visio has prove to be difficult. A myriad of problems hider effective implemetatio ad executio, ad most of these problems stem from a umber of commo pitfalls. The primary pitfalls that impede PBL implemetatio iclude: Lack of defied roles ad resposibilities for both the customer ad the support provider; Misaligmet of support-provider competecies with customer eeds; Lack of relevat metrics or ueforceable metrics; ad Iadequate data collectio ad iterpretatio processes for logistics maagemet ad performace moitorig. Although some of these ca be mitigated with a wellegotiated cotract, a commo uderstadig ad a disciplied process are essetial for realizig a effective support solutio (see Exhibit 1, page 2). Need for a Commo Laguage betwee Govermet Customers ad Providers Oe of the most widespread hazards to successful PBL implemetatio is the lack of clear expectatios cocerig supportig roles ad resposibilities o the part of both govermet ad support-provider participats. There appears to be a widespread uderstadig ad acceptace regardig PBL goals, as well as the belief that the purchase of support as a itegrated, affordable performace package will optimize system readiess. However, clarifyig performace goals ad addressig the allocatio of specific maagemet ad support-structure fuctios is less clearly uderstood. May curret PBL programs iclude very geeral, top-level measuremet criteria oly. Some simply iclude platform-level Operatioal Availability without sustaiig equipmet ad system-level performace data. May also do t delve ito the facilitatig maagemet orgaizatio, or do they specify tasks ad lies ad levels of authority. This combiatio leaves participats operatig i a vacuum of assumptios, ad it creates a laguage barrier that impedes success. I other words, both govermet ad support providers ofte sig a cotract with great fafare ad hope ad the, lackig guidace to the cotrary, adopt oe of two courses: They retur to busiess as usual ad adopt traditioal methods, roles, ad resposibilities i hopes of a improved outcome; or both parties adopt ew methods they believe will brig them the hoped-for PBL advatage but without coordiatig
Exhibit 1 Performace Maagemet Ed-user Needs Program Maager Product Itegrator Source: Booz Alle Hamilto Establish project requiremets Establish key performace metric drivers Establish required performace Develop cost/performace aalysis Establish PBA with ed-user Develop alterative support costructs Address barriers to itegratio Coduct life cycle support plaig Develop BCA of support alteratives Negotiate support agreemets ad cotracts Improve iteral processes to maximize itegratio competecy Maage ad improve parterships Maitai strog commuicatio to PM ad ed-user regardig performace-impactig issues Set Requiremets Facilitate Requiremets ad Maage Performace Provide or clarifyig with their parter first. Either approach is a recipe for disaster. If oe hopes to attai optimal system readiess via PBL, both parties eed to be prepared to meet specific performace requiremets via tailored fuctioal roles ad resposibilities roles ad resposibilities that most likely will be quite differet from their covetioal oes (see Exhibit 2). Metrics ad Competecy Cosideratios: How, the, should PBL parters proceed? Ufortuately, there is o silver bullet o oe easy actio that will perfectly alig expectatios ad commuicatios: It comes dow to doig homework before sigig o the dotted lie. The first portio of the work is egieerig-based, ad is eeded to develop measurable equipmet, system, or platform performace metrics. Reliability-cetered maiteace (RCM) aalysis is oe approach, as it helps to uderstad the art of the possible: How reliable is the equipmet? How ofte does it break dow? Give the operatioal performace requiremets, at what levels will repairs be required? I additio, equipmet itegratio ad iterrelatioships eed to be addressed ad uderstood i such a way that they ca be treated as a system. This is importat because the metrics must be clear. Lackig clear system measures, oe may eed to start a PBL agreemet at a equipmet level, movig to the system or platform level oly after collectig baselie data. Most PBLs are log-term agreemets, ad flexibility is critical i the iitial period. Oe must allow course correctios i order to develop realistic, edurig, ad most importat eforceable metrics. The secod portio of the work is creatig a lik betwee the egieerig results ad the selected orgaizatioal model. This is where Busiess-Case Aalyses (BCAs) are importat. Give that the equipmet-maiteace requiremets are uderstood to a degree, BCAs are the eeded to determie who is best suited to perform what portios of the support effort, with overarchig guidace to develop ad sustai supplier aligmet. BCAs typically break work ito commo fuctioal areas such as orgaizatioal, itermediate, or depot-level maiteace, warehousig, egieerig oversight, ad techical data maagemet. Determiatios eed to be based o established criteria, such as residet techical expertise, existig facilities, core competecies, legal ad regulatory issues, ad iheret govermet roles ad resposibilities (such as eforcemet of laws ad treaties ad fiscal oversight). Durig the BCA effort, it is importat to perform a realistic cost aalysis to esure best value for performace. Because govermet ad idustry capture costs differetly, it is importat to verify that all pertiet cost elemets are captured, i order to make true apples to apples comparisos. Govermet orgaizatios do ot geerally iclude iteral persoel or facilities costs i estimates, as they are usually fuded out of other-tha-program fuds. However, idustry typically captures all direct ad idirect costs i order to gauge their true ecoomic health Exhibit 2 Icetives to Itegrate Uder Traditioal or PBL Approach Techical maagemet priorities Implemet techical chages Maage processes across all fuctioal support areas Icetives to Itegrate Uder Traditioal Approach Govermet maages desig chage ad overall egieerig support Govermet provides logistics-support providers fudig to make chages provider is oly required to meet Statemet of Work (SOW) provider is ot accoutable to dowstream system performace provider is ot icetivized to itegrate the supply chai Icetives to Itegrate Uder PBL Approach provide maages desig chage ad overall egieerig support provider ivests i chages that improve system readiess or reduce cost provider profitability is tied to meetig requiremets specified i the Statemet of Objectives provider is accoutable to dowstream system performace provider is icetivized to itegrate supply chai Source: Booz Alle Hamilto
2 ad profitability. They capture techical ad maagemet persoel, full facilities, ad ifrastructure costs. Commesurate govermet costs must be captured as well. The BCA portio of the effort ca be very difficult, as it is ofte packed with emotioally charged discussios ad bureaucratic wraglig. A idepedet third party ca be ivaluable to help avigate through this thory part of the edeavor. Data Collectio ad Iterpretatio Cosideratios: Oce overarchig roles have bee determied, specific resposibilities ad ways of doig busiess eed to be discussed. This is where face-to-face commuicatio becomes most critical. All parties must fully uderstad each other s stregths, weakesses, ad orgaizatioal cultures. A meas of workig together o a day-to-day basis eeds to be determied, a method that would iclude facilitatig iformatio techology (IT) tools. Establishig tools that help the trackig ad iterpretatio of logistics data is at the core of proactive performace maagemet. Agreemets cocerig the IT tool suite eed to go dow to the data elemet level, ad whe doe correctly will help esure cosistet team data maagemet, ad will be crucial for capturig, moitorig, plaig ad forecastig, proactive sourcig, maufacturig, ad distributio. Sometimes existig i-house software is sufficiet for these tasks; sometimes software ad/or hardware will eed to be procured ad/or modified to provide the tailored fuctioality required. The importace of IT systems caot be uderestimated. If there is ot a i-house or a offthe-shelf tool available to perform the fuctios desired, this could be a sigificat fudig cosideratio. Supplier Competecy Cosideratios: Cotract parameters also eed to be addressed so there is aligmet betwee supplier competecies ad govermet eeds. It does o good if the govermet requests items or services that the vedor caot provide. For example, the govermet may specify that parts eed to be provided o a quick turaroud basis via a trasactioal costig basis, while keepig the price reasoable. However, the cotractor may ot have processes or support tools to facilitate this cotiual respose ad trackig mode i a efficiet maer. I this case, it would probably be better to procure spares via a performace cotract. This would allow the cotractor a level of autoomy i maitaiig optimum parts support while elimiatig the requiremet to respod ad track o a itemby-item basis. Oce performace requiremets are agreed upo ad orgaizatioal roles determied, ogoig commuicatio will put the PBL executio to the test. Relatioships betwee idividual participats are key to PBL success ad logevity, ad developig a solid foudatio for these relatioships is de rigueur. The topic of developig a commo laguage betwee the govermet ad support providers is critical ad complex, ad it deserves a more i-depth discussio. This brief examiatio serves oly as a overarchig perspective o the issue, ad hopefully uderscores the importace of focusig o the details. PBL is ofte preseted i vague pictorial form, as if support irvaa will appear at cotract sigig. I actuality, PBL takes work, ad ca be successful oly with the requisite effort. PBL Value Propositio PBL is a strategy that optimizes the supply etwork ad ecourages best practices. These best practices develop ad sustai competitive advatage versus other support alteratives. Competitive advatage must be focused ad rooted i the followig areas: Optimal supply-chai maagemet (SCM) processes; Effective prioritizatio ad applicatio of techical maagemet; ad Robust collectio ad iterpretatio of logistics data. Competitive advatage is achieved ad maitaied through coordiatig ad leveragig product-support plaig (PSP), logistics egieerig (data collectio ad aalysis), ad processes cotrol. This coordiatio is icetivized by the PBL agreemet/cotract. The result is a structured, performace-based support solutio that ca provide optimal logistics support at optimal cost. Exhibit 3 Optimal Logistics- Model Source: Booz Alle Hamilto Logistics Egieerig Data Performace-Based Logistics Process Optimal Logistics Structure Product Plaig Booz Alle Hamilto s Optimal Logistics Model
3 The takeaway from Exhibit 3 is the iterdepedecy of PSP, logistics egieerig, ad PBL. PSP provides structure to a proactive support approach, eablig logisticias to improve support performace throughout the system s life cycle. I particular, good PSP lays the foudatio for a effective logistics egieerig effort. Logistics egieerig focuses o robust data collectio ad iterpretatio practices that remove much of the guesswork from maagemet iitiatives ad ivestmet decisios. This is key to the PBL process. PBL Provides a Profitable Busiess Opportuity Through Itegratio Performace-based support is ot busiess as usual. I a PBL, the govermet becomes the performace maager, focusig o the aligmet betwee ed-user eeds ad support-provider metrics. As part of the aligmet, the support provider is empowered to meet ad is held accoutable to performace objectives. Empowermet meas that the resposibility ad risk for how to support operatios shifts from the govermet to the support provider. The govermet is o loger a maager of processes but becomes a maager of performace (see Exhibit 4). These resposibilities ad risks focus the support provider o itegratig the supply chai to improve performace ad develop process efficiecies. Specifically, the focus is o maagig the iterrelatioships betwee maiteace, techical, ad parts maagemet ad the associated etwork of support providers. The product-support itegrator (PSI) must fid busiess parters that help build a effective ad efficiet support system. Itegratio at every level of the support structure gives parters vested iterest i the ed result, thus optimizig performace (see Exhibit 5, page 5). PBL is ot a oe-size-fits-all approach to product support. However, every effective PBL solutio does use performace metrics to drive customer aligmet ad support-provider itegratio. The PBL maturity model i Exhibit 5 outlies the stages ad associated complexity of PBL solutios. Stage 1 is focused simply o improvig delivery performace of a fuctioal support area (e.g., ivetory maagemet). The PSI uder a Stage 4 PBL is resposible for missio success. The complexity of itegratio icreases at high levels of maturity. Whe most people thik of PBL, they evisio Stage 3 (guarateeig availability). I reality, most PBLs are developed ad applied to operate at Stage 1 or 2, with the govermet actig as the overall platform itegrator. Stated i a differet way, the program office supports a Stage 3 or 4 PBL if they have a performace-based agreemet (PBA) with the ed-user. The providers supportig the program office are at Stage 1 or 2 sice they sig up for metrics tied to delivery or availability of compoets or subsystems. ig the availability of a compoet or subsystem requires itegratig the support elemets of the compoet or subsystem. Stage 3 or 4 requires maagig the much greater itegratio complexity of the etire platform. Exhibit 4 Optimal Logistics Maiteace (Repair/build capacity plaig, process plaig) Optimal Logistics Techical Maagemet Ivetory Maagemet (New ad repairable parts maagemet) The fuctioal areas of logistic support are depedet o each other. Example: Priorities of techical maagemet impact the what, whe, ad how to buy for ivetory requiremets. These techical priorities also affect capacity, cost, ad repair versus buy decisio makig. Note: A fuctioal support provider caot be held accoutable to metrics that are ot uder its cotrol. (How to repair ad build. Priorities for techical improvemet/refresh) Source: Booz Alle Hamilto
4 Exhibit 5 PBL Maturity Model Complexity of Itegratio Icreases Meetig Performace Measures STAGE 1 STAGE 2 STAGE 3 STAGE 4 Delivery Agreemet Parts Availability Focus System/ Platform Life Cycle Process Missio Assured Customer Requiremets Process Efficiecies Delivery Speed Material Availability Operatioal Availability Missio Reliability Cotract Scope/ Icetives Competecy Advatage Repair Cycle Performace Delivery Performace Parts Availability Order Ship Time Availability Failure Rates Repair Time Missio Success Rate Maiteace Actio Frequecy Measuremet Methodologies Haul Time/Cost Issue Effectiveess Logistics Delay Time Critical Failure Rate Source: Booz Alle Hamilto Commercial Opportuities PBL offers commercial participats a expaded role i DoD product-support solutios. This leads to greater reveue ad profit opportuity. The commercial firm must thik proactively while guidig the customer to effective ad edurig solutios through a well-formulated product-support strategy. Because performace-based logistics is ot busiess as usual, the commercial firm must embrace icreased busi- ess risk i order to realize greater fiacial rewards ad growth opportuities. Booz Alle Hamilto recogizes the challeges to successful PBL implemetatio. We ca assist i avigatig the ucertai waters ad complex itegratio issues that PBL presets. I additio, our experiece overcomig the commo pitfalls that hider PBL success will esure a more effective PBL solutio. Exhibit 6 PBL Value Propositio Improved itegratio through: Aligig icetives Esurig competecy advatage Maagig performace Performace maagemet Govermet maages desig chage ad overall egieerig support Wi-wi Tie supplier profits with improvig ed-user readiess at reduced cost PBL Optimizig logistics support through improved itegratio Result Improved readiess Reduced logistic footprit Reduced cost Competecy advatage Esure a iheretly efficiet support costruct Esure support provider(s) have techical ad maagemet competecy advatages Source: Booz Alle Hamilto
5 Booz Alle has a uique uderstadig of govermet ad commercial sectors ad possesses the experiece i deliverig performace-based product support solutios. We ca help your efforts developig the major aspects of a PBL (see Exhibit 6, page 5): Facilitatig the completio of a credible PBL-BCA; Developig ad maitaiig the competecy advatage of performace-based product support; Establishig robust logistics-egieerig practices; Implemetig ad sustaiig realistic roles ad resposibilities betwee providers ad customers; ad Developig effective ad applicable metrics ad a performace-moitorig capability. Booz Alle is a leader i developig wi-wi logistic support solutios. We employ prove approaches ad methodologies for assessig ad developig support strategies ad implemetatio plas. We uderstad the importace of itegratio. Booz Alle has a rich ad diverse experiece base (with both fuctioal ad domai expertise) that ca be leveraged for buildig your support solutios. What Booz Alle Brigs Booz Alle Hamilto has bee at the forefrot of maagemet cosultig for busiesses ad govermets for more tha 90 years. Providig cosultig services i strategy, operatios, orgaizatio ad chage, ad iformatio techology, Booz Alle is the oe firm that helps cliets solve their toughest problems, workig by their side to help them achieve their missios. Booz Alle is committed to deliverig results that edure. With 19,000 employees o six cotiets, the firm geerates aual sales of $4 billio. Booz Alle has bee recogized as a cosultat ad a employer of choice. I 2007, for the third cosecutive year, Fortue magazie amed Booz Alle oe of The 100 Best Compaies to Work For, ad for the past eight years, Workig Mother has raked the firm amog its 100 Best Compaies for Workig Mothers. To lear more about the firm, visit the Booz Alle Web site at www.boozalle.com. To lear more about the best ideas i busiess, visit www.strategy-busiess.com, the Web site for strategy+busiess, a quarterly joural sposored by Booz Alle. Cotact Iformatio: McLEAN Mike Joes Vice Presidet 703-902-3833 joes_mike@bah.com Toy Kime Pricipal 202-548-3727 kime_toy@bah.com James Beggs Seior Associate 703-902-5175 beggs_james@bah.com Debbie Orbacz Seior Associate 703-377-1392 orbacz_debra@bah.com Dowloadable digital versios of this article ad other Booz Alle Hamilto publicatios are available from www.boozalle.com.
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