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 strong trend 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.
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 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 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:
- 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.
- 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 PS 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.