Performance-Based Logistics

1
Performance-Based Logistics (PBL) Innovating
the Supply Chain for Current and Future Defense
Department Programs Bill Johnston Atif Mirza
2
Why are we here?
The
importance of Defining Success the Evolving
Landscape of PBL

• Performance-based logistics (PBL) is the
  Department of Defenses preferred product support
  strategy to deliver improved weapons systems
  readiness at the same or lower total cost (DODD
  5000.1, Paragraph E1.17, The Defense Acquisition
  System, May 12, 2003)
• Goal Weapons Systems should be designed,
  maintained and modified to continuously reduce
  the demand for logistics

• DoD Definition PBL is the purchase of support as
  an integrated, affordable performance package
  designed to optimize system readiness and meet
  performance goals for weapons systems through
  long-term support arrangements with clear lines
  of authority and responsibility (Defense
  Acquisition Guidebook (Section 5.3))

• Customer Vision -
• Industry Vision -

Availability and Affordability Integrated
activities and reasonable profit

PERFORMANCE OUTCOMES (NOT Acquisition of
Individual Parts and Services)
3
Agenda

• Welcome and introduction of PBL
• How are we defining success?
• Baseline definition of PBL
• Key messages
• PBL overview State of PBL
• Status of agencies in PBL adoption and
  application
• Status of contracting community
• What is your business model?
• An integrated approach
• Transitioning the contract
• Rewarding the right program behaviors
• Supply chain management is the foundation of the
  PBL contract
• Innovating the supply chain
• Summary

4
Welcome and introduction of PBL
Baseline definition of Performance-Based
Logistics (PBL)

• Traditional Logistics Process Contractor Paid for
  Breakage

Aircraft Flies
Contractor Paid to Support XX Flight Hours
Aircraft Breaks
Aircraft
Aircraft
Aircraft Flies
Maintainer Identifies Fault Replaces Failed
Part
Airplane notifies maintenance a part will fail
in XX hours
Maintainer decides when to replace part
Failed Part Sent for Repair
Maintainer replaces part
Part Repaired Returned to Supply
Failed part sent for repair
Contractor repairs part with goal of reducing
repair frequency and repair cost. Improved part
is returned to supply
Contractor Paid For Repair
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Welcome and introduction of PBL
Models for various levels of sustainment

• Assuring aircraft mission capability, engineering
  services and system reliability
• Mission Capable Aircraft

Synchronization (Level 4)
Industry

• Assuring subsystem availability, parts
  availability and engineering services
• Subsystem Availability

Collaboration (Level 3)
Integration (Level 2)
RiskFocus

• Engineering services and meeting parts
  availability
• Fill rates
• Award/ Incentive Fees

Engineering (Level 1)

• Engineering services in modifications and sell
  parts
• Lead time availability of parts
• complete of software upgrades
• Engineering changes rate

Govt.
Increasing Industrial Performance
6
Welcome and introduction of PBL
What the levels mean - Sustainment metrics

• At Level 1, where the Performance Objective is
  Delivery Speed, inventory levels are high to
  achieve an acceptable Logistics Response Time
  (LRT).
• At Level 2, where the Performance Objective is
  Availability, reliability improvements (Value
  Engineering) and the development of repair
  capabilities allow for reduced inventory levels
  and the achievement of acceptable Material
  Availability metrics.
• At Level 3, where the Performance Objective is
  Operational Availability, investment is made in
  Configuration Management and Maintenance
  capabilities as Life Cycle Support
  responsibilities transfer to the PBL provider.
• At Level 4, where the Performance Objective is
  Mission Reliability, the focus changes from
  weapon system support to investments that allow
  for successful mission outcomes.

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Welcome and introduction of PBL
Key Messages - PBL incentivizes the right things

• Readiness
• Reliability
• Accountability
• Improved Systems
• Win-Win Relationships
• Optimizes for the Warfighter

PBL pay for PERFORMANCE, not transactional good
(parts) and services (repairs)
Minimizing repairs and spares increases profit
for the support provider
There is a SINGLE focal point responsible for
integrating all sources of support to provide
performance outcomes
Same or lower cost
DoD gets guaranteed results at a fixed price the
Support Provider gets the authority and
flexibility to maximize their profit partnering
PBL is vertical (weapon system) oriented, versus
horizontal (commodity) oriented
HOW DO WE DEFINE SUCCESS?

• Accountability Product Support Integrator
  (PSI), Product Support Provider (PSP), Original
  Equipment Manufacturer (OEM), Suppliers
• Balancing flexibility, sustainment, and
  affordability
• Ensuring performance objectives are met
• Structuring the right business deal that meets
  the customers needs and allows financial
  success

KEY MESSAGES
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Agenda

• Welcome and introduction of PBL
• How we are defining success?
• Baseline definition of PBL
• Key messages
• PBL overview State of PBL
• Status of agencies in PBL adoption and
  application
• Status of contracting community
• What is your business model?
• An integrated approach
• Transitioning the contract
• Rewarding the right program behaviors
• Supply chain management is the foundation of the
  PBL contract
• Innovating the supply chain
• Summary

9
Status of agencies in their adoption and
application of PBL
PBL Overview State of PBL
Recent History of PBL Agencies need to find a way
to reduce cost and increase performance BRAC
decisions consolidations of depots Office of
Secretary of Defense drives for Performance Based
Logistics

• Hon Jack Bell (DUSD LMR) Delivered the Defense
  Departments Keynote Address on
  Maintaining Warfighter Readiness at the Annual
  DoD Maintenance Symposium October 28, 2008
• Air Force mandates that Business Case Analyses
  (BCAs) be developed for all PBL contracts
  (Instruction 65-509) Sept 19, 2008
• Specific guidance on PBL BCA requirements found
  in AFI 63-107 on Integrated Product Support
  Planning and Assessment
• AFI 63-107 spans the entire public and private
  spectrum on sustainment, from Depot Maintenance
  Management to Contractor Support for systems and
  equipment
• Acquisition, Technology and Logistics (ATL) PBL
  Guidance Document on Implementing a Life Cycle
  Management Framework Memorandum for Secretaries
  of the Military Services July 2008

PBL institutionalized as the preferred strategy
for weapon system sustainment
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Status of agencies in their adoption and
application of PBL
PBL Overview State of PBL

• Congressional Requirement
• 2001, 2006 Quadrennial Defense Review
• DoD policy
• Requires PBL, no going back, no status quo
• Aggressive PBL implementation for weapons systems
  platforms starting in fiscal year 2006
• Military Services Defense Agencies (DLA)
• Wide range of application (learning curve)
• Major Weapon Systems
• Sustainment of fielded systems
• Differences in Weapon Systems (and employment of
  them)
• One Size Does NOT Fit all

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Status of agencies in their adoption and
application of PBL
PBL Overview State of PBL
PBL is the Departments near-term strategy to
increase weapon system readiness through
integrated logistics chains and public/ private
partnershipsJanuary 23, 2004 Memo from Acting
USD, ATL Michael Wynne
Certain PBL arrangements such as short-term
contracts, unstable requirements and funding, DOD
ownership of inventory and the lack of cost
metrics and effective incentives could limit the
ability of contractors to reduce support
costsDecember 19, 2008 GAO Report to
Subcommittee on Readiness, Committee on Armed
Services
DoD Still Mandating its Program Managers to
Implement Performance Based Logisticsdespite
recent criticism
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PBL Overview State of PBL
Status of agencies in their adoption and
application of PBLMajor contractors obtaining
PBL sustainment contracts

• Lockheed Martin
• F-117 Nighthawk
• Joint Strike Fighter
• C-130J Super Hercules
• F-22 Raptor
• Boeing
• F/A-18E/F
• F414 Government industry Logistics Support (GILS)
• F/A-18 Integrated Readiness Support Teaming
  (FIRST)
• C-17 Globemaster III Flexible Sustainment
• Northrop Grumman
• Joint STARS Total System Support Responsibility
  (TSSR)
• B-2 Total System Support Partnership (TSSP)
• BAE Systems
• Typhoon Support Contracts

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Status of agencies in their adoption and
application of PBL
PBL Overview State of PBL

• Navy experience
• 25 of business now on PBL (NAVICP)
• Essentially all to OEM of equipment
• Public-private partnerships (PPPs) required with
  existing organic depot
• FFP supply contracts (similar to DLA)
• Joint Strike Fighter Leading the way for PBL
  future
• Air Force experience
• PBL concepts driven into new systems
• PPPs required
• Cost type contracts in beginning
• Embracing concepts, but slow to execute
• Long-term contracts
• Award fee/ award terms/ incentive contracts
• Single systems integrator
• F-22, C-17
• Army experience
• Commodity driven
• Low price, competition
• Embracing PBL

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PBL Overview State of PBL
Status of agencies in their adoption and
application of PBLConcerns in recent months

• New Congress
• Greater emphasis on transparency and insights
  into contractors
• Congressional oversight
• TINA
• Option Contracts
• Funding Constraints
• Deputy Administrator (Lesley Field), Office of
  Federal Procurement Policy
• Greater use of competition
• Limited sole source
• Firm fixed price
• Appropriate outsourcing
• GAO questions PBL effectiveness on reducing
  support costs December 2008 Defense Logistics
  Report to Congress

Flexibility of PBL concepts in light of changing
environment
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Status of Contracting CommunityWhat is the PBL
expectation?
PBL Overview State of PBL

• From the governments/ Prime contractors
  perspective
• Near-term
• Increased readiness/ sustainment capability
• Significantly reduced implementation cost
• Lower support cost
• Over Life Cycle
• Continuous improvement in sustainment performance
  to warfighter
• Continuous improvement in affordability
• Reduced requirements for government investment

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PBL Overview State of PBL
Status of Contracting CommunityWhat is different
in PBL?

• Contractors make X return with old, low risk
  sustainment approach
• PBL approach to sustainment transfers support
  risk to contractor
• Performance requirements/ guarantees
• Long term affordability improvements
• Front end investment to reduce support costs
• Increased risk Increased return
• Contract provisions to eliminate unnecessary risk
• Long term contracts
• FAR / CAS Accounting
• Metrics
• Contract Terms

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PBL Overview State of PBL
Status of Contracting CommunityWhat are the
issues and concerns?
Priorities

• Performance Objectives
• Responsibilities
• Term of Contract
• Flexibility (range of support)
• DMS/ Obsolescence
• Continuous Modernization/ Improvement
• Incentives/ Penalties
• Cost reduction Cost stability
• Contractor Investments
• Title 10 Compliance
• Technical Data

• Accountability
• Metrics
• Minimum number of CLINs (5-10)
• Caps on liabilities
• Risk mitigation
• Long-term (5 years ) Multi-year
• Incentives
• Return on Net Assets (RONA)
• Clarity and Flexibility
• Priced Based Contracting
• Investments with Returns
• Depot maintenance for Repairs
• Technical Data Important Company Assets

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Agenda

• Welcome and introduction of PBL
• How we are defining success?
• Baseline definition of PBL
• Key messages
• PBL overview State of PBL
• Status of agencies in PBL adoption and
  application
• Status of contracting community
• What is your business model?
• An integrated approach
• Transitioning the contract
• Rewarding the right program behaviors
• Supply chain management is the foundation of the
  PBL contract
• Innovating the supply chain
• Summary

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An integrated approachThe PBL Business Principles
What is your business model?
Sustainment objectives

• Increase performance of Warfighter and Improved
  Aircraft Availability
• Reduction in life-cycle costs and affordability
• Ensuring organic capability
• Increase operational tempo capability
• Stability in financials, workforce and supplier
  base

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An integrated approachThe PBL Business
Principles PBL Elements
What is your business model?
Shared Risks Rewards between Customer
Contractor

• High level measurements (PBL metrics) reflecting
  system performance
• Reduction of life-cycle costs and affordability
• Clear line of authority/ responsibility (Product
  Support Integrator)
• Commitment to organic depot workload
• Title 10 50/50 Core Workload
• Accountability of deport performance agreements
• Public-Private Partnerships (PPP)
• Operational tempo capability and levels of
  performance
• Theater of operations
• Duration of conflict
• Commercialization of function
• Long-term relationship
• Commercial like pricing/ contract
• Minimal oversight
• Usage based principles
• Technical data

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What is your business model?
An integrated approachThe PBL Business
Principles Proposed PBL Business Approach
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What is your business model?
An integrated approachTerms Conditions

• Contract type
• FFP commodity level, if all factors are defined
• Cost Plus when all factors are not known or
  proven
• Award term contract
• Multi-year/ award term/ requirements contracting
• Competition
• At the component level
• Purchasing power from volume discounts
• Sole Source Long-term Contracting, OEM, Tech
  Data
• Contract Length
• 5-25 years
• Pricing Structure
• Menu of services price table
• Cost per unit (Flying hour)
• Options
• Firm pricing
• Price improvement curve
• Rolling pricing

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What is your business model?
An integrated approachTerms Conditions
(continued)

• Pricing Structure
• Menu of services price table
• Cost per unit (Flying hour)
• Options
• Firm pricing
• Price improvement curve
• Rolling pricing
• Incentive Structure
• Award fee Objective, subjective, not subject to
  disputes, base fee, fee percentage
• Incentive fee
• Award term
• CLIN Structure
• Most in a single CLIN
• Flexibility??

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What is your business model?
An integrated approachTerms Conditions
Critical Items

• Recovery of Depot Advanced Payments
• Cash Neutral Payments

• Payment Provisions
• Flight per hour
• Milestone
• Performance Based
• Define Roles ( Product Support Integrator
  related support)
• Clearly Defined Statement of Work
• Incentive Provisions
• Default/ Remedies
• Off Ramps
• Depot Partnering incorporate in Contract
• Funding Exclusions (Title 10, Propulsion)
• Program Interdependencies
• Investment Recovery
• Accounting Issues
• Subcontract terms and conditions proper flow
  downs including depots

Success is having a clear understandable contract
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What is your business model?
An integrated approachEnsuring organic capability
Depots have record of outstanding performance and
low costs

• Depots could be Product Support Integrators
• Prime Contractors are Product Support Integrators
  
• Workload versus Direct Sales Agreements
• Title 10 Payment Liability/ Compliance
• Core 10 U.S.C. 2464
• 50/50 10 U.S.C. 2466
• Services account differently
• Effort to be performed by Depot
• Investments
• Rates are not firm

Success is in Partnering
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What is your business model?
An integrated approachIncentives
Goal To incentivize contractor to improve
products and processes

• Increase sales
• Long-term customer base
• Increase profitability
• Market leader
• The right thing to do

WHY?

• Long-term Contract (10 years)
• Performance (Award term, award fee (objective),
  incentives (in increased performance and
  reliability)
• Fixed Price
• Less Oversight
• Use of Commercial Like Pricing, TINA tailored or
  wavered, FAR Part 12, Commercial Accounting
  (GAAP), Price Based Contracting

HOW?
Success is incentivizing the contractor to
make investments to have less breakage, increased
performance which reduces overall costs
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Agenda

• Welcome and introduction of PBL
• How we are defining success?
• Baseline definition of PBL
• Key messages
• PBL overview State of PBL
• Status of agencies in PBL adoption and
  application
• Status of contracting community
• What is your business model?
• An integrated approach
• Transitioning the contract
• Rewarding the right program behaviors
• Supply chain management is the foundation of the
  PBL contract
• Innovating the supply chain
• Summary

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What is your business model?
Transitioning the contractInhibitors and tools
to address
CONTRACT TRANSITION ISSUES

• Policy, Regulatory, and/ or Statutory Changes
• Long-term Contract
• Multi-year Contract w/ Contract Extension
• Product Support Integrator (PSI)
• Competition in Contracting Act CICA (sole source
  contracts)
• Commercial like pricing
• FAR Part 12
• TINA
• FAR-Based Accounting
• Technical Data
• Alternative approaches (TO/DO, Award Term, CLIN
  Pricing)
• US Depot Partnering

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What is your business model?
Transitioning the contractInhibitors and tools
to address
CONTRACT TRANSITION ISSUES (continued)

• Business Case Analysis (plus Validation and
  Updates)
• Business and Information Systems
• Reliability of Contractor Cost Data
• Verification of Performance
• Contract Management
• Multiple LRIPs
• Multiple Line Items
• Overlapping Years
• Price Improvement Curve (PIC)
• Provisions for Operational Tempo

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What is your business model?
Transitioning the contractInhibitors and tools
to address
CONTRACT TERMS AND CONDITIONS

• Contract Type Cost Reimbursable to Fixed Price
• Fee Structure
• Funding
• Payment (biweekly/ interim)
• U.S. Depot Partnering
• Over and Above Items
• Government Requirements GFP/ GFE
• Deployment of Aircraft and Personnel Overseas
• Import/ Export/ Tax Duties

Address issues today
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Agenda

• Welcome and introduction of PBL
• How we are defining success?
• Baseline definition of PBL
• Key messages
• PBL overview State of PBL
• Status of agencies in PBL adoption and
  application
• Status of contracting community
• What is your business model?
• An integrated approach
• Transitioning the contract
• Rewarding the right program behaviors
• Supply chain management is the foundation of the
  PBL contract
• Innovating the supply chain
• Summary

32
Supply chain management is the foundation of PBL
Two guys in a bicycle shop could do it
Rewarding the Right Program Behaviors

• The first federal aircraft acquisition contract
• Date 1909
• Supplier The Wright Brothers
• Target Price 25,000
• Target Speed 40 MPH
• Incentive Contract Structure
• 2,500 for every MPH over target
• (2,500) for every MPH under target
• Minimum acceptance requirement of 36 MPH
• A Win/ Win result
• Delivered performance at 42 MPH
• Incentive pay-out of 5,000

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Rewarding the Right Program Behaviors
Supply chain management is the foundation of PBL
Supply chain is a bit more complex today

• Government is customer, partner and competitor
• DoD depots must provide touch labor
• Defense Logistics Agency is preferred source
• There is a broader dynamic in the buyer-seller
  relationship
• All the armed services have Performance-Based
  Logistics programs at some level
• Prime AD contractors have received PBL awards
  since the Defense Dept. started their annual
  recognition event
• The export controls environment is more
  challenging
• Marked increase in license applications and
  caseloads across the State and Commerce Depts.
• As portions of US aerospace production goes
  offshore, companies will be
  motivated to work around the constraints of the
  licensing process
• Technical Assistance Agreements (TAAs) are adding
  to the systemic stress in the export regulatory
  system

Source Center for Strategic and International
Studies, Defense-Industrial Initiatives Group
paper (2008)
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Rewarding the Right Program Behaviors
Supply chain management is the foundation of PBL
The need for innovation has never been greater

• Supply chain is a major priority for the US
  Government
• DoD spent approx. 178 billion on its supply
  chain in FY07 (including 84B on maintenance)
• The nature of acquisition is changing (fewer
  programs on the horizon, more resets)
• Renewed geo-political alliances will require
  different structures for defense cooperation and
  this may drive a new wave of supplier
  consolidation

US Army Reset Costs (FY04 to FY13)
6
23
10
62
Source DoD Maintenance Fact book and
Estimates from Army data,
GAO-08-669T (2008)
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Rewarding the Right Program Behaviors
Supply chain management is the foundation of PBL
Deployment is still a work in progress,
increasing focus on higher impact programs
PBL Strategy - Evolution
to Outcomes
Platform Level (major weapons and
System-of- Systems)
Mission success Availability Life cycle cost
mgt. Govt.- industry teaming
Subsystem Level (minor weapons, major subs)
Component Level
Systems eng. approach Footprint
reduction Obsolescence mgt. Reliability,
maintainability and supportability
F-22 Raptor (Lockheed, Boeing,
Pratt Whitney / USAF)
T700 Aircraft Engine
(GE / Navy)
Improved Target Acquisition System (Raytheon /
Army)
Note OSD Award Winners for PBL Excellence
(various years)
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Rewarding the Right Program Behaviors
Supply chain management is the foundation of PBL

Debate now focuses around delivery
Shift in risk and reward model

• Traditional Contracting
  (Cost Of Input Measures)
• Focus
• Parts
• Inventory
• Maintenance
• Risk Drivers
• Cost to produce/deliver
• Operational failure
• Key Success Factors
• Manufacturing learning curve
• Low cost design
• Operations excellence

• PBL Contracting
  (Cost Of Output Measures)
• Focus
• System availability
• System performance
• User satisfaction
• Risk Drivers
• Alignment with performance requirements
• Performance optimization delivery
• Key Success Factors
• Supply chain alignment
• Supplier incentives
• Modeling and predictive accuracy

37
Rewarding the Right Program Behaviors
Supply chain management is the foundation of PBL
End Game Optimizing the entire value chain to
the point of application

• Today, emphasis is mainly on repairables, but
  major programs are moving the concepts upstream
  into System Architecture Design
• Value potential and risk increases for both the
  buyer and supplier as this moves forward

System Development and Support Lifecycle PBL
Progressions
System Development / Demonstration
Concept Development
Technology Development
Production Deployment
Operations Support
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Rewarding the Right Program Behaviors
Supply chain management is the foundation of PBL
Winning in the changing PBL environment

• Not just a contracting issue PBL is one of
  fifteen lifecycle sustainment enablers for
  materiel readiness
• Requires an enterprise view of acquisition,
  technology and logistics

Condition-based maintenance Continuous process
improvement Corrosion prevention Data
management Depot maintenance plan Diminishing mfg
sources Integrated supply chain mgt Item unique
identification Long-term agreements Performance-ba
sed logistics Predictive modeling Radio
frequency identification Technical data Title 10
requirements Training
Product Management
Product Support Integrator (PSI)
All Integrated by real-time asset visibility and
communication (Technology)
Engineering Development
Supply Chain
Operations
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Rewarding the Right Program Behaviors
Supply chain management is the foundation of PBL
Investment horizons enable ROI
Contractual Investment Window

• Illustrative Only

1 Year
3 Year
5 Year
10 Year
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Rewarding the Right Program Behaviors
Supply chain management is the foundation of PBL
Product support integrator

• Rigorous configurations management of definition
  and interplay of system requirements, support
  baseline and product support strategy
• Integrate capabilities horizontally and flexibly
• Leverage long term agreements
• Maximize value of stable cash flow
• Creative problem solving
• Eliminate non-value added administrative
  processes
• Identify and leverage the best of the best
  capabilities
• Recognition of gaps between performance
  requirements and control requirements

Customer
Product Support Integrator
Common Items
Major Subcontractors
SCM Sub/ Vendor
OEM
Depot Partnerships
DLA
SCM
Balance Integrator Accountability, Authority
Risk
41
Rewarding the Right Program Behaviors
Supply chain management is the foundation of PBL
Cross-functional agenda

• Dynamic relationships and agreements up and down
  the supply chain
• Long term agreements enable appropriate
  investments and risk horizons
• Integrated teams across customer, internal
  organization, contractors government
• Team connected throughout lifecycle of program
  from competition to sustainment

Program Management

• Integrated product teams
• Design for Supportability the support system as
  an integrated technical requirement
• Failure mode analysis
• Predictive maintenance inputs using sensors,
  diagnostic software and system
• performance models

Engineering Development

• Anticipating requirements condition-based and
  reliability-centered maintenance
• Design for PBL collaboration tools,
  standardization, network modeling
• Business process focus PBL alignment, data
  availability, continuous improvement
• Optimization tools system dynamics, life cycle
  cost analysis, data mining

Supply chain operations

• Collaborative planning and forecasting tools
• System-wide logistics portal
• Unique item identification and performance data
  capture
• Knowledge sharing and warehousing

IT governance
42
Rewarding the Right Program Behaviors
Supply chain management is the foundation of PBL
Contracting establishes the core SCM
relationships and enables
the cascading of requirements
Prime
DoD
43
Agenda

• Welcome and introduction of PBL
• How we are defining success?
• Baseline definition of PBL
• Key messages
• PBL overview State of PBL
• Status of agencies in PBL adoption and
  application
• Status of contracting community
• What is your business model?
• An integrated approach
• Transitioning the contract
• Rewarding the right program behaviors
• Supply chain management is the foundation of the
  PBL contract
• Innovating the supply chain
• Summary

44
Rewarding the Right Program Behaviors
Innovating the supply chain Ensuring enterprise
capability

• Develop a portfolio approach to determining what
  drives PBL desired outcomes
• Optimize by leveraging external relationships and
  defining what is core in your business

Make/ Buy/ Develop
45
Rewarding the Right Program Behaviors
Innovating the supply chain Align and deploy PBL
supply chain relationships

• Supplier Collaboration Model
• Alignment with PBL
• Tailored relationship categories
• New operational ground-rules
• New contractual framework
• New collaboration communication connectivity

• PBL Success Factors
• Dynamic Planning Scheduling
• JIT Deliveries
• Product reliability improvements
• Asset rationalization
• Information transparency

Mission Critical
Description
Align and Deploy PBL Supply Chain Relationships
Step 1
Step 2
Step 3
Step 4
Re-Evaluate Supplier Against PBL Requirements
Deploy Business Agreements
Contract Compliance Reviews
Integrate Into PBL Strategy
Implementation Strategy

• Involve in full program life-cycle from capture
  through phase-out
• Define role in each stage
• Establish as part of PSI team

• New communication and collaboration links
• New JIT rules
• New payment triggers

• Align new value model with PBL requirements
• Cascade contractual approach
• Focus on PBL capability set

• Conduct compliance audits
• Update agreements as program lifecycles and risk
  profiles change

46
Rewarding the Right Program Behaviors
Innovating the supply chain Contracting
incentives and flowdown

• Flow down strategy is dictated by the nature of
  the supply relationship

Cascade Full PBL
Performance Focused
High Risk
Low Risk
Price Focus
Cost Sharing
Transactional
Performance Criteria Critical
47
Rewarding the Right Program Behaviors
Innovating the supply chain Applying the right
business model is critical

• Lose/ Lose
• Input based organization deployment
• Unit costs driven down
• Inventory deployed to cover contingencies
• Vertically integrated to ensure control
• Results
• Total system costs rise
• Buyer realizes lower performance
• Contractor realizes lower profit
• Win/ Win
• Output based organization deployment
• Sustainment costs driven down
• Logistics optimized around predictive and
  signaled requirements
• Leveraging of portfolio capabilities to optimize
  deliverables
• Results
• Total system costs reduce
• Buyer realizes higher performance
• Contractor realizes higher profit

48
Agenda

• Welcome and introduction of PBL
• How we are defining success?
• Baseline definition of PBL
• Key messages
• PBL overview State of PBL
• Status of agencies in PBL adoption and
  application
• Status of contracting community
• What is your business model?
• An integrated approach
• Transitioning the contract
• Rewarding the right program behaviors
• Supply chain management is the foundation of the
  PBL contract
• Innovating the supply chain
• Summary

49
Summary
Transitioning the contractBuying the right
predetermined package
Determine your PBL Offering
Adjust for changes, levels of performance, funds
Ensure proper metrics and performance
Structure contract, bound risks in terms and
conditions, price
Perform, monitor, deliver

• New Programs
• Use walk before your run, techniques,
  transition slowly, proving metrics and costs as
  you go.
• Legacy Programs
• Industry only uses PBL on older systems when
  costs and criteria are well known

50
Summary
Transitioning the contractBalancing Risk Reward
In balancing risk and reward ask (and answer),
the following

• What is your programs sustainment strategy?
• How is the sustainment strategy being
  accomplished?
• What are the short and long-term milestones?
• Explain the business and contractual provisions
  to accomplish sustainment strategy?
• What are the incentives?
• What are the metrics?
• What are the funding provisions?
• What is the supplier, vendor and subcontract
  strategy?

Success is understanding your business model in
light of government, customer pressures, and
define accordingly your contractual and financial
obligations
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Thank You!