Selecting ERP for Performance-Based Logistics (PBL)

W h it e pa pe r Selecting erp for performance- BaSed logiSticS contracting content dod’S preferred approach .................................................................................... 1 requirementS of pBl .............................................................................................. 3 BaSic functionality required ............................................................................... 4 hoW to prepare ....................................................................................................... 5 pBl WiSdom .............................................................................................................. 5 1 Selecting eRP foR PeRfoRmance-BaSed logiSticS contRacting Selecting erp for performance- BaSed logiSticS contracting By Dan norrish Vice PresiDent iFs north america Major suppliers and systems integrators working within the military are already getting involved in performance-based logistics (PBL) contracts. Performance-based logistics is a different way of doing business. It is a logistics support solution that shifts traditional DoD inventory, supply chain, asset sustainment, and technical support functions to the supplier for a guaranteed level of performance at the same or reduced cost. Even middle-market and smaller suppliers are beginning to address PBL contracting as the military accelerates its move toward this innovative and efficient way of systems acquisition and sustainment. These contracts will increase the involvement of suppliers in services delivered after the sale, placing new demands on business systems that were not designed for this type of business model. Suppliers will need to invest in new technology designed to help them profitably meet the requirements of PBL contracts. dod’S preferred approach The PBL business model is the government’s preferred approach for implementing product support. The overall goal of PBLs is to optimize system readiness. The supplier is required to meet support goals for a weapon system by establishing a support structure based on performance metrics with clear lines of authority and responsibility. The supplier performs logistics functions that have been historically performed by government personnel while implementing commercial best practices. PBL contracts augment the support of weapon systems by employing the purchase of system support as an integrated performance package. In other words, when the Air Force buys a fighter jet from a supplier, it doesn’t simply pay for the physical product. Instead, the Air Force has a performance-based contract with the supplier. This contract’s bottom line is that the Air Force reimburse- ment to the supplier is contingent on the jet’s performance; how often the jet is able to fly. PBL is a support strategy that helps the military quantify and plan for costs by contracting with vendors not just for purchased assets, but replenishment or even maintenance, repair and operations of those purchased assets. PBL is a support strategy that covers a spectrum of support services that a branch of the military may contract from a supplier in order to optimize support for the asset. 2 Selecting eRP foR PeRfoRmance-BaSed logiSticS contRacting What this means to military vendors and contractors is that an asset or asset component supplier may contract to take on some of the maintenance or support roles traditionally handled directly by military personnel. In some cases, military staff and civilian contractors may work side-by-side within a depot to support that craft. In other cases, support may be provided entirely by the supplier. The supplier might be paid on a performance-based contract for scheduled or non-scheduled maintenance on an aircraft engine or other components or a whole craft, while keeping performance readiness at a determined level. PBL represents a change from the traditional approach, under which the military was primarily concerned with what to buy, to a new paradigm where the focus is on who to buy from – what kind of services are required to get the most value out of what is purchased. For each program, the military is asking itself “what are the performance goals for this contract? Should we be buying material and support of that material, support, service for inventory – or complete asset sustainment from the supplier?” In the past, this support and maintenance work was done directly by military personnel, and cost-cutting was done organically through Base Realignment and Closure of military depots and facilities. But as the potential to realize actual savings from further closings diminished, the military began to seek new efficiencies and cost reductions; PBL is being recognized as one such solution. The number of PBLs has increased over the last five to ten years and will continue to increase in the future. The military is still learning from existing PBL contracts how to best use this tool, and contractors are also learning how to better support PBL contracts. PBL contracts can be simple or complex, but all require ongoing involvement by a supplier. A PBL contract could be as simple as involving the supplier in managing inventory. Others might extend to contractor logistics support (CLS), where the supplier takes more responsibility for inventory and offers some additional level of sustainment. Some PBLs go so far as to include total system program responsibility, with a supplier taking over entire sustainment process from inventory to asset management. Suppliers may not need to install an entirely new enterprise resources planning (ERP) system, particularly if their ERP backbone is modern enough to easily inte- grate with third-party functionality designed to facilitate PBL-related processes. Remember that PBL contracts represent a full spectrum of involvement that can be as limited as direct vendor delivery management. This means that the supplier is main- taining the inventory on the manufacturing floor, and supplying raw components or materials on the depot site. In this case, all that may be needed is an inventory management costing module and some type of scorecard to record the metrics. But to support ongoing PBL contracts, suppliers should make sure that their ERP func- tionality can be augmented and expanded as their role changes and grows over time. 3 Selecting eRP foR PeRfoRmance-BaSed logiSticS contRacting requirementS of pBl Already, tier one or tier two military suppliers are getting involved in PBL contracts, earning not only a margin for the sale of the asset but for services performed over the life of the asset that might extend five, 10, 20, 30 or even 40 years. They are able to take their knowledge of the asset and its configuration, and the fact that they have access to parts and other supplies, and turn it into recurring revenue under the PBL. But before suppliers serving the military can realize this new revenue, they will have to assess whether their internal manufacturing or maintenance processes and systems can support the external services required for PBL. Suppliers may find they need a separate system from the rest of the operation for data integrity and security. Systems required to profitably deliver on a PBL contract also require advanced functionality for predictive maintenance, risk management and service management. Addressing the need for this new technology is difficult because the defense supplier industry is, by nature, very conservative. They tend to replace their infor- mation systems less frequently than companies in other commercial marketplaces. So even with the promise of additional revenue from PBL contracts, many execu- tives in this industry will be reticent to either replace their legacy IT systems with technology flexible enough to integrate with additional PBL-based tools, or aug- ment existing ERP systems with specialized software tools. Those that try to use an information system designed for a manufacturing environment to manage ongoing sustainment, particularly in the areas of maintenance or asset management, risk either losing money on those PBL contracts or finding that they are not equipped to deliver as promised. When trying to force a manufacturing business system to support PBL, one common problem spot is the bill of materials. A manufacturing bill of materials is very different from a maintenance bill of materials. The manufacturing bill of materials looks like a pyramid, and is used in essence to build things up to the pre- defined end point of the manufacturing process. A maintenance bill of materials has to be more dynamic, with multiple bills of materials and multiple options depending on the defect and the maintenance plan. That is a significant difference that can hamstring efforts to deliver on PBL contracts. Two other issues that can prevent a manufacturer with an older legacy system not designed for PBL from succeeding in this space are the need to isolate government data from internal processes, and a lack of deep maintenance functionality down to the component level. There are specific requirements regarding data security and privacy that the military puts forward, along with the requirement that inventory used on government contracts be kept separate from other inventory, even if it is identical. Powerful maintenance functionality is required as suppliers get involved in sustaining equipment over time. because they need to develop predictive mainte- nance programs not only for the asset as sold, but for the various components they 4 Selecting eRP foR PeRfoRmance-BaSed logiSticS contRacting may have purchased from external suppliers or subcontractors. All of the work necessary to sustain the asset needs to be costed during contract negotiations and managed on an ongoing basis over the life of the contract. BaSic functionality required When it comes to the technology used to support a PBL contract, the ability to handle change over time is critical, not only for the PBL-related software function- ality but for the manufacturing software functionality with which it is integrated. PBL contracts tend to change and become complex over time, moving from lim- ited toward deeper vendor involvement. Moreover, change in the PBL environment, as is the case across the aerospace and defense market, is driven by the customer rather than by the vendor companies. This means that suppliers working in a PBL environment can expect to be asked by their government agency customers to make changes to their business practices, and ought to have a plan for how the technology underpinning these practices can keep up. But perhaps the most challenging element of PBL for most suppliers will be the challenge of predicting the total cost of the PBL contract from a risk management standpoint. Larger system integrators and defense suppliers do a good job of assessing total cost and risk involved in PBLs. One lesson to take from their early experience is that the better engineering information captured on the asset and its projected reliability and maintenance costs, the better data there will be to work with when undertaking that analysis. Suppliers engaging in PBLs will not only need asset life- cycle data on their own contribution to their finished products, but for all of the purchased components that are part of their product. And they will not only be called on to service parts they can get to by opening a panel, but other parts that require a separate teardown by a subcontractor and supplier. Only by collecting detailed information on reliability, engineering and the level of effort involved in sustaining the entirety of the asset can the supplier define the risk of sustaining that asset and what PBL should be a part of cost negotiations with the military. This means that as part of their ERP and PBL systems, suppliers will need strong configuration management tool so they can track the lifing and maintenance parameters of any part in that asset. Suppliers must further be able to predict main- tenance costs given the environment the asset is operated in, whether that environ- ment is a desert, a Midwest winter, or an aircraft carrier, given a certain number of hours, cycles, thrust and other parameters. If a supplier underestimates the level of effort required under a PBL contract, they certainly will lose money. But suppliers that do capture the required asset sustainment information can make a better margin and meet their PBL metrics. Moreover, data from one PBL can be replicated and used to enhance and improve pricing and performance in negotiations for subsequent contracts. 5 Selecting eRP foR PeRfoRmance-BaSed logiSticS contRacting hoW to prepare Supplier’s intent on getting involved with PBL will first need to audit their existing technology infrastructures. It is entirely possible that, if their existing ERP environ- ment is relatively new and facilitates integration through a modern service oriented architecture (SOA) that third-party PBL-specific functionality can be integrated with their existing systems. If the supplier is relying on a patchwork or point solutions, or is running a dated enterprise-wide system, complete system replace- ment may be unavoidable. Suppliers in a position to simply add-on PBL functionality can get up and running rapidly because they will not have to disrupt their existing systems and processes to implement this technology. Since they had not likely been undertaking PBL work before, they are spared the disruption that comes with replacing one way of doing things with another. But with few exceptions, even very elaborate ERP solutions like those from SAP and Oracle will need to be augmented with additional PBL technology. PBL add-ons may be able to leverage supply chain and perhaps even maintenance functionality within an existing ERP, although in many cases this functionality is better handled by a PBL-specific software tool. In almost all cases, PBL-specific functionality will be necessary to capture correct metrics so the supplier can get paid under the terms of the PBL. Under the PBL contract, a supplier agrees to support an asset or inventory environment or other service to the military at a certain level of performance or metric, and that means it is necessary to capture performance data to illustrate that terms of the contract have been met. For instance, a supplier contracting to support an aircraft engine may need to capture labor and material costs and turnaround and make sure they are meeting the terms of their contract. Not only is this necessary to demonstrate contract compliance, but it allows the supplier to visualize their margins to ensure profitable performance. Regardless of whether an existing legacy ERP needs to be replaced, suppliers implementing PBL-oriented technologies ought to look for solutions based on non- proprietary technology. In a world where systems need to work and play well with each other, and the nature of integrations between systems of a supplier and its government customer change rapidly, closed, proprietary technology stacks will serve as a barrier to effective PBL management. Different PBL contracts may require different processes and applications. Adapting to different processes mandated by the government customer will be an ongoing process, so reducing barriers to change is of the utmost importance. pBl WiSdom If this whitepaper leaves you with only a few key take-aways, here are some concepts that may be valuable. 6 Selecting eRP foR PeRfoRmance-BaSed logiSticS contRacting • Don’t try to make a manufacturing system work in a PBL environment. It may work if the PBL requires only simple vendor-managed inventory, but even in this situation, there is valuable data that you will not be collecting – data that can help you ensure profitability on this and subsequent PBL contracts. There are certain supply chain pieces that a typical manufacturing system will not support. Manufacturing and sustainment are made up of different sets of processes and capabilities. • Separate your PBL data from internal data. Under the terms of PBL contracts, you can not share this government-related information with internal or external parties. Before you buy any systems or infrastructure to support PBL, you’ll want to identify a formal process for segregating this data, and for other ele- ments of contract fulfillment. Once this process is defined and outlined, you can use that outline to drive comparison of various PBL-related solutions. But also keep in mind that each PBL contract will be different, and you will want a technology infrastructure that is flexible enough to change and add capabilities over time. • Make sure you have open architecture. SOA is very important if you are going to integrate your PBL solution with your enterprise system or with external military systems. You may also want to consider new military-oriented RFID technology to track inventory or assets. This RFID technology also requires an open architecture in order to be implemented in a cost-effective way. Dan norrish is Vice President with iFs north america, the global enterprise applications company. Prior to taking on his current role, he held leadership positions with iFs north america aerospace & Defense division. norrish has been in enterprise software field for 17 years, and previously had spent 10 years in manufacturing management. en 23 22 -1 P ro du ct io n: iF s co rp or at e m ar ke tin g, a pr il 20 09 . aBout ifS iFs is a public company (omX sto: iFs) founded in 1983 that develops, supplies, and implements iFs applications™, a component- based extended erP suite built on soa technology. iFs focuses on agile businesses where any of four core processes are strategic: service & asset management, manufacturing, supply chain and projects. the company has 2,000 customers and is present in more than 50 countries with 2,700 employees in total. net revenue in 2009 was sKr 2.6 billion. more details can be found at www.ifSWorld.com. 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