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January 1, 2013  

Turning acquisition on its head

Will the U.S. get serious about performance-based logistics?

Whatever happened to performance-based logistics? In 2001, the Pentagon declared PBL its preferred approach to maintaining and supporting weapons. The Defense Department still believes in the concept, which seeks to save money and improve availability by rewarding contractors for system uptime rather than parts sales, yet today uses it in a relatively small number of programs.

In an age of diminishing defense dollars, it may be time to get serious about PBL.

It’s not hard to find military program managers who tout the approach’s increased uptime, or defense industry officials who say it helps both sides win: DoD saves tens of billions of dollars; the companies get longer-term contracts and other incentives. They cite success in a range of programs: C-17 Globemaster, AH-64D Apache, V-22 Osprey, E-8 Joint Surveillance Target Attack Radar System, F/A-18 Super Hornet and High Mobility Artillery Rocket System.

But Congress and the independent Government Accountability Office are not convinced. They question whether this strategy truly saves the money it claims to save. Moreover, legislators are reluctant to sign off on decade-long contracts that could tie the hands of future lawmakers, and fear the effects on depots that employ thousands of their constituents. Consequently, the approach receives a perennial cold shoulder on Capitol Hill. It has been mentioned only four times in congressional testimony over the past two years, and quickly dismissed each time.

RELIABILITY AND AVAILABILITY

PBL turns much of the acquisition model on its head. In the old way of doing things, industry would cash in every time a part broke — and troops would wait days, weeks and even months for spare parts to arrive or be installed.

Under the PBL model, availability is the money metric. The quicker the system is fixed, the more industry stands to make. Incentives to improve products and processes are built into the contract.

Organizations ranging from the Defense Logistics Agency to the Heritage Foundation think tank say this approach has varied and lasting effects. They say programs with PBL contracts see better reliability and availability, with fewer back orders and decreased response and repair times. The contracts also reduce the military’s logistics footprint, increasing parts availability even as they shrink the mountains of unneeded components trapped in a stove-piped supply chain.

With 80 percent of an aircraft’s life cycle cost arriving after development and production, it is not hard to see why some hope PBL might someday trim 10 percent to 20 percent of the total spending on big-ticket items.

Industry is quick to throw out plenty of numbers to support the approach.

“With the current budget woes, government may need to reconsider its position on this approach,” said Peri Widener, director of Boeing’s Rotorcraft Support Programs Global Services & Support.

Over the past decade, Boeing executives said, PBL and related programs lofted various rotorcraft to their best availability rates ever, despite sky-high op tempos. They expect PBL to reduce the consumption of CH-47 Chinook blade components by 10 percent, and may expand its purview to avionics. The Apache helicopter has exceeded requirement readiness rates and is exceeding material availability requirements by 13 percent.

Parts availability for the F/A-18’s General Electric F404 afterburning turbofan engine has risen from 43 percent to better than 90 percent, according to DLA data. PBL has eliminated its backorder of 718 parts and saved some $90 million.

DLA data also shows that the High Mobility Artillery Rocket System’s readiness rate, required to be at 92 percent, sits above 99 percent. The average mission-capable delivery has dropped from 24 to about 14 hours in the United States, and from 96 hours to less than one hour overseas. Repair turnaround in the field has dropped from a five-day average to 1.2 days.

The C-17 took the 2012 Secretary of Defense Performance-Based Logistics Award for a system-level achievement. It boasts a sustained average readiness rate of 85 percent for the past 10 years while reducing costs by 26 percent and saving $1.1 billion. It remains the fleet’s most dependable airlifter, with an availability 10 percentage points above the average.

Case Study: V-22

While these and other successes are out there, the V-22 Osprey is quickly becoming the PBL poster boy.

Boeing is building 360 of the tilt rotors for the Marines, 50 for U.S. Special Operations Command and is trying to sell the Navy 48 to replace the Carrier Onboard Delivery aircraft.

The program is wrapping up the fourth year of a five-year PBL contract, said Martin Anderson, Boeing’s director of V-22 support. Three metrics were used to measure performance:

• Technical assistance. Field service reps deploy with the aircraft and are on hand to fix any problems. Eighty percent are fixed in two hours or less, Anderson said. If a tech can’t fix it or find a solution, he has Boeing engineers standing by. Cases in which aircraft have received combat damage have seen a replacement part engineered, built and on the aircraft in days rather than weeks.

• Engineering investigations. If a component fails, frequent failures emerge or something just seems peculiar, this team finds the answer. The answers, and solutions, are coming in 60 days on average, as compared with a 200-day average prior to PBL, Anderson said.

• Publications. On-hand tech support has reduced by 70 percent the number of tech assists that require updates to equipment manuals, Anderson said. Company folks also are there to explain the publications, update with new information and make sure they are easy to understand.

This three-pronged approach helps the company establish “demand forecasting,” which is the ability to know what parts to buy, when to buy them and where to put them, Anderson said.

The Osprey program is about to enter its second PBL phase, which will focus on supply and readiness improvements as the company teams with service depots. It will integrate reliability improvements into the supply chain and provide operations in lesson management. It is here that Boeing programs have seen more than $140 million saved in obsolescence cost avoidance alone.

The PBL program helped the V-22 Cost Per Flight Hour Reduction Team win the 2011 David Packard Excellence in Acquisition Award. The $13,800-per-flight-hour cost had been greatly exceeding the $11,600-per-hour budget. The team developed a new model that replaced parametric comparisons with actual component demand data and current pricing to provide greater accuracy and fidelity.

“It then executed an innovative, comprehensive plan which included reliability and maintainability improvements, maintenance concept changes, stand-up of additional repair capability, component repair price reductions, and alternate contract strategies,” the award said. “In addition, the team worked closely with the V-22 In-service Team to improve the readiness and reliability of the V-22 fleet by identifying key high cost readiness degraders with corrective improvements available, which were then reflected in out-year CPFH projections. All of this resulted in costs that are now below estimate.”

Ultimately, costs were reduced to $9,400 per flight hour, which is projected to save $10 billion over the remaining life of the V-22 fleet, according to Defense Department data.

What’s The Catch?

These kinds of savings might allow the Pentagon to keep more programs and people, and invest in modernization and training. So what’s the catch? There are a couple.

First is the question of whether all these savings are simply smoke and mirrors. The GAO has tried at least twice to assess the real cost benefits of PBL, and found answers elusive.

In 2008, the agency analyzed PBL arrangements for 29 programs. Despite DoD guidelines recommending that business-case analyses be used to guide decision-making, the GAO found that about half of the programs did not include such analysis. The ones that did were not consistent and missing one or more of the elements needed for economic analysis.

The Pentagon responded by revising and more clearly defining its guidance for PBL business-case analysis, and published them in the April 2011 Product Support Business Case Analysis Guidebook. Today, program managers must perform a business case-analysis every five years or before changing support strategy. The analysis must compare the actual results to planned or estimated results, and it must include information about operations, cost, performance and funding. The DLA also created a PBL office at its headquarters.

The GAO later returned to the subject, looking at 10 long-term weapons contracts to determine the extent to which DoD uses long-term maintenance contracts, its ability to select alternative maintenance providers, and how these contracts have been structured to incentivize performance and manage cost.

In May 2012, the agency reported that the Pentagon did not do a good enough job at collecting and analyzing information on the use of long-term maintenance contracts by major weapon programs. The Pentagon also failed to disseminate lessons and best practices regarding the use of incentives and cost-control tools, which could reduce the government’s leverage when considering future contracts.

Defense officials sing a different tune. In a Nov. 13 press briefing, Frank Kendall, defense undersecretary for acquisition, technology and logistics, said his organization “took a hard look” at about a dozen PBL contracts.

“What we found was that in almost every case, you could quantify significant savings to the government. In the cases where you could not, we had not done a good job of managing the effort,” Kendall said. “So, the idea here is to make sure people are trained on this so we do a good job from our side, from the government’s side, of ensuring that we have effective execution of performance-based logistics, but it does pay dividends. So we’re going to look at expanding the use of that.”

Roadblocks

Getting better measures and accountability is a fixable issue, said one senior Army official who spoke on the condition of anonymity. The greater problem is the law, he said, and a political bias among lawmakers that has restrained PBL for the past decade.

The law to which he refers is Title 10, which governs the role of the armed forces. It requires that half of maintenance work be done in military depots. That would be hard to do with many existing systems, he said, but many newer programs are finding innovative ways to apply PBL without breaking the 50/50 rule.

“Still, Congress will take notice if a program — even a cost-cutting program — leads to a reduction in depot time and a possible consolidation of depots,” the senior Army official said.

He pointed to Congress’ recent annual decisions to keep M1A1 Abrams tanks rolling out of the factory, though the Army has repeatedly said the tanks are not needed and are a waste of money.

“You’re talking about jobs here,” he said. “And jobs affect votes.”

Sometimes industry itself stands in the way.

Such was the case on Sept. 14, 2010, when Deputy Defense Secretary Ashton Carter issued his “Memorandum for Acquisition Professionals,” a sweeping acquisition guidance designed to deliver better value to the taxpayer and war fighter.

One stated goal was to increase competition by requiring more frequent recompetes of knowledge-based services. Although 89 percent (by value) of DoD’s services contracts were awarded under competitive conditions, one-fourth of the contracts (by raw quantity) received only one bid.

“This suggests bona fide competition (two or more bids) is not occurring in the $31 billion represented by those cases,” Carter wrote. “To improve competition in services, I will require the military departments and DoD components to review the length of time that services contracts remain in effect before recompetition occurs. Single-award contract actions should be limited to three years (including options) unless, by exception, it is fully justified for longer periods by the senior manager for services. Contract length should be appropriate for the activity performed. Knowledge-based services readily meet the three-year limit. Other services such as Performance Based Logistics (PBL), LOGCAP, and environmental remediation, as examples, may not. The intent is that each service requirement will be reviewed by the appropriate official and only those with a sound business rationale will contain longer contract performance provisions.”

That was welcomed by lawmakers who have said they don’t want to enter long-term PBL contracts because they unduly bind their future colleagues. Of course, Congress does so every year, whether it is authorizing a new fighter program, approving the construction of a new aircraft carrier, or signing off on the multiyear purchase of the venerable CH-47F Chinook that was authorized in the 2013 National Defense Authorization Act. And more broadly speaking, Congress obligates its future members whenever it passes a deficit budget and adds to the national debt.

A Different Path

Still, most U.S. PBL contracts have been restricted to a range of three to five years. In contrast, the United Kingdom is currently more than six years into a 34-year PBL contract for its Chinooks. The job is recompeted every five years.

Boeing, the incumbent, is quick to cite the program as an example of value obtained in long-term contracts. Since placing its maintenance under the PBL contract, Boeing said, the British Chinook program has seen overall costs decline 13 percent, availability rise more than 12 percent, flying hours increase by 50 percent and major maintenance cycle time fall by 58 percent.

All this has led the U.K. to purchase another 14 Chinooks without a sales pitch, said Jim O’Neill, Boeing’s president of Global Services and Support. While he doesn’t expect the U.S. Congress to enter into a 34-year contract anytime soon, he did say that bumping up to an eight-year contract would be optimal.

Ironically, PBL was birthed in response to congressional direction to re-engineer product support. The Pentagon’s answer was a comprehensive 1999 review titled “Product Support for the 21st Century.” Outcome-based strategies such as PBL served as a cornerstone. And they should, argues Baker Spring of the Heritage Foundation. In a 2010 report, Spring outlined four steps that would help the military realize the PBL’s promise:

• Congress should provide avenues for expanding the application of performance-based logistics. Baker recommended hearings by the House and Senate Armed Services committees to learn whether the reach of the performance-based approach extends to the components and subsystems of weapons systems.

• Congress should reinforce the partnerships between contractors and the depots in the performance of logistical work for DoD. This will require Congress to overcome any political bias that exists against private contractors, Baker said.

• Congress should establish a pilot program for identifying the barriers to expanding public-private partnerships in logistics. More regulation does not necessarily mean better regulation, and certain provisions of Title 10 and accompanying regulations may obstruct the public-private partnerships that make performance-based logistics succeed, Baker said. He recommended a pilot program lasting no more than five years that would allow the deputy defense undersecretary to grant waivers to existing regulations as long as “opportunities for public-private partnerships at the depot are provided, an explanation of how the waiver will increase efficiency and lower costs is included with the request and the request certifies that the necessary consultations have been completed.”

• DoD and Congress should plow savings from the logistical system back into procurement. Congress needs to recognize that if the savings are removed from the defense budget, the defense acquisition system cannot escape a death spiral, Baker said. Rather, the savings should be retained within the defense budget and channeled to fund the procurement of the next generation of weapons and equipment.

All this depends on lawmakers, who asked for a better way and now stand in the way. “Congress has long asked for a radical acquisition reform, and rightly so,” the senior Army official said. “Let’s be honest: We don’t have the best track record here. What I can’t get my hands around is the fact that industry and the Defense Department have worked out a pretty good solution, but Congress isn’t buying. I don’t know what it is going to take to change their mind, and I don’t know what it’s going to cost if they don’t.” AFJ

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