The environment in which weapon system sustainment takes place is changing fundamentally. The authors believe these changes will require the Department
of Defense and industry to transform the way they do business.
The UH−60 Black Hawk helicopter is familiar
to the American public, but few outside the
U.S. Government have thought much about what it costs. Sikorsky Aircraft Corporation sells the Black Hawk to the Army at an average cost of approximately $14 million (including platform procurement and initial spares). The fleet currently consists of about 1,800 Black Hawks, each with an average lifespan of 25 years. During every year of its life, a Black Hawk requires about $800,000 of repair and spare parts purchases. These purchases fall into the category of sustainment.
While attention is typically focused on the initial cost of procuring a weapon system, sustainment spending actually accounts for most of the total lifetime cost of ownership. Sustainment is critical from a mission and readiness perspective. When sustainment is optimized, weapon systems perform better, spend less time under repair, and remain in use longer, thus delaying the need for their replacement. For every additional year that a helicopter remains in use, the Army saves over $4 million.
At a time of defense cost-cutting, acquisition transformation, and emphasis on responsible use of taxpayer dollars, a bipartisan perception has grown that the Federal procurement system has problems buying and maintaining big-ticket weapon systems from the aerospace and defense industry. The current way of doing business in the weapon systems market is primed for a major overhaul. Given that the Department of Defense (DOD) budgets 60 percent more for operation and maintenance than for procurement, the United States faces an opportunity to improve how it acquires weapon system sustainment.
This article outlines a major paradigm shift toward a more collaborative management approach: aligning logistics and acquisition activity among the military services, the Defense Logistics Agency (DLA), and private industry. In the ideal future state, DOD would bridge the gap between supply chain and procurement management through a disciplined operational strategy of collaborative management. This strategy would include collaboration
within both individual and joint weapon system portfolios, providing seamless integration of supply chain management (including sourcing) by the services, DLA, and industry.
A New Environment Calls for Change
Weapon system sustainment today fails to take advantage of opportunities for generating efficiencies and savings. Legacy practices have prevented DOD from optimizing lifecycle costs. The services buy individually from the same suppliers and, in some cases, purchase identical systems, parts, and services.
Furthermore, the separation of supply chain and acquisition activities means that total system portfolio costs are hard to capture. Key decisions are made in isolation, resulting in significant sustainment cost and readiness impacts that should have been addressed in acquisition. The services also have been unable to partner effectively with industry to ensure top-notch service.
Weapon system sustainment is currently undergoing rapid change. While several efforts are underway to improve sustainment throughout DOD, the environment surrounding sustainment is rapidly and fundamentally changing. In order to make lasting improvements, we must first understand these changes and their implications.
An Emphasis on Precision Over Brute Force
The DOD mission is shifting from brute force to persistent precision. DOD’s mission continues to evolve from the Cold War garrison model to one that can conduct the Global War on Terrorism with a smaller, more precise, more responsive, and more persistent footprint. DOD forces and their supporting supply chains must be able to deploy, reconstitute, and redeploy on a moment’s notice. Weapon systems must be able to move and maintain readiness in this rapid-fire environment. These demands leave little room for process inefficiencies, especially those that affect supply chain performance, by either DOD or its sustainment providers in industry.
Internal DOD Changes Affect Sustainment
The approach to sustainment reflects internal DOD changes. Just as DOD’s mission has shifted, the fundamental approach to sustainment sourcing has adapted to key changes within DOD, including base closure and realignment (BRAC), DLA’s evolving role, and several Office of the Secretary of Defense (OSD)-led initiatives.
BRAC legislation has forced DOD to further rethink the management of inventory and supply chains. DOD is changing the current distribution channels for parts, commercializing significant pieces of the defense supply chain, and bringing DLA into organic depot operations. One particularly important DOD imperative deals with logistics—in particular, sustainment sourcing with commercial providers. This current BRAC imperative has raised concern among the services that sustainment sourcing will have an effect on overall mission performance. When sustainment sourcing is done well, commercial logistics offerings properly align with DOD products, services, assets, and capabilities. When sustainment is done poorly, it hampers DOD’s quick-strike capability.
DLA, in coordination with the U.S. Transportation Command (TRANSCOM), OSD, and the services, has been a vocal leader in the transition to an enterprise supply chain. DLA has implemented many strategic sourcing initiatives that relate directly to weapon system sustainment. The agency created multifunctional strategic sourcing material groups within its eight cross-service supply chains (aviation, land, maritime, construction and equipment, clothing and textile, medical, subsistence, and energy).
This expanded DLA role has produced a broader sourcing portfolio that includes class IX (repair parts) and cross-service partnering in tire acquisition (among the Army, Navy, and Air Force), the Industrial Prime Vendor program, and the Fleet Automotive Support Initiative. However, there is still room for significant improvement not only within DLA but also throughout DOD.
The transition to thinking jointly across DOD is still far from complete. The services and defense logistics providers understand the clear need for a joint supply chain approach. They know that they use many common parts, components, subsystems, platforms, and repair capabilities and have integrated some low-level areas of common supply. However, the major weapon systems and platforms present a significant challenge. The services fear that indiscriminate leveraging will overlook the unique service and product needs of complex weapon systems or platforms, and they maintain a strong desire to retain ownership of sustainment.
To move forward comfortably, the services must feel confident that a weapon system sustainment portfolio has clearly articulated business and performance requirements tailored to their own needs that can be forwarded to industry, bid on, and executed. However, at this point the services recognize that they do not fully understand what is unique about their requirements versus what elements are common to all the services. It is absolutely essential that the services be able to communicate what differentiates their own major weapon systems. Otherwise, they cannot make educated decisions on what to keep in house and what to share.
Hidden Ownership Costs
Separating supply chain and acquisition activities hides total ownership costs. Historically, inventory procurement, commercial repair, and organic repair for weapon systems have been contracted separately, subject to the uncoordinated involvement of program management officers, line-item managers, and contracting officers. As a result, it is difficult to understand and quantify the portfolio of spare parts and repair requirements for a given national stock number. This challenge has become more profound with the expanding role of DLA. More importantly, this complexity translates into limited visibility of purchasing across these activities, a tremendous potential for redundancy within an enterprise portfolio, and lost opportunities to leverage buying power to reduce costs.
Industry Partnerships Are Evolving
Industry partnerships, while an important element of DOD’s transformation, are also key elements of the underlying challenge of sustaining weapon systems. While many approaches have been tried with varying degrees of success, the best model for these partnerships has yet to be defined. Over the past several years, the number of industry partnerships has increased dramatically; DOD repair depots alone have 348. Although the nature of the agreements has also evolved as partnerships have become broader and more complex in scope, depot partnerships are still primarily focused on blue-collar activities and have not encouraged substantial investment from the industrial base.
Using Performance-Based Agreements
Use of performance-based logistics (PBL) agreements is growing. A particularly successful form of industry partnership, PBL is a sustainment support strategy that aligns incentives for logistics performance with the desired outcomes for weapon system performance. While PBL has been implemented successfully with industrial suppliers, DOD is exploring opportunities to apply it within the organic repair community.
PBL agreements usually include some level of baseline, award, or penalty payments associated with prenegotiated supply chain or weapon system performance metrics, such as on-time delivery, materiel availability, or system uptime. More importantly, PBL agreements create incentives for sustainment providers to continuously improve their logistics efficiency and performance, resulting in improved weapon system performance at lower support costs.
The most progressive (or inclusive) PBLs outsource significant elements of the DOD weapon system supply chain, such as distribution, maintenance, and inventory management or ownership. The least progressive PBLs simply outsource a single function, such as distribution or supply.
DOD’s experience with PBLs has shown that certain performance-based approaches are more appropriate in specific situations. Platform-level programs, such as the Air Force’s C−17 transport, align all aspects of sustainment to the overall goal of platform readiness. However, common subsystems, such as auxiliary power units and aircraft engines, are used jointly and across platforms. In those cases, the key performance objective is simply the availability of the subsystem. Similarly, commodity parts providers have entered into PBL agreements focused primarily on parts availability and delivery performance. The PBL contract for Navy aircraft tires is a leading example of a commodity-level PBL agreement.
The critical factor for PBL effectiveness is balancing the amount of risk that DOD will transfer to an industry partner against the amount of financial liability that the industry partner is willing to accept. Failure to achieve this balance translates into inadequate and costly supply chain performance or financial damage to the company entering into the PBL. These arrangements must be “win-win” scenarios that deliver required performance at acceptable cost to the Government and ensure that the commercial partner can meet the performance requirement profitably.
With experience, DOD is getting better at drafting PBL agreements. In recent PBL programs and second-generation negotiations, DOD is asking industry to determine the costs of their contracted performance levels. DOD is also asking industry to meet performance targets by making repairs rather than purchasing excessive inventory. This approach reduces the Government’s level of inventory ownership and risk. Some programs have transferred a significant portion of inventory ownership to industry providers, encouraging industry to balance investments in inventory with investments in optimal inventory planning, system design, and component quality. Such investments lead to lower overall costs, a smaller logistics footprint, and greater reliability.
DLA is becoming a larger player in weapon system sustainment and industry partnerships with major tier-1 vendors. DLA has long managed the acquisition of consumables. Its expansion into managing contracts for depot-level reparables has forced program management offices (which maintain logistics and supply chain requirements) to coordinate their sustainment buying requirements with both service-owned and DLA contracting offices as well as industrial suppliers. Now that industry has shifted toward complex contractual sustainment relationships (which include spares, repair, and other supply chain outsourcing elements), suppliers, DLA, and DOD are now integral sustainment players and partners.
In recent years, a number of PBL agreements, many of which deal only with parts distribution and are applicable across platforms, have been transitioned from the services to DLA. The services tend to keep a tighter grasp on more progressive weapon system agreements. In fact, PBL inclusiveness is the de facto boundary line for deciding which contracts are transitioned to DLA management. This practice has led to “inclusiveness inflation.” Some large weapon system sustainment contracts have become unnecessarily inclusive, with the result that the services retain control of many sustainment functions. The downside is lost opportunities to benefit from cross-service and cross-platform supply chain management.
The Future: Collaborative Management
Against a background of fragmented processes and solo organizations, weapon system sustainment will evolve toward a tightly managed, integrated supply chain. It should be governed under joint management that seamlessly integrates the services, DOD logistics providers such as DLA and TRANSCOM, and industry. The sustainment portfolio must be tightly controlled by the services’ program management offices.
At the tactical level, contracting officers must be able to translate logistics requirements into contracts with commercial vendors that deliver top supply chain and cost performance across the entire portfolio. Contracting officers therefore must fully understand all aspects of a system’s sustainment portfolio. Business requirements must be appropriately drafted, negotiated, executed, and managed by a cohesive DOD contracting team. Finally, industry and Government must establish win-win relationships for logistics and contract management and for supporting a dynamic and demanding customer base.
Currently, the Government has begun integrating the primary players, but that integration is far from finished. DLA must cement the boundaries of sustainment control in the face of considerable uncertainty. Should DLA own PBL agreements? Should DLA be in the repair business? Substantial work by logistics and acquisition personnel will be needed to hammer out the best contractual relationship between cost and performance. The services and DLA must first build an effective integrated relationship and then work with industry to form a well-functioning team.
By fully adopting the following competencies and practices, DOD and its suppliers can dramatically transform the way they interact and collaboratively manage their relationships.
Use End-to-End Supply Chain Management
Before spending money on weapon system sustainment, particularly in a fixed-price environment, the Government must first understand exactly what the end-to-end supply chain is expected to do and how it should perform. Each system’s supply chain is unique, as are its performance metrics. Once DOD identifies the appropriate performance categories, it can then determine the optimal levels of performance.
For example, if DOD decides that system uptime is critical, the next question is how much uptime is optimal. This process involves combining a deep understanding of the system supply chain with benchmarked analytics for the chosen metrics that carefully balance performance and cost.
Articulate Unique Sustainment Requirements
Once weapon system performance outcomes are set, they must be translated into unique sustainment requirements. Program management offices must carefully state sustainment requirements to contracting officers so they can appropriately bid and award the work. Program management offices need to know not only what performance levels are required but also how those levels can be achieved.
For example, system uptime can be achieved through repair turnaround or inventory procurement. A clearly articulated business requirement would prescribe uptime levels and specify how the contractor must achieve that metric. An example would be, “I want to achieve 95-percent uptime by maintaining no more than 75 inventory days of supply and no more than a 7-day repair turnaround time on critical items.”
DLA and the services have already defined the distinctive supply chains and begun integration across their customers. To achieve optimally structured supply chains, they must engage customers in collaborating to eliminate stovepipe thinking. Despite DOD’s mandate to drive integration, the different services and even individual commands can present obstacles. Driving change requires convincing DOD clients of the need for change and of DOD’s competence to lead that change. A key element of change management will be listening closely to fully understand the customers’ perspectives and then demonstrating that the proposed strategies will address their needs and concerns.
Model Lifecycle Costs
DOD’s ability to model lifecycle costs should help convince customers of the need to change. Typically, customers simply cannot see all elements of the supply chain across DOD, and their decisions solely reflect their own interests. With its analytical capabilities and view of the entire supply chain, DOD can bring a holistic, fact-based perspective to the conversation. The services and DLA have already transitioned from measuring cost to measuring service. The logical next step involves understanding the strategic tradeoffs between cost and service based on rigorous analysis.
Make the Most of What Is in Hand
A weapon system’s end-to-end supply chain contains millions of dollars’ worth of inventory. Whether these spare parts inventories are at the depot or forward-deployed in the field, they contain the pieces and parts that often dictate how fast a downed system will be ready to use again. Historically, DOD has relied on mountains of inventory to maintain readiness. With increased interest in cost reduction and the leaner and more precise mission requirements of today’s wars, DOD must sustain its systems with less inventory.
Program managers will ultimately have to rely heavily on repair to replenish depleted inventory. They will also need to understand exactly where in the supply chain repair decisions must be made. Industry, which may own progressively larger parts of sustainment supply chains, must be equally savvy. The more vendors deliver contracted performance levels through repairing rather than purchasing, the better their bottom-line margins will look.
Build Industry Partnerships
DOD’s shift from managing inventories internally to relying more broadly on industry has laid the foundation for the next shift: a balanced partnership with industry. While the Japanese model of supplier partnerships can remove untold waste, DOD must build partnerships that balance a commitment to cooperative relationships with a commitment to competitive pricing.
Many commercial organizations have found themselves relying on “partner suppliers,” only to discover that the supplier was capturing most of the value from the relationship. Emerging disciplines within DOD, such as supplier relationship management (SRM), help to alleviate these concerns. Under the SRM framework, industry best practices, such as demand forecasting, asset visibility, and total lifecycle management, are integrated seamlessly within DOD partners. These types of partnerships are built to evolve over time and create long-term value for both parties.
Differentiate Supplier Relationships
Building on the foundation of the strategic supplier alliances and the Supply Chain Alliance model should result in a broader array of differentiated relationships. By looking at needs holistically, the services and DLA can create the most advantageous supplier relationships rather than focusing on the largest DOD suppliers.
In some cases, the original equipment manufacturer will take on a larger role in managing the total supply chain from development to sustainment and even disposal of a weapon system. But in other cases, the supply chain will be broken down into its parts and roles assigned along different dimensions, such as geography or activity. These differentiated roles will help to clarify priorities and accountabilities.
Maximize Leverage With Suppliers
The role of industry will only grow larger in future weapon system sustainment. DOD will repeatedly buy from the same primary vendors for both repair and spares (particularly for joint weapon systems). This massive level of spending can be leveraged for maximum cost discounts and performance levels when contracts are awarded in combination with multiservice and interservice buys. With streamlined, multifunctional contracts for multiservice or interservice programs, vendors can streamline inventory, distribution, and repair capacity.
Maximize Organic Capability
BRAC is already reconfiguring organic capability and capacity. DOD’s organic capacity throughout the country is shifting dramatically through the closing of some depots and the expansion of others. DOD must perform a balancing act by selecting industrial suppliers while maintaining its own production and repair capacities in accordance with Title 10 (which mandates a 50−50 commercial-to-organic workload). In this realignment, it is important to understand what capabilities should be preserved in house and what should be contracted. Collectively, the portfolio of depot work should make maximum use of depot capabilities.
With so much spending being distributed among both commercial vendors and depots, the potential for capability redundancy is significant. While some redundancy ensures bandwidth and scalability when demand is high, too much redundancy can create major cost and performance inefficiencies. The Government often double-buys: It pays industry to perform work or buy inventory, but it continues to act as well. DOD should reduce redundancy while maximizing its organic capability.
The Benefits of Collaborative Management
A glimpse into the future shows numerous benefits from collaborative management. No longer will essential knowledge and business requirements for a purchase get lost in transition between functions.
Contracting centers of excellence will provide best practices and intellectual capital to help contracting officers create more advantageous contracts. A better management philosophy will alleviate inefficiencies and make the process easier by automatically building the most critical supply chain business and performance requirements into best-in-class, lifecycle-focused contracts.
Furthermore, these contractual agreements will relieve overtaxed Government resources of the burden of intensive cost and performance management. Management will place skilled people where they are required and make full use of their expertise. This is not to say that roles will remain static: Today’s roles may call for additional skills, and new roles may well be instituted. The vision is one of smoothly meshing gears among partners within and outside Government.
Although instilling the discipline and required competencies of collaborative management into weapon system sustainment is a long-term process, DOD is beginning the journey. Program management offices, including that of the Black Hawk helicopter, are already building the foundation for collaborative management. As the Black Hawk program management office rationalizes its vendor base, it is also establishing more progressive competencies outlined in this article: formalized SRM programs with strategic vendors, progressive performance-based contract development, collaborative depot partnerships between the Government and industry, and continued coordination with DLA, OSD, and the services in the design of a joint supply chain architecture. Much work remains to be done. Nonetheless, Black Hawk sustainment is among many examples that show that DOD recognizes the importance of weapon system sustainment and the collaborative management practices that optimize it.
The future state of weapon system sustainment will ultimately depend on how the progression toward collaboration continues. Collaborative management in sustainment will emerge through careful planning and execution grounded in rigorous due diligence and tactical discipline, often on a platform-by-platform or system-by-system basis. Though the process may lack drama, the future state seems worth the effort. It will one day close the gap among acquisition, logistics, and commercial industry leaders so that all parties can work together to support the warfighter in a combat environment that is demanding, dynamic, and historically unique.