Performance not Parts: Business Process Implications for Performance Based Logistics
If you’re a business process expert for an OEM in the aerospace and defense industry, there’s an acronym out there that I’m sure you’ve heard by now: PBL (Performance Based Logistics). Pushed primarily by the US Department of Defense (DOD) – though being adopted elsewhere – PBL allows customers to offload the risk of asset development, manufacturing and maintenance to OEMs.
Is this a good thing?
Under traditional business models, the OEM produces an asset and sells it to the customer who takes possession and assumes responsibility for maintaining it. The risk is low for the OEM but so are the margins.
PBL stands this model on its head. Instead of paying when assets break, customers pay only when the asset works. Instead of buying spare parts, repair services, and engineering expertise, customers buy reliability, effectiveness and availability. The emphasis is on improving performance across the entire asset lifecycle through value-driven services provided by the OEM.
Estimates that I’ve heard say that for every dollar spent on a given asset, seven dollars are spent on lifecycle support. If this sort of statistic doesn’t make manufacturers stand up and take notice, I don’t know what will. But PBL requires more than an entry into the aftermarket maintenance and repair business. Under the PBL model, OEMs essentially take on end-to-end responsibility for the entire asset lifecycle. While the risks are higher, so is the profit potential.
What does it mean for the A&D BPX community?
The business process implications of the PBL model are numerous – all of which focus on the ability to better manage costs, performance and risk under extremely dynamic program conditions. To succeed, OEMs will need more effective ways to leverage elements in the value chain that constitutes the A&D partner network. Areas of concern include contract, product, supply chain and service management. Let’s take a quick look at each:
Contract Management Under the PBL model, the contract is king. And without capabilities to meticulously manage all aspects of contract management, OEMs won’t be able to make the model work. Many OEMs, accordingly, are looking for ways to better plan programs and contracts and establish pricing based on metrics that monitor program performance throughout the asset lifecycle. Based on such KPIs, OEMs can run sophisticated what-if scenarios to decided whether or not to bid and how much to bid to ensure success. OEMs also seek more flexibility and transparency to better negotiate and manage complex contracts within highly regulated government environments. Analytics, such as balanced scorecards, will also be needed to track performance throughout the asset lifecycle.
- Product Management Traditional methods of acquisition – where customers buy spare parts to fix broken equipment – is a classic example of misaligned incentives between customers and suppliers. One of PBL’s greatest advantages is that it better aligns these incentives so that suppliers are paid only when their equipment is operational. Suppliers, in other words, have a clear business motivation to build maximum maintainability and reliability into their equipment. Product management under a PBL approach requires tools to ensure that products are engineered with the total lifecycle costs in mind.
- Supply Chain Management When OEMs own the asset lifecycle, the ability to evaluate, select and monitor suppliers based on cost, quality, speed and reliability becomes critically important for business success. After all, when network suppliers fail, the OEM fails. What’s more, both suppliers and OEMs must collaborate more effectively to meet the supply network process demands implied by the PBL model. These include supplier managed inventories, dynamic replenishment, automated procurement approval, and real-time sense and alert monitoring for faster responses to unplanned supply network deviations.
- Service Management Where PBL contracts are in place, OEMs commit themselves to certain levels of asset availability and performance. This requires better service and service parts planning capabilities so that OEMs can optimize inventory and ensure that the right parts get to the right place at the right time. It also requires greater visibility across the supply chain to monitor, manage and improve asset performance and reduce downtime. Specifically, OEMs are looking to develop maintenance strategies based on proven RCM & FMECA methodologies as well as prognosis and health management (PHP) capabilities to reduce schedule and unscheduled maintenance.
Where OEMs can optimize aftermarket logistics, the profit potential is enormous. But in the PBL model, the aftermarket should not be considered in isolation. Rather it should be seen as closing the loop on the asset lifecycle. Customers, for example, would pay dearly for the ability of the OEM to flexibly introduce engineering changes into operational assets on demand. This requires the ability to link back to engineering and manufacturing – which is only possible when OEMs approach the service aftermarket as an integrated part of the asset lifecycle.
OEMs Play the Key Role
While many manufacturers will remain unwilling to take the risks associated with assuming the role of asset lifecycle owner, it bears mentioning that OEMs stand in a relative position of power when it comes to making PBL a reality. Yes, customers have their demands – but PBL simply does not happen without OEMs stepping up to the plate.
To make it happen, one of the most important themes to stay focused on is the issue of improved collaboration throughout the partner network. All lifecycle participants play a role:
- OEMs need to build a critical mass to provide financial security while transforming the business to support better collaboration. An adaptive supply chain and superior planning models that help spread risk across partners are critical. Also important are close-to-real-time performance analysis capabilities – as well as powerful simulation tools for making more informed decisions.
- Customers need to share an extensive amount of information with OEMs – who must be integrated more effectively into the customer’s internal operation. At the same time, customers must develop an eyes-on, hands-off approach that allows the model to work without creating unnecessary obstacles.
- Suppliers need to achieve best-in-class capabilities for their specific areas of expertise. They also need to manage and share program risk, ensure supply chain transparency, and support collaboration throughout the partner network – even in cases where coordination with competitors is required. Here, collaboration is not limited to inventory concerns alone, but also extends to areas such as asset structures, procurement and maintenance planning.
As it relates to IT, these requirements point to an open standards-based business process platform capable of supporting enterprise-level service oriented architecture (enterprise SOA) – coupled with best of breed applications for activities such as resource and portfolio management, parts optimization and earned value management – just to name a few. This is where SAP and its partners excel – but we can put this conversation off for another time.
This is hardly the last word on PBL and its implications for the business process community. Each of the topics touched on here could be expanded on indefinitely. So, let’s keep the dialogue rolling. I invite your comments.