Performance-Based Logistics Contracting: Does it Work?

Author:Marceau, James

Since its introduction to government contracting some 20 years ago, performance-based logistics (PBL) contracting has often delivered the intended result--to improve warfighter readiness through better weapon system availability and reliability, at lower cost.

The intent is to shift responsibility for outcomes to suppliers while also lowering overall lifecycle costs. From the Defense Department perspective performance-based logistics contracts can work, and there is a renewed push to use them. The question then is how is this working out for suppliers since the shift of responsibility also gives them much more of the risk-share?

Supplier incentives have been reversed from "the more spares and repairs I can sell, the more profit I can make" to "the less I use, the more profit I can make." In concept, this is exactly what the department has been trying to achieve more broadly in its relationship with industry--to drive innovation and provide better solutions at lower cost. To help sell the benefit, the graphic from the Defense Acquisition University demonstrates the potential increase for supplier profit from using performance-based contracts.

The idea is that instead of selling, for example, a weapon system and then selling replacement parts, repairs and maintenance, a supplier signs up to deliver the reliability and availability of a system at certain agreed-to levels. This shifts the supplier/customer relationship to a focus on outcomes versus transactions.

The incentive for suppliers is that it encourages long-term planning and investment in improvement with a business model that can provide higher margins to reward improvements such as: better inventory management, including the opportunity to reduce stock; better resource planning through opportunities to reduce labor costs; and fewer but higher-priced long-term contracts via opportunities to reduce overhead costs. The key word here obviously is opportunity. The supplier's challenge, and risk, is turning opportunity into tangible, improved financial results.

Why don't PBL programs always deliver the anticipated margin improvements?

Making the transition from a "spares and repairs" business to a "reliability, availability, maintainability and supportability" enterprise requires a cultural overhaul. The focus changes from discrete stove-piped performance, modification and modernization efforts as directed by customers, to a focus on product and process improvements that are self-generated...

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