Performance‐Based Logistics and Interfirm Team Processes: An Empirical Investigation

• Author: Stephen R. Geary,Jeffrey J. Haynie,Timothy G. Hawkins,Wesley S. Randall,David R. Nowicki,Achilles A. Armenakis
• Date: 01 June 2015
• DOI: http://doi.org/10.1111/jbl.12084
• Published date: 01 June 2015

Performance-Based Logistics and Interfirm Team Processes: An

Empirical Investigation

Wesley S. Randall

1

, Timothy G. Hawkins

2

, Jeffrey J. Haynie

3

, David R. Nowicki

1

,

Achilles A. Armenakis

4

, and Stephen R. Geary

5

1

University of North Texas

2

Western Kentucky University

3

Nicholls State University

4

Auburn University

5

Supply Chain Visions, Inc.

Practitioners are using performance-based logistics (PBL) strategies to reduce cost and improve value in industries such as defense, transpor-

tation, manufacturing, and healthcare. PBL is part of a group of increasingly popular buyer–supplier strategies that focuses on outcomes as

oppose to the delivery of products or services. A key tenet of PBL is the use of innovation to create cost avoidance that benefits buyers and

suppliers. In this research, we explore the interfirm team-level factors associated with innovation in successful PBL strategies. This research

brings together business, organizational behavior, and engineering literature to study PBL team success. The study entailed interviews with 17

managers involved in large scale PBL projects. The interviews and follow-on member checking sessions resulted in a model composed of eight

emergent categories and associated propositions. Both practical and theoretical implications are provided.

Keywords: teams; supply chain management; performance-based logistics; performance-based contracting; innovation; metrics

INTRODUCTION

There exists a trillion dollar opportunity to reduce cost, grow

revenue, and improve customer value in industry sectors com-

posed of complex, long-life, systems such as defense, transporta-

tion, and healthcare (Kim et al. 2007). Owners, operators, and

end system users are using performance-based strategies, such as

performance-based logistics (PBL) to organize the post-produc-

tion, and service delivery market, for what are now being called

SDS (Singh and Sandborn 2006; Randall et al. 2015). A sustain-

ment-dominated system (SDS) is defined as a system whose

sustainment phase represents the highest cost and longest dura-

tion of any phase within its lifecycle (Sandborn et al. 2003).

Large-scale complex systems such as those found in aerospace

and defense, utilities, healthcare, and social sciences are repre-

sentative of sustainment-dominated systems (Feng et al. 2007;

Rojo et al. 2010). The operation and support costs associated

with these systems often far exceed the upfront design and

production cost (Singh and Sandborn 2006).

The SDS market place has been hampered by unsophisticated

buyer–supplier relationships that lack any form of post-produc-

tion integration (Randall et al. 2011). Historically sustainment

dominated systems have been plagued with high and often esca-

lating year-after-year costs coupled with decreasing system per-

formance (Maclean et al. 2005). At the same time downtime

costs during the post-production phase can be significant

(Guajardo et al. 2012). The lack of integration results in the

transactional exchange of products and services where buyers are

at risk for system performance and suppliers have little reason to

innovate or invest (Sultana et al. 2013; Selviaridis and Norrman

2014).

In recent years, an increasing number of buyers and suppliers

involved with sustainment dominated systems have found that

properly executed performance-based strategies decrease life

cycle cost and increase system performance (Miller 2008; Hypko

et al. 2010; Roels et al. 2010; Siemens 2011; Randall et al.

2014b). Performance-based strategies address market deficiencies

by spurring supplier financial and knowledge investment while

encouraging customer commitment to long-term relationships

with stable funding (EAP Task Force 2011). The key tenet of

performance-based buyer

1

supplier relationships is a focus on the

delivery of measurable outcomes instead of on the unbundled

delivery of products and services (Geary et al. 2010; Hypko

et al. 2010).

One of the first performance-based strategies, dating back to

the 1990s, is performance-based logistics (PBL) (Perry 1994).

Two decades later, there have been numerous derivations of

PBL. These strategies can be found under the moniker of perfor-

mance-based contracting (PBC), performance-based strategy, and

performance-based maintenance by contracting, and power-by-

the-hour (Kim et al. 2007; Sultana et al. 2013). In this article,

we use the classic term, PBL, but the underlying governance

mechanism is similar for other performance-based strategies.

PBL works by creating a governance structure that aligns sup-

ply chain-wide incentives in a return-on-investment business

model (Kratz and Diaz 2012). This outcome focus is a significant

departure from the traditional approach to postproduct support,

where the buyer pays transactionally for the spares and repairs

needed to keep the system in service (Geary and Vitasek 2008).

Corresponding author:

Wesley S. Randall, Department of Marketing & Logistics, College

of Business, University of North Texas, 1307 West Highland Street,

Denton, TX 76201, USA; E-mail: wesley.randall@unt.edu

1

Typically the buyer is also the user or operator of the system.

In this article, we will use the term buyer to mean the buyer who

is also the operator of the system.

Journal of Business Logistics, 2015, 36(2): 212–230 doi: 10.1111/jbl.12084

© Council of Supply Chain Management Professionals

In PBL, the buyer pays the supplier to maintain system perfor-

mance at an agreed level. Performance is represented by metrics

(e.g., aircraft ready to fly 80% of the time). Randall et al.

(2010b) showed how PBL guides innovation across a system’s

life cycle by leveraging innovations in materials, processes, and

technologies that were not affordable when the system was

fielded. This return-on-investment business model resulted in

PBL being credited with saving billions of dollars in the defense

sector alone (Fowler 2008). This performance-based strategy type

has been used successfully in a number of long life cycle sys-

tems. Table 1 provides a sampling of implemented performance-

based strategies.

In the traditional postproduction support strategy, the buyer

purchases the system from the manufacturer (e.g., aircraft) and

then contracts transactionally for the goods and services (e.g.,

spares and repairs) needed to keep that system in service (Sols

et al. 2007). The traditional model has an inherent incentive defi-

ciency, where the suppliers make more money the more the sys-

tem breaks (Randall et al. 2011). Performance-based strategies

correct this deficiency by monetizing potential supplier cost

avoidance using a return-on-investment governance structure

(Kratz and Diaz 2012). This governance structure ties supplier

profit to investment in innovations, which reduces the total cost

of ownership. At the same time, suppliers are guaranteed a con-

sistent flow of funding over the term of the contract. The guaran-

teed funding provides the incentive that encourages investments

that increase system reliability, reduce costs, and improve profit-

ability (Randall et al. 2010b). The success of PBL in defense has

led to variations of this model in manufacturing, consulting,

information technology, construction, healthcare, and child and

family services (Corsten and Felde 2005; Martin 2007; Hypko

et al. 2010; Roels et al. 2010; Administration for Children &

Families 2011).

Unfortunately, the economic model of PBL is not always suc-

cessful (Behn and Kant 1999; Government Accountability Office

2008) and practitioners have called for explanations as to why

some PBL succeed and others fail (Kratz and Diaz 2012). Boyce

and Banghart (2012, 28) acknowledge that “there is a sentiment

among some that PBL are more expensive than transactional

alternatives.”Kratz and Diaz (2012, 42–43) conclude that an

“absence of a clearly defined business model and inadequate

training was a significant factor in the failure of some managers

to implement PBL successfully.”Others expressed concern that

customers may not have the expertise to properly orchestrate the

PBL initiative (Brucker and Stewart 2011; Fallah-Fini et al.

2012; Ssengooba et al. 2012). In fact, Behn (2002) acknowl-

edges several individual decision barriers (e.g., fear and new

behavioral changes) that can influence PBL team effectiveness.

A common theme within these criticisms is how the PBL

business model is influenced by organizational factors of the

interfirm teams (Guajardo et al. 2012).

The monetization, investment, redesign, and payback structure

of PBL requires entrepreneurial decisions by interfirm team

members (Randall et al. 2011). An understanding of team pro-

cesses within and across multiple independent organizations

(Marks et al. 2005) has promise for PBL. Team research clarifies

strong positive relationships among team processes, performance,

and team-member satisfaction (Lepine et al. 2008), so delving

into these team processes should provide further insight into

PBL. The research question is: what team processes within the

PBL buyer supplier governance structure leverage knowledge,

skills, and abilities in a way that increases system affordability?

The objective of this research is to develop a model of team-

level factors that influence PBL success. This article is organized

in the following manner. First, a literature review on PBL and

teaming is presented. Next, the method, grounded theory (GT), is

described. Last, discussion, implications, limitations, and conclu-

sions are offered.

Literature review

PBL began as a strategy to reduce postproduction support costs

of complex defense systems (Perry 1994). According to the U.S.

Department of Defense (DoD), PBL has been credited with

increasing system performance by 40% and reducing logistics

delay time by 70% (Fowler 2008, 2009). PBL has been attrib-

uted with saving the U.S. Navy’s F/A-18 program $688M. In the

United Kingdom Defense Ministry, PBL saved the CH-47 sup-

port program $250M (Fowler 2008).

PBL foundation

Traditionally postproduction support for long life cycle systems

involved transactional relationships, where the goal is to return

the system to production specifications (Carter 2009). In this

framework investment is targeted to safety flaws, significant reli-

ability issues, or performance improvements (Maclean et al.

2005). There are seldom significant investment funds available to

Table 1: Sample of performance-based strategy use

Use Context Reference

Design and

maintenance of

roads and bridges

Transportation Ozbek and de la

Garza (2011)

Design, operation,

and maintenance

of rail

Transportation Siemens (2011)

Postproduction

support activities

within the defense

sector

Defense Kratz and Diaz (2012)

Postproduction

support in

commercial

aviation

Aerospace Flint (2007); Kim

et al. (2010)

Highway systems

sector

Roads Transportation Research

Board (2009)

Public waterworks Utilities EAP Task Force (2011)

Child welfare Social services Collins-Camargo

et al. (2011)

Public healthcare Healthcare Ssengooba et al. (2012);

The World Bank (2008)

Manufacturing

facilities

Manufacturing Hypko et al. (2010)

PBL and Interfirm Team Processes 213