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Operations strategy for theeffective delivery of integrated

industrial product-serviceofferings

Two exploratory defence industry case studies

Partha Priya DattaOperations Management Group,

Indian Institute of Management, Calcutta, India, and

Rajkumar RoyDepartment of Manufacturing, Cranfield University, Cranfield, UK

Abstract

Purpose – As enterprises focus on offering integrated product/service bundles, performance-basedcontracts become ever so important in ensuring effective delivery. Performance-based contracts fallunder the result-oriented category of industrial product service systems (PSSs). The paper aims topresent a conceptual framework for operations strategy in performance-based industrial PSSs that willhelp manufacturing companies configure their operations to support effective delivery of integratedproduct/service offering.

Design/methodology/approach – This paper first develops a conceptual framework for operationsstrategy in performance-based contracts by identifying the key elements after a detailed systematicreview of literature. A major shift in support and maintenance logistics for complex engineeringsystems over the past few years has been observed in the defence and aerospace industries.Availability contracting, a special type of performance-based contracts, is replacing traditional serviceprocurement practices. Two exploratory case studies involving defence availability contracts areconducted for making inferences regarding the operations strategy.

Findings – The important findings of this research are a set of elements of operations strategyguiding the development of a conceptual framework, a set of operating principles and processessupporting effective delivery of performance-based service contracts.

Originality/value – The true value of this research is to open up the novel area of result-orientedindustrial PSSs operations strategy by capturing the key characteristics of operations using bothliterature and empirical evidence.

Keywords Operations management, Contracts, Defence sector

Paper type Case study

1. IntroductionUpon entering into twenty-first century, the business environment for the manufacturingindustry has changed significantly. Well-designed products are no longer found tobe criteria for distinct competitive advantage in manufacturing industries.

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0144-3577.htm

This research reported here is jointly funded by British Aerospace Systems PLC and Engineeringand Physical Science Research Council (EPSRC) and conducted as part of the Support ServiceSolutions: Strategy and Transition (S4T) project consortium led by the University of Cambridge.

Industrialproduct-service

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Received October 2009Revised March 2010

June 2010October 2010

Accepted November 2010

International Journal of Operations &Production Management

Vol. 31 No. 5, 2011pp. 579-603

q Emerald Group Publishing Limited0144-3577

DOI 10.1108/01443571111126337

Manufacturers now tend to include more services in their total offering to facilitate thesale of their goods (Brax, 2005). Unlike the normal product offering with definedfunctionality the product-service mixed offering includes a greater variety of functionsand therefore a higher value ( Johansson et al., 2003).

Baines et al. (2007) have identified several key challenges of integrated product/serviceofferings. The transformation towards including a higher degree of services in the “productsolution” has in some cases produced some managerial difficulties for the companies (Olivaand Kallenberg, 2003). Companies need to be able to configure their operations strategy tosupport their offering and there is little guidance in existing literature on how to achievethis. This paper aims at understanding the operations strategy for successfully deliveringintegrated product/service offerings. This paper particularly focuses on industrial productservice offerings, which is defined as supply of services in the form of tangibles such asspares, manpower and consumables related to maintenance of industrial goods andintangibles as training, knowledge, technical support and customer support for effectiveoperations (Johansson and Olhager, 2004). The contracts between the customer andprovider are of prime importance in industrial product service systems (PSSs). Especially,for high-cost, high-technology and long-life products/equipment, the service contracts areextremely crucial. Performance-based contracting is replacing traditional spare purchasetype contracts. Customers are now focusing on “what” is required in terms of equipmentoperations rather than “how” a facility (a spare/repair action) is to be delivered according toset technical specifications (Gruneberg et al., 2007). A major shift in support andmaintenance operations for complex defence equipment (aircrafts, ships and missiles) hasbeen observed in defence and aerospace industry over the past few years.

Availability-based contracting, a variant of performance-based contracting,is increasingly being used in UK defence equipment service procurement. Anavailability-based contract is a type of contract in which the end customer contracts outthrough-life support of equipment based on availability levels, as opposed to the traditionalmodel where assets and services are purchased on demand (www.defenseindustrydaily.com/). Such contracts are beneficial for both customers and providers. The customereliminates maintenance infrastructure and inventory costs. On the other hand, the providerassures a long-term revenue stream through long-term contracts. However, such contractscan only deliver benefits if the operations strategies are properly and effectivelyimplemented. The academic literature provides very little guidance with respect to how theoperations strategies for such contracts should be implemented. This paper aims at fillingthis gap by reporting the key elements of operations strategy for performance-basedindustrial service contracts in the context of UK defence industry.

This paper first reviews the relevant literature in the field of operations strategy in thecontext of industrial service offerings. Next, the paper discusses the concept ofperformance-based service contracts and the delivery strategies. The paper provides aconceptual framework for operational strategy for performance-based service contracts.Next, the paper describes the case study based research methodology adopted and showshow the different elements of operations strategy identified in the framework contribute toeffective delivery of services in two defence service contracts.

2. Literature reviewThe changes in the type of offering (a combination of product and services) and theassociated performance outcomes warrant a reformulation of a firm’s operations strategy.

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This paper focuses on performance-oriented industrial services operations strategy.The next two sub-sections review literature in industrial services operations strategyand performance-based industrial service contracts.

2.1 Industrial serviceIn industrial services, firms move from manufacturing physical goods to deliveringservices by adding services as a key component of their business strategy.

One of the first to discuss the change in operations under industrial service settings wasLevitt (1972) who described how manufacturing firms should integrate services into theirofferings and focus on nurturing their customer relationships, recommending aproduction-line approach to services. Sundbo (1994) presents the idea of modularisedservice as a category between pure manufacturing and pure services (Table I). This enablesservice operations to utilise the efficiency characteristics of manufacturing processes. Thischange has later been designated as “servitisation” (Vandermerwe and Rada, 1988).

Manufacturing Modulised service Classic service

The product it generally concrete(it is technology)

The service is semi-material (it isnot technology, but is embeddedin a technological form)

The service is intangible(it is not technology)

Ownership is transferred when apurchase is made

Ownership is partly transferred(the right of using the servicefacility in an appointed periodand form)

Ownership is not generallytransferred

The product can be resold The product can be passed onand sometimes resold

The product cannot be resold

The product can bedemonstrated

The product can bedemonstrated by reference toprevious examples

The product cannot usually beeffectively demonstrated (it doesnot exist before purchase)

The product can be stored bysellers and buyers

The product can sometimes bestored (e.g. self-service, discs)

The product cannot be stored

Consumption is preceded byproduction

Production and consumption areseparated in many cases (but notin all)

Production and consumptiongenerally coincide

Production, selling andconsumption are locallydifferentiated

Production, selling andconsumption are locallyseparated in many cases(but not in all)

Production, consumption andoften even selling are spatiallyunited

The product can be transported The product can often betransported (if it is aninformation service)

The product cannot betransported

The seller produces The buyer takes part in thecomposition of the finishedproduct, but not in theproduction

The buyer/client takes partdirectly in the production

Indirect contact is possiblebetween company and client

Direct contact is not necessaryfur the production, butsometimes for delivery

In most cases, direct contact isnecessary

Can be exported The service can sometimes beexported (particularly if it is aninformation service)

The service cannot normally beexported, but the servicedelivery system can Table I.


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A PSS is considered to be a special case of servitisation, which provides value byintegrating products and services (Baines et al., 2007). Case study research (Roy, 2000) hasrevealed a spectrum of PSS types. First is the product-oriented service (where the primefocus of the offering is the product and service is offered as an addition), second is theuse-oriented system (where the provider sells the use providing all additional actions tosupport life cycle of maintenance and upgrade) and final category is result-oriented system(where the seller is paid for the units of service delivered to the customer). Baines et al.(2009) studied a manufacturer providing a portfolio of product/service offerings andoutlined a framework for operations strategies in the context of product-based servitisedorganisations. The researchers identified 12 different types of operational characteristicsunder two key operations strategy elements – structural and infra-structuralcharacteristics. Although this study throws some light into the operations strategy in areal-world industrial services offering yet the study focuses more into standardisedproduct assembly type services with strong product-oriented service focus.

Oliva and Kallenberg (2003) demonstrated a manufacturing to services continuum formachine manufacturing industry. They showed how products become part of theoffering in industrial services in contrast to being the focal point of value proposition.Jackson and Cooper (1988) found that industrial services need to be customised to meetan organisation’s needs and that they are also more complex. Jackson et al. (1995) dividebusiness services into two categories: maintenance, repair and operation services andproduction service while Boyt and Harvey (1997) classify industrial services intoelementary, intermediate and intricate services. Hence, industrial services are viewed asa series of activities connected to customer’s value creating processes in abusiness-to-business context.

Thus, industrial service offerings are increasingly of a more customer oriented,comprehensive and tailored nature. According to Wise and Baumgarter (1999),“integrated solutions” entail products and services being combined into seamlessofferings. A “customer solution” is an integrated offering characterised by customisation(i.e. based on the unique requirements of each customer) and typically, but not necessarily,co-creation (i.e. co-developed with the customer) (Vandermerwe, 1996). According toFrambach et al. (1997), industrial customers increasingly want turnkey solutions insteadof products that partially solve their needs. This means suppliers having to offer tangibleproducts augmented with product services. Finally, “full/advanced service” is defined as“comprehensive bundles of products and/or services that fully satisfy the needs and wantsof a customer related to a specific event or problem” (Oliva and Kallenberg, 2003). In orderto adopt service orientation in industrial firms, perspective transitions have been pointedout by several researchers. A transition is needed when firms change from a servicesupporting the customer’s product to a service supporting his actions (Mathieu, 2001).Adopting a full service or solutions strategy in industrial services is typically interrelatedwith a number of strategic changes on the supply side of firms (Gadde and Snehota, 2000).

Spring and Araujo (2009) examined the implications of offering differentcombinations of products and services on the operations strategy. A generaldiscussion of product/service offerings is carried out in different examples ranging frombusiness-to-business to business-to-customer personalised offerings. The study islimited to intra-firm capabilities in conceptual discussion of operations strategy thuslacking a holistic perspective. The study lacked practical significance in absence ofdetailed empirical study of real-world cases. One study by Roy and Cheruvu (2009)

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looked at the different drivers for competitive industrial product service offeringsdevelopment. They looked at the infrastructural factors as well for deliveringsustainable customer value. However, the framework is the conceptual nature with novalidation from real world. Frohlich and Westbrook (2001) investigate the differingsupply-chain integration strategies implemented by a firm with upstream suppliers inaccordance with its integration strategies with downstream customers. These authorsconclude that tighter integration (i.e. longer “arcs”) resulted in better performance. In theservice operations literature, a distinction has been made between “back office”(supplier-facing) and “front office” (customer-facing) activities (Chase and Tansik, 1983).Most of the literature in industrial services focuses mainly on conceptual frameworkderivation (Boyt and Harvey, 1997; Johansson and Olhager, 2004). Very few studies havelooked into the operations strategy of industrial organisations adopting a service focus.Also, empirical evidence on implementation and challenges of implementing theoperations strategies to effect successful delivery of full services is sparse in literature.

2.2 Performance-based industrial service contracts – why and howPrincipal-agent model provides a good theoretical basis for understanding thebuyer-supplier relationships, information and need for performance monitoring(Robinson and Scott, 2009) in industrial service contracts. The principal (customer)cannot observe and evaluate the time and effort put in by the supplier in a particulartask. Under such situations, the agent (supplier) can attempt to maximise his utility byinappropriately representing his efforts (Kunz and Pfaff, 2002). It is, therefore, importantto have an output or performance-based contract designed. The performance-basedcontracting tends to focus on achieving a required outcome rather than a contract for thesupply of a set of prescribed specifications (Gruneberg et al., 2007). Thus, the buyerpurchases the result of product use not ownership of the product. Underperformance-based contracts suppliers have full responsibilities for performance(Glas and Essig, 2008). There are equitably aligned risks and incentives betweensuppliers and customers in performance-based contracting (Kim et al., 2007). Since suchtype of contracts involve the entire performance periods of the assets, relationshipbetween actors play a key role in the operations strategy formulation.

Performance-based contracts are an example of result-oriented industrial PSS.This has affected the way in which the supply network interacts as responsibilities getredistributed based on a target outcome (Alonso-Resgado and Thompson, 2006).This means that all associated parties need to understand the process, competencies andassets required to deliver the customer’s required performance level. Through incentivesor penalties, involved parties need to improve performance over contract period.In performance-based contracts, customers may have significant tasks to perform(Ferrer et al., 2010). Parasuraman et al. (1985) state that evaluating the quality of a serviceis a difficult matter, because customer’s involvement makes it difficult to standardise theoutput. They also state, in many cases, there are no clear performance measures forevaluating service quality as it is based on the outcome as well as the process of servicedelivery. This paper highlights performance assessment as one of the key elements ofoperations strategy in performance-based service contracts.

A successful service delivery as per the pre-set performance requirements (quality,speed, flexibility or cost leadership) requires understanding the operations capabilitiesof the provider firm. Most world-class operations strive to deliver high performance in all


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four of these performance requirements, but in any performance-based service contract,this is very hard to quantify and maintain as there are many uncertainties involved.A match between demand and resources enables desired service quality standards to beachieved while also maintaining resource productivity rates (Armistead and Clark,1992). In order to achieve this match, it is necessary to identify and study processesinvolved in service delivery (Aurich et al., 2006). As the service offering constitutes arange of different activities, there is value in breaking down the different elementsconfiguring the industrial service operations strategy and analysing the interactions anddistinctions between them. Operations strategy needs to account for service deliveryuncertainty driven by the quality of information and type of contract (Armistead andClark, 1992). These need to be studied in detail to guide operations strategy developmentin performance-based industrial and performance-based service contracts.

3. Research design3.1 Research question and programmeThe literature review shows that few research work have been directed to understand theoperations strategy in a result-oriented industrial services offering. A number oftypologies, models have been developed to provide some guidance on how to configurean operations strategy. However, empirical validation is required to provide a completeand detailed picture of the challenges and effective operations in performance-basedindustrial PSSs. Performance focus is lacking in most of the studies in industrial serviceoperations strategy literature. Thus, the research question arises for this study as to howto provide an effective and efficient service delivery system that is capable of meetingtarget outcomes desired by the customer and the service provider? As previous work inthis area is largely conceptual and the area of performance-based service contracts isrelatively new, we first build a theoretical framework that synthesises the differentoperations strategy elements mentioned in extant literature. Next, we carry out in-depthcase study of two such performance-based service contracts. The results of this study areused to identify operations strategy elements for effective delivery of performance-basedcontracts. The case study method is summarised in following sections.

3.2 Case study based research approachCase study based research is appropriate in this context since we are addressing a “how”type of research question (Baines et al., 2009). This methodology is suitable for arelatively new, exploratory investigation where the variables are still unknown and thephenomenon being studied (operations strategy in performance-based industrial PSS) isnot well understood (Ferrer et al., 2010). The unit of analysis for this research programmeis an organisation, which enters into performance-based service contracts withcustomers in order to deliver services as per pre-agreed performance measures.We reviewed two cases in depth. The analysis and review of the cases were based onsemi-structured interviews with personnel within the customer organisation and thefirm. All the interviewees are managers involved in the operation and design of thecontracts. In all, 15 semi-structured interviews were conducted with stakeholders fromthe firm and customer organisation. Many of the interviews were conducted by a largemulti-disciplinary research team (involving researchers from manufacturing, marketingand operations management disciplines). This allowed an all-rounded coverage of theresearch topic and facilitated exploration from different perspectives for effective data

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collection (Meredith, 1998). The resultant interview questions were decided by theresearch team in an integrated manner after carrying out several initial familiarisationworkshops with the organisations. The interview questions primarily focus ondetermining how and why the case companies had begun to deliver advanced/full serviceofferings and the issues, this was posing for their earlier product-oriented operations.A series of guiding interview questions were identified. These were organised around theframework that is presented in Section 5. A selection of key questions included:

. How is the service designed? How is service performance measured?

. How is the service delivered? What constitutes the offering? What are the keyresources?

. What is the outcome of the service delivered? What is the benefit to the customer?

. How do you perceive the service level delivered? What is the benefit to you?(customer questions)

. How do you manage operations to deliver target performance?

. What are the implications of shifting away from a manufacturing-orientedoperating model in these contracts?

3.3 Case selectionChoice of case companies is critical to this research as we needed to explore a companywith experience of executing performance-based service contracts. Since the area isrelatively new and services are diverse, it was very difficult to find contracts offeringsimilar types of product/service combinations. We were of the opinion that the casecompany should have prior experience of configuring operations strategy inproduct-based offerings. This would help bring out the challenges and new elementsof operations strategy in an advanced services offering under performance-basedcontracts. The UK defence industry was the ideal choice for our research.

Availability-based contracting is increasingly being used in UK defence equipmentservice. The premise behind availability contracting is summarised in the official UKMinistry of Defence (MoD) Guidelines (2007, www.berr.gov.uk/files/file33168.pdf):

Contracting for Availability (CfA) is a commercial process which seeks to sustain a system orcapability at an agreed level of readiness, over a period of time, by building a partneringarrangement between the MoD and Industry.

Under CfA, the supply of spares takes second place to the overall goal of providing theavailability and upgrades to mechanical and electrical equipment. Consequently,industry is incentivised to deliver reliable and capable equipment (e.g. an aircraftshould be capable of flying day or night with the weaponry to defend and attack),reduce maintenance downtimes and minimise the number of required spares as part ofa total package of maintenance, repair, overhaul, logistics support as well as equipmentavailability. In such cases, both the delivery and the availability performance becomepart of the service offering. While organisations may be aware of the former and couldprice/contract accordingly, it is often a challenge to contract/price on the latter asavailability is of value to the customer even if the actual service does not get consumed.

Two defence contracts are used as two case studies to be able to understand newprocesses and behaviours and overcome single case study limitations. Both thecontractors are predominantly manufacturing-oriented organisations and availability


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type service contracts are totally new business to them. For confidentiality reasons, thetwo contracts are termed X and Y and the companies are termed 1 and 2, respectively.Contract X is for weapons systems service in the army and Y is for fighter aircraft servicewithin the air force.

3.4 Results and data analysisData were collected between June and November in 2008. Interviews were conducted withkey personnel from the two organisations and the MoD. Each of the 15 interviews lastedbetween 1.5 and two hours and was recorded and subsequently transcribed. We coded theinterview data on a number of dimensions underpinning the conceptual framework to gaininsights into the key variables that govern the service delivery performance. In the nextfew sections, we describe our framework along with the interplay of different keyvariables and illustrate them with exploratory investigation of case material.

4. An operations strategy framework for performance-based industrialPSSThis section summarises the principal constructs underlying the theoretical frameworkshown in Figure 1. Table II summarises the key elements of operations strategy (extractedfrom literature). These are categorised under prime dimensions of the framework. Fourkey dimensions of operations strategy in performance-based contracts are identified. Thefirst is contract definition that covers price, payment plan, technical and functional aspectsof the industrial assets, key performance indicators (KPIs), operations constraints,contract duration, contingencies and liabilities of both parties (Gupta et al., 2008). Thesecond dimension operations strategy of the service provider includes end-to-end service

Figure 1.Performance-basedcontract operationsstrategy conceptualframework

Contractdefinition

a) Incentives

b) Performance measures

Service provideroperations strategy

Organisational readiness

Customeroperations strategy

Service deliveryPerformance measures

Co-production

External environmental factors

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Table II.Performance-based

industrial servicecontract operations

strategy map


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operations carried out by the provider (Kumar and Kumar, 2004). The service deliverystrategy involves the process of providing the service for sustaining customer specifiedperformance (Gupta et al., 2008). Such type of contracts depends heavily on customer’soperations strategy. Table II shows the interrelationships between the differentdimensions through identifying the key elements described below.

4.1 Co-productionThe performance-based contracts imply active customer participation. Ng et al. (2009)state that, usage of the equipment by the customer under such long-term contracts for thewhole operational life of the equipment will have impact on the way the contractor deliversservice. Kumar and Kumar (2004) support this by stating that climatic and operatingconditions have considerable influence on service delivery. Customers’ motivation,knowledge, expectations and skills can be diverse and difficult to capture causinginefficiencies in the output process (Kellogg and Chase, 1995). Therefore, the servicedelivery system has to be flexible enough to cope with the variability in (customer) inputs.However, some researchers are of the opinion that, service output improves throughcustomer participation by enhancing two-way communication (Lovelock and Young,1979) and enhancing the perceived value of service offerings (Bitner et al., 1997). Hence,customer’s operational processes form a very important part in forming operationalstrategies for performance-based service contracts.

4.2 InformationServices are information rich and require information processing capability from theservice personnel and service technology. Customer is a key supplier of performancecritical information in delivery of performance critical information (Sampson andForehle, 2006). Customers exchange information with service delivery performers toassure that customer expectations fit his/her perceptions at least for those activities(Collier, 1994). Information on the installed equipment or service performed is requiredas an input for delivery of industrial services, performance measurement andcontinuous improvement (Oliva and Kallenberg, 2003). Information sharing integratesfront and back office activities (Price et al., 1995) and reduces customer effort to acquireinformation about back-office activities.

4.3 IncentivesPowerful incentives are used in such contracts to transfer risks and ensure compliance withperformance measures (Robinson and Scott, 2009). Consequently, as suppliers take on moreresponsibility, they seek new arrangements for sharing of profits, costs and risks(Johnsen et al., 2009). In defence contracting, “incentives to produce good performance” and“incentives to induce innovation” were subjects of discussions (Fuhr, 2007) to ensure that thegoals of the parties concerned are aligned. Robinson and Scott (2009) showed an incentivesystem that measures level of service against a percentage scale with a minimum standardand a scale for applying penalties if performance falls below threshold. Kim et al. (2007)used analytical models to examine the optimal incentive mechanism for delivering thebest product availability requirements in aerospace and defence organisations. Accordingto Ng et al. (2009), unless severe conditions arise service providers’ inability to meet targetsmay result in payments being withheld or reduced. If service performance is tied withcustomer’s operations, uncertainty due to varying level of equipment usage will be reduced.

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588

4.4 Organisational readinessDeveloping a service culture inside a traditional manufacturing business is needed forcomplex engineering service design and delivery (Neely, 2008). In industrial services,solution provider will get competitive advantage by understanding customerorganisational cultures and values (Kumar and Kumar, 2004). In industrial servicedelivery, it is necessary to involve the entire supply chain. In industrial service supplychains, the efficient management of demand, capacity and resource, customer and supplierrelationship is important (Lee, 2002). An agile service network has to be developed that canbe changed dynamically with varying customer demands (Roy et al., 2009).

4.5 Performance assessmentThe selection of the KPIs is a key step to define the processes in service delivery.A well-drafted output specification is fundamental to the successful delivery of long-termperformance-based service contracts (Robinson and Scott, 2009). Co-production ishowever, a source of two measurement problems. First, input calculus should embrace allthe productive resources provided by supplier and customer in the transformationprocess. Typically, the contributions of the client are not accounted or compensated butthey affect as sacrifice for the client (Ravald and Gronroos, 1996). Second, the total serviceoutput consists of the benefits gained by both parties. To bring the reasoning a stepfurther, service processes may link several contributors and beneficiaries, which are notcompensated for their inputs or charged for the gained benefits and spillages (businesscycles or competitors or numerous works done as a gesture of goodwill). There exist anumber of factors that affect the service outcome beyond the official book keeping of theparticipating companies. As illustrated by Parasuraman (2002), service operationalproductivity is sum of seller and buyer productivity. The buyer assesses his productivityby relating the effectiveness (quality, satisfaction and utility) to his own inputs, whilesupplier’s productivity links revenues to the inputs in use.

4.6 The frameworkAll these elements, dimensions of operations strategy and their linkages are shown inthe form of a framework in Figure 1. The arrows show the information element ofoperations strategy that contributes to the service delivery. The contract definitionshapes the supplier’s operations strategy which in turn affects the service delivery.Performance critical information from customer’s operations strategy is essential forsuccessful service delivery. Similarly, the service performance information from servicedelivery will help customer develop operations strategy in terms of resource and facilityplanning. Customer’s operations strategy shapes the performance measures drafted incontract definition, whilst incentives reshape customer’s operations strategy in terms ofresponsible equipment usage. The entire framework is shaped by environmental driverslike world and state economy, business scenario and technology development. Theexternal political and economic environment can impact the customer’s ability toprocure a system as the need arises. Accordingly, this will shape the contract definitionand operations strategy of customers. Rapid technological development can increase thecapabilities of the companies and this might positively influence the supplier’soperations strategy. The members in the performance-based contracts need to agree onpayments, rewards and performance measures after assessing the gap between requiredand delivered services. The service delivery process is often at an unbalanced state,


offerings

589

where the service provider’s capacity and the demand rate are not equal. This influencesthe sustainability of a contract as the perceived customer value or satisfaction getsaffected. The suggested conceptual framework serves as the foundation for illustratingoperations strategy of performance-based service contracts in the case studies discussedin the next section.

5. Findings from the case studiesIn the following sub-sections, we first discuss the key findings from the two case studiesand categorise them under the key operations strategy dimensions. Next, we will carryout a comparative analysis of the two cases to show how the interrelationships betweenthe different operations strategy constructs and dimensions affect the service deliveryperformance.

5.1 Customer operations strategy5.1.1 Multiple customers. Projects X and Y are launched to provide support to defenceequipment on an availability basis. The companies have to satisfy two differentcustomers, one is the defence logistics organisation (DLO) or the “commercial customer”who drafts the contract jointly with the companies and the other is the “operationalcustomer” or the MoD personnel in regiment, navy or air force who actually use theequipment (Figure 2). The operational customers provide necessary resources calledgovernment furnished assets (GFA) for service delivery. The service level agreementsbetween DLO and operational customer are about setting the key performance measuresfor availability. The DLO expects the contractor to offer means to save operating costs.The selected case studies involve similar equipment in operation for a long time and theMoD has detailed service and cost information for X and Y.

Both the DLO and the operational customers demand reduction of operational faultsin battlefield. To add to the complexity, all military equipment spares inventory isowned by the MoD and contractors are tasked to either use existing inventory of sparesto ensure availability or purchase new ones at their own costs. This creates a choice ofdelivering availability through existing spares (lower costs to the contractor but may

Figure 2.The differentrequirements of customersin availability contracts

Commercialcustomer

Operationalcustomer

GFA Contractor

1st linearisingsreduced

SLA Contract

Savings

Manpower savingsaircraft availability Increased profit

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590

need more frequent repairs) or new parts (cost more to the contractor but would requireless frequent repairs). Under a CfA type of contract the contractor will endeavour tomanage the trade offs in the most efficient way possible. One representative fromcompany 1 mentioned about the dilemma as:

If you rely on the kit being to a certain standard or reliability, there will be a problem.Since the kit may not have been looked after properly in the past, has not been maintainedproperly [. . .] we might suddenly find ourselves spending a lot more money than firstanticipated.

5.1.2 External environment. The problem of having multiple customers is pointed outby one MoD respondent as the separation of point of service delivery and usage. Thisactually impacts the contract definition:

There’s quite a big gap between the commercial staff who negotiated the contract [. . .] andthose who employ the output of the contract.

An important element of the operations strategy is the external environment. As theneed to mount military operations from different geographical regions develop,current CfA does not take that into account sufficiently as for where the real availabilityneeds to be delivered.

5.1.3 Co-production. One of the respondents from the customer side commented:

The service is delivered through a network which is not owned by the contractor renders itunstable [. . .] because the military customer acts as a supplier to the industrial contractor interms of returning the unserviceable components in a timely fashion.

This is true for both the cases and actually harms the service delivery by adverselyinfluencing the performance. The typical challenges of co-production in the two casesare discussed in Table III.

First problem is the timely availability of customer supplied resources in suchcontracts. In view of the companies, customer does not necessarily regard or see impactof their roles in delivering the service. Customer always believes their “first role is to bea fighting force”. Though customer commits fixed annual man-hours to the contract,but only a fraction is available, rest is spent in guard duty, sports day. Thisnon-availability adversely impacts the performance of the contracts.

Second problem is culture compatibility. One MoD respondent believes the earlieranimosity on air-force side to apparent invasion of company 2 has died down slowly.However, such operation in partnership is effective only with contractors’ little bit thatis close to the air-force bases where a small team of company 2 is co-located. Thecompany 2 and MoD organisations which are far away from the service delivery sitestill inherit the age-old adversarial buyer supplier relationships. Some examplesare depicted in Table III.

5.2 Contract definition5.2.1 Incentives. In contract Y, company 2 and MoD are incentivised through again-share pain-share mechanism. The incentive scheme is based on a banded firm price(i.e. price varies with different flying usage band) and a built-in mechanism for sharingsavings throughout the contract. Price is reviewed every five years. The monthlypayment is linked to contractor’s availability performance. Also, there is an annualreconciliation against where company 2 said they are going to be in terms of spending.


offerings

591

Op

erat

ion

sst

rate

gy

dim

ensi

ons

Con

trac

tX

Con

trac

tY

A.

Cu

stom

erop

erat

ion

sst

rate

gy

Al.

Co-

pro

du

ctio

n1.Im

plem

entatioonof

co-production.

Com

pan

y1

emp

loy

sp

erso

nn

elw

ho

join

the

terr

itor

ial

arm

yto

ensu

refr

ont-

lin

eav

aila

bil

ity

and

they

wor

ksi

de-

by

-si

de

the

Roy

alE

lect

rica

lan

dM

ech

anic

alE

ng

inee

rs(R

EM

E).

Th

eyar

eca

lled

spon

sore

dre

serv

es

1.Im

plem

entation

ofco-production.

Com

pan

y2

has

tou

sep

eop

lean

das

sets

that

“bel

ong

”to

the

MoD

ind

eliv

erin

gth

ese

rvic

ean

dal

sob

eco

-loc

ated

ph

ysi

call

yat

the

cust

omer

’ssi

te.

For

exam

ple

,b

oth

com

pan

y2

and

MoD

per

son

nel

wor

kin

the

bay

ssi

de-

by

-sid

eon

mai

nte

nan

cean

dre

pai

rac

tiv

itie

s2.Culture

clash.I

nit

ial

adv

ersa

rial

rela

tion

ship

bet

wee

nR

EM

Ean

dco

mp

any

1p

erso

nn

elis

stil

lex

isti

ng

.Th

eM

oDp

eop

lear

esc

epti

cal

abou

tfe

llow

civ

ilia

nw

ork

men

.C

ult

ure

oftr

ust

isst

ill

not

ther

e.Y

ears

ofn

egli

gen

ceto

obso

lesc

ence

risk

man

agem

ent

orp

roce

ssim

pro

vem

ent

resu

lted

inla

rge

spar

esst

orag

e

2.Culture

clash.J

oin

tb

ehav

iou

r/cu

ltu

reem

erg

ing

afte

rin

itia

lp

erio

dof

anim

osit

y.C

ult

ure

ofb

lam

eis

exis

ten

t.S

up

pli

ers

bla

me

GF

Ain

case

ofan

yp

erfo

rman

cefa

ilu

re.A

irfo

rce

bla

mes

sup

pli

ers

ifth

ere

isan

yp

rob

lem

even

ifn

otre

late

dto

them

.Cu

ltu

reof

“if

ind

oub

tse

nd

bac

kto

rep

air”

resu

lts

inh

ug

eco

sts

ofre

pai

ror

test

ing

ofn

ofa

ult

sar

efo

un

dB

.C

ontr

act

des

ign

Bl.

KP

IsO

nly

one

sin

gle

com

pos

ite

succ

ess

fact

oris

use

dto

asse

ssco

ntr

act

per

form

ance

Mu

ltip

lep

erfo

rman

cein

dic

ator

sar

eu

sed

toas

sess

con

trac

tp

erfo

rman

ceB

2.In

cen

tiv

es1.Service

provider

incentives.

Fu

llri

skis

onco

mp

any

1as

ther

eis

no

pai

n-s

har

ear

ran

gem

ent

and

any

esca

lati

onin

cost

sd

ue

toin

effi

cien

tm

anag

emen

th

asto

be

com

pan

y1’

sre

spon

sib

ilit

y.

Th

eg

ain

-sh

are

arra

ng

emen

tis

also

var

iab

le

1.Serviceprovider

incentives.

Ver

yd

iffi

cult

toco

mp

reh

end

and

com

ple

xto

oper

ate.

For

exam

ple

,th

eco

ntr

act

Yin

cen

tiv

esc

hem

eh

asa

fix

edco

stel

emen

t(a

cert

ain

nu

mb

erof

emp

loy

ees

wh

ow

ill

be

onth

ep

latf

orm

for

the

life

ofth

ep

latf

orm

,IT

/IS

dev

elop

men

tan

dtr

ain

ing

).T

his

mea

ns

that

cost

sh

ave

tob

ere

cord

edan

dal

loca

ted

acco

rdin

gto

wh

eth

erfi

xed

and

par

tof

the

ince

nti

ve,

orfi

xed

bu

tn

otp

art

ofth

ein

cen

tiv

esc

hem

e,an

dv

aria

ble

cost

s.E

ven

then

ther

eis

add

itio

nal

com

ple

xit

y;t

he

“fix

ed”

nu

mb

erof

emp

loy

ees

isn

otac

tual

lyfi

xed

and

wil

lfl

exd

own

war

ds

som

ewh

atov

erti

me.

Var

iab

leco

sts

are

lin

ked

dir

ectl

yto

rep

air

rate

s2.Custom

erincentives.

To

pro

tect

the

serv

ice

pro

vid

erfr

omu

nex

pec

ted

cost

sd

ue

tom

isu

sere

late

dd

amag

es,c

ontr

acts

are

des

ign

edto

cov

erth

ese

clau

ses

2.Custom

erincentives.

Th

eco

ntr

acts

are

des

ign

edto

cov

erG

FA

-re

late

dis

sues

.If

ther

eis

alo

ssof

avai

lab

ilit

yd

ue

toG

FA

non

-av

aila

bil

ity

,th

ese

rvic

ep

rov

ider

can

reco

nci

leth

esh

ort-

fall

(continued

)

Table III.Operations strategydimensions for contractsX and Y

IJOPM31,5

592

Op

erat

ion

sst

rate

gy

dim

ensi

ons

Con

trac

tX

Con

trac

tY

C.

Ser

vic

ed

eliv

ery

1.Maintenance.F

orw

ard

and

dep

thm

ain

ten

ance

pol

icy

–tr

adit

ion

alfo

ur

lin

esof

mai

nte

nan

cesu

pp

ort

con

den

sed

into

asi

mp

lifi

ed,

two-

lev

elco

nst

ruct

:fo

rwar

dan

dd

epth

.F

orw

ard

sup

por

tco

nta

ins

only

bet

ter

trai

ned

fron

tli

ne

peo

ple

and

has

ag

reat

ern

eed

for

resi

lien

ceas

equ

ipm

ent

infr

ontl

ine

has

ver

yli

ttle

dow

nti

me.

Dep

thsu

pp

ort

coll

apse

sth

ese

con

dli

ne

ofm

ain

ten

ance

by

red

uci

ng

the

nu

mb

erof

mai

nte

nan

celo

cati

ons.

Com

pan

y1

isac

cou

nta

ble

toop

erat

eth

eb

ase

mai

nte

nan

cesa

vin

gm

anp

ower

and

red

uci

ng

rep

air

tim

e.–

Intr

odu

cin

gfl

eet

man

agem

ent

and

con

trol

led

hu

mid

ity

stor

age

toav

oid

det

erio

rati

onof

spar

esan

dsu

stai

neq

uip

men

tre

adin

ess/

avai

lab

ilit

y.–

Pro

vid

ing

spar

esw

areh

ouse

atre

gim

ent

wh

ich

isre

ple

nis

hed

asan

dw

hen

req

uir

ed

1.Maintenance.

Com

pan

y2

has

resp

onsi

bil

ity

for

sup

ply

chai

n,

flee

tm

anag

emen

t,op

tim

isin

gca

pab

ilit

yre

qu

ired

inai

rcra

ft,

man

agin

gob

sole

scen

ce,i

mp

rov

ing

mai

nte

nan

ceth

rou

gh

pu

t,re

du

cin

gle

vel

sof

risi

ng

s/fa

ult

s,re

du

cin

gn

o-fa

ult

s-fo

un

d,i

mp

rov

edte

stin

gfa

cili

ties

ofai

rcra

fts,

red

uci

ng

spar

esin

sup

ply

chai

nre

pai

rlo

op.

Com

pan

y2

also

inv

esti

ng

larg

ely

ind

iag

nos

tics

,te

stin

gto

avoi

dse

nd

ing

not

-fau

lty

par

tsto

rep

air

loop

2.Flexibility.

Com

pan

y1

also

intr

odu

ces

flex

ibil

ity

by

goi

ng

extr

a,fi

nd

ing

ever

yw

ayto

red

uce

cost

san

dim

pro

ve

serv

ice,

neg

lect

min

oru

ser-

rela

ted

dam

ages

,u

seof

all

the

oper

atio

nal

kn

owle

dg

eof

the

syst

emto

mak

eth

eop

erat

ion

sfl

exib

leto

chan

ges

incu

stom

erre

qu

irem

ents

2.Flexibility.

Con

trac

tor

for

thei

row

nb

enefi

th

asm

oder

nis

edth

eai

rfo

rce

wor

ksh

ops,

crea

ted

qu

alit

ym

anag

emen

tsy

stem

san

dre

du

ced

cost

sb

yd

oin

gth

ing

sd

iffe

ren

tly

.D

esig

nte

ams

look

ath

owth

ing

sar

ed

one

atb

ase,

how

they

serv

ice

and

how

tore

du

cese

rvic

ing

cycl

es,

can

they

bri

ng

mod

ifica

tion

sto

serv

ice

asth

eyk

now

oth

eru

sers

ofsa

me

airc

raft

doi

ng

thin

gs

dif

fere

ntl

yth

anth

ew

ayth

eU

Kd

oes.

An

ych

ang

esor

mod

ifica

tion

isen

dor

sed

thro

ug

hco

ntr

act

chan

ge

pro

toco

lb

yjo

intl

yd

evel

opin

gw

ith

cust

omer

D.

Ser

vic

ep

rov

ider

oper

atio

ns

stra

teg

yD

l.O

rgan

isat

ion

alre

adin

ess

1.Culture

change.T

rad

itio

nal

ly,c

omp

any

1w

ill

hav

eco

ntr

act

for

tech

sup

por

t,su

pp

lysu

pp

ort

sep

arat

ely

.In

bas

icm

ann

er,

cust

omer

kit

bre

aks

dow

nan

dth

eyco

me

toco

mp

any

1to

mak

eit

mor

ere

liab

le.I

nn

ow

ayth

ere

isin

cen

tiv

eto

red

uce

cost

sfr

omco

mp

any

sid

eex

cep

tg

ood

wil

l.A

lso,

ther

ew

asn

oco

mp

uls

ion

from

bot

hsi

des

tod

eliv

erb

ya

cert

ain

dat

e.B

ut

now

com

pan

y1

has

tob

ear

the

cost

tolo

okat

safe

ty,o

bso

lesc

ence

,rel

iab

ilit

y,e

tc.t

hro

ug

hou

tth

ed

ura

tion

ofco

ntr

acts

thou

gh

they

mig

ht

not

dir

ectl

yaf

fect

the

avai

lab

ilit

y

1.Culture.

Pre

vio

usl

y,

itw

ason

lycu

stom

eras

kin

gfo

rsp

ares

and

com

pan

y2

has

tosu

pp

lyit

.A

irfo

rce

got

wh

atth

eyas

ked

for.

No

dia

log

ue

was

ther

e,w

hy

they

nee

ded

that

par

ticu

lar

spar

e.T

hu

s,tr

adit

ion

alco

ntr

acts

inre

sult

edin

lots

ofas

sets

onth

esh

elf.

How

ever

,in

con

trac

tY

,co

mp

any

2is

mor

ein

tere

sted

inso

luti

ons,

dat

a,st

akeh

old

erm

anag

emen

tan

dri

skan

du

nce

rtai

nty

anal

ysi

sto

red

uce

the

cost

sof

serv

ice

2.Supplychain.

Th

ere

isa

lim

ited

gai

nsh

are

agre

emen

tw

ith

one

sup

pli

er,

bu

tsu

chn

egot

iati

ons

wer

eex

trem

ely

dif

ficu

lt,t

her

ew

asli

ttle

enth

usi

asm

inth

esu

pp

lych

ain

for

avai

lab

ilit

yco

ntr

acti

ng

.A

lso

asre

por

ted

abov

e,w

ider

sup

ply

chai

nin

vol

vem

ent

was

lim

ited

by

the

spar

esan

dca

nn

ibal

isat

ion

pos

sib

lein

this

con

trac

t

2.Supplychain.S

up

pli

ers

acco

un

tfo

rar

oun

d7,

096

ofsu

pp

lych

ain

cost

bu

tco

mp

any

2d

oes

not

app

ear

toad

opt

ajo

int

stru

ctu

ral/

pro

acti

ve

app

roac

hin

wor

kin

gw

ith

maj

orsu

bco

ntr

acto

rs.

Th

esu

pp

lier

sfe

elle

ftou

tof

the

avai

lab

ilit

yco

nce

pt

and

thu

sar

en

otlo

cked

into

the

risk

shar

ing

arra

ng

emen

ts.

Dif

ficu

ltie

sin

exte

nd

ing

the

dia

log

ue

insu

pp

lych

ain

sas

ther

eis

ver

yp

oor

lev

elof

sup

por

td

ata

avai

lab

le

Table III.


offerings

593

With respect to pain/gain sharing arrangements, there is pain or gain sharing set at50/50 if company 2 over-spends or under-spends, respectively. So, there are strongfinancial motivations for both parties to work together and continually reduce aircraftoperation costs. In contract X, company 1 effectively signs up for all of the risk in termsof agreeing to a firm price. There is no pain share in the contract. In the first few years,MoD gets a much higher percentage of the savings, after that majority of gain share goesto company 1.

The target price performance incentive (TPPI) type of arrangement between MoDand company 2 is shown in Figure 3. The key features of this incentive mechanism are:

. it gives a price sufficiently stable at contract signature to allow internal;

. the price easily changes with varying flying levels;

. fixed unit prices with supply chain providers; and

. provides a financial motivation (and simple share-out mechanism) for both sidesto work together to reduce “overall” programme costs.

The variable costs are subject to 50:50 gain and pain share keeping aside a certainpercentage for profit. The fixed costs savings are retained by the service provider whileadditional costs are funded by the provider.

The incentive arrangement is self-funded by savings under contract X. The share ofsavings is skewed based on involvement in the project. In early years, since MoD ismore involved (Figure 4), it enjoys larger share of savings. While towards the end ofthe contract, the share of company 1 (industry in Figure 4) grows. Again the shares of

Figure 3.Target price performanceincentive mechanism

Risk allowance in price

Painshare at 50:50

Company 2 retain 100% savings Company 2 retain 100% savings

Gainshare at 50:50 Gainshare at 50:50

100% fundedby customer (inc 3%)

Costincrease Cost

increaseProfit @ 3%

Baseline costand profit

Profit @ 10%

Costdecrease

Source: Contract Y, Company 2

Variable costs

• Spares-inclusive repairs• Manpower sensitive to flying levels

Fixed costs

• Fixed management team• L&IS and CIS• Training

• Contract price initially based on mutually agreed flying hours• Price and payment for variable costs is adjusted annually from baseline if projected flying hours differ to contract assmuptions• Annual adjustment also compares baseline costs/risks against actual cost/risk spend to calculate either painshare or gainshare

• Annual adjustment compares baseline costs/risks against actual costs/risk spend to calculate gainshare

Cost increase funded by company 2

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594

industry go down if the availability performance is below the set success factor (SF).On the other hand, if performance . SF, no additional price is paid to the industry byMoD but that additional savings is retained by the industry.

5.2.2 Performance assessment. The performance indicators in contract Y are set aftermuch careful considerations. The KPIs were designed to measure number of aircraftsavailable (flying hours to make them usable for training or battlefront) and sparesavailable (number of non-functional days). There is a non-contractual KPI that measuresthe the MoD’s performance in delivering GFA. In contract X, a single SF is based on a set ofweighted contract performance indicators (CPIs) (Figure 5). Performance indicators (PI)are measured to indicate the cause or mitigation of future problems. All CPIs are calculatedbased on analysis of quantifiable PIs. For example, in-barracks-availability (target100 per cent) is measurable based on threshold of two hours. If company 1 cannot get theequipment functioning in two hours, it starts losing money. The flexibility in design ofPIs and KPIs and how to achieve that are down to companies 1 and 2, respectively.

5.3 Organisational readinessExternal business environment and temporal demographics need to be considered inservice provider operations strategy. For example, in winter due to chartered airlinesmaintenance work sufficient number of maintainers may not be available.

Figure 4.Incentive mechanism

MoDshareline (%)

Industryshareline (%)

Contractstart

Contractend

Contractperformance + SFyy

Contractperformance + SFxx

Contractperformance

Source: Contract X, Company 1

MoDshareline

(%)

Industryshareline

(%)

Figure 5.Performance indicators

Equipementreadiness

PP

PP

P

P

P

Analys

is

Weig

htingIn Barracks

availability

Availabilityon

excercise/Ops

Source: Contract X, Company 1

SF


offerings

595

There are serious cultural challenges of a partnered solution. The military andcommercial teams have different ways of thinking about maintenance. For example, inorder to plan operations it is essential to record the timing of each activity inmaintenance but MoD personnel does not have the “swipe in culture”. So, it costscompanies extra manpower to find out MoD labour hours.

Both companies are design authorities in the equipment. Managing MoD runworkshops, managing military workforce are all new to them. The biggest challengefor company 2 is to gauge the fleet capability, maintenance schedules and stages ofoperational service upgrade. Attempts to simultaneously optimise the capability andupgrade are totally unexplored areas for it.

Another cultural barrier for both the companies was shedding off the pride of beinga design authority. One respondent clearly mentioned this challenge as:

[. . .] it’s engineering, it’s design, it’s manufacture, it’s drawings it’s configuration control it’sobsolescence whereas contracting is what else can I do for you sir and a courtesy and scopecreep again [. . .]

In view of one company 1 respondent:

[. . .] in traditional spare repair type contracts, contractors could have turned round and said“We can’t deliver” but now, if they do they are the ones who are going to suffer.

So, now both companies calculate over the period of contract the number of sparesbased on consumption profile data and price accordingly.

Suppliers account for the majority of supply chain cost and play key roles insubsystems, technical upgrades, repairs and obsolescence management. Sinceavailability contracting incentivises lower number of faults, it is very difficult toincentivise the suppliers in such long-term contracts. In the cases, the service providersset up traditional contracts with their suppliers, where the suppliers have no visibility ofthe customer demand.

5.4 Service delivery5.4.1 Information. Both companies and the MoD respondents mentioned visibility offrontline usage is an issue in successful operation of such contracts. One MoDrespondent quoted:

[. . .] if the weapon system for which you are providing availability leaves your hands and youare not informed of any changes that would be germane to that engineering climate you startto see a risk developing that by the time it comes back into your hands you will have lost theopportunity to plan.

The data quality for spares, maintenance logs were very poor for both the contracts.Company 2 respondent commented that:

We manage the flow of assets from the suppliers but we also manage the demand of assetsfrom the suppliers. The subtlety here is that the transportation system is what we call theGFA [. . .] there is very little point in us by better demand forecasting having an assetavailable at a supplier if the customer’s system takes four weeks to get that asset from thesupplier to the aircraft.

Issues regarding information integration within company 2 are evident in oneresponse:

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[. . .] the teams that accompany our main interface with the supply chain are from our ownorganisation team which is in the North West. I don’t believe that they are being engaged asmuch as we at base probably should do.

5.4.2 Service delivery effectiveness. Company 1 created an integrated service deliveryframework (Figure 6). In “As-was” solution, company 1 used to deliver stand-alone servicesto the customer as and when requested. In contract X, the whole programme is delivered bya joint team formed across customer and service provider organisation. This team has fullinformation of all levels of maintenance activities. Company 1 now has full ownership of allrepairs and spares workshop, recruits military man power (sponsored reserve or SR inFigure 6) for carrying out service at battlefront and the regimental base. Royal Electricaland Mechanical Engineers (REME) reduction saves customer manpower. Apart fromabove changes in service delivery configuration, company 1 introduced innovativemeasures as use of parts from drawn down equipment to help reduce procurement costs.

Another key aspect of contract X is a two-tier integrated project team where thecompany 1 team is integrated with MoD at operational and strategic levels. The seniorcustomer executive roles are more useful in expediting solutions.

Company 1 spends a lot of time in building relationships and trust with customer.Company 1 tries to be as flexible as possible in ignoring minor customer errors, butafter certain level, they bind them to CPIs. So, for equipment which is damaged due tocustomer misuse and losses are huge (up to £5 million) MoD will be charged.

Contract Y is a combination of several contracts which were already running withthe customer for several years. However, there were major issues in terms ofmisalignment of previous supply chain contractual terms with what company 2 signedup in contract Y (performance based). One of the key challenges thus was to integrate

Figure 6.Service delivery

framework for company 1

Customer programme executiveHQ land IPTL

Project manager

Joint delivery team

Training and trainingequipment support

Centralised repairworkshop

Primary Eqpt. Spares

Spares and distribution

Regiment base

Regiment

OJT training

Unit holdingsTA holdings

Factory SRU/LRURepairs

Reprovisioning

Engineering supportConfiguration/upgrades

ObsolescenceMissile management and

surveillanceSafety

Reliability assessmentHelp desk

Technical queriesTechnical support

1stLine levels 1 and 2battery fitter sectionREME and company1 operators (SR)

Company 1 operatedLevel 3 repair capability

In battlefronts

Operations

4th line/industry

SR

Reprovisioning

Fleet managementstorage

Supply managementtraders

Missiles

MoD logistics

Company 1 accountabilityin contract X

Information:Equipment:Company 1 accountability in

“as was”solution

1st linesupport


offerings

597

the different individual traditional contracts under the aegis of contract Y. One of thekey difference in operations of contract Y and previous contracts is summed up as:

One of the things that we found in contract Y is the customer has bought a whole load ofcapability upgrade kits through earlier supply contracts with us. These are still sitting in theboxes that we supplied them in because they haven’t had the capacity, the time, the willand/or whatever to actually embody those onto the aircraft. Our challenge going forward is tobatch the upgrades in an effective manner and integrate them and not only integrate themonto the platform but integrate them from a commercial and project delivery perspective intocontract Y because at the minute this has been done by a separate project team based in aseparate location.

Company 2 relies on air force engineers to help them deliver the service. Thedownsizing of air force maintenance manpower has made it difficult to providesufficient number of working hours. In addition, non-availability of other GFA resultsin additional costs in the form of subcontracts.

In spite of so many challenges, contract Y is still delivering service to the requiredperformance levels because of “actual physical proximity of the teams and aligning aswell as to customer’s environment and expectations.” Company 2 has implementedintegrated information systems to time the activities for better planning, implementedcontinuous improvement measures, such as better housekeeping and safety standards,total quality control initiatives at service bases.

The most important element of operations strategy for service delivery is thecustomer’s operations strategy. The drafting of the contract, setting the KPIs and relatingthem to meaningful payment mechanisms constitute important part of operationsstrategy. While considering the contractors operations strategy, organisational readinessfactors need to be considered. All these shape the service delivery, which includesmaintenance policies, facility layout, obsolescence management and process improvement.Since the level of operational risk and complexity is so much in these types of contracts,the contract never attains stability. Uncertainty in supply is influenced by availability ofright resources. Uncertainty in demand included information on usage. Other sources ofuncertainty in service delivery derive from the supplier-customer interaction and theadoption of service culture.

6. DiscussionThrough comparing the findings from two case studies, we identify the key factorscontributing to the successful delivery of performance-based industrial servicecontracts. In this paper, we have researched engineering service contracts where thekey objective was to maximise the availability of the equipment under long-termservice contract. Both organisations 1 and 2 are new to industrial service provision andare undergoing a massive culture change. Table IV shows the different importantelements of operations strategy and how they can benefit the customer and thesupplier. We use different factors to tabulate the benefits, for example to the customerthe prime benefits are availability improvement and cost reduction. While for theservice provider, there can be many benefits, for example, increasing the resource poolfor future business sustainability, responsiveness to customer demand, informationflow and improved customer and supplier relationships.

Information is of prime importance for success of performance-based service contractas it helps in defining the contract terms, setting pre-bid costs for the contracts for the

IJOPM31,5

598

Key

fram

ewor

kel

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tsC

ontr

act

Xan

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del

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ysu

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atio

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tern

and

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wor

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ide

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ion

Bet

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edu

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cost

Ser

vic

ep

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oper

atio

ns

stra

teg

y

(a)

Mai

nte

nan

ce:“

Sp

end

-to-

Sav

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pe

cult

ure

:in

ves

tin

new

ereq

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men

t,sa

fety

and

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man

agem

ent

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den

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par

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Bet

ter

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ilit

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erfo

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edu

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cost

(b)

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y:

acco

mm

odat

ing

and

flex

ible

tov

ary

ing

cust

omer

dem

and

,ov

er-l

ook

ing

min

ord

amag

esb

yth

ecu

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db

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din

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int

del

iver

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am

Red

uce

dco

stG

ood

cust

omer

rela

tion

ship

and

tru

st,

goo

din

form

atio

nfl

ow

(c)

Ex

tern

alb

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nes

sen

vir

onm

ent

orte

mp

oral

dem

ogra

ph

ics

con

sid

erat

ion

–u

sem

ult

i-sk

illi

ng

and

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ing

ood

stre

ng

thof

trai

ned

wor

kfo

rce

toh

edg

e

Bet

ter

avai

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ilit

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rman

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pro

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resp

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ven

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(d)

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ing

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ice

orie

nte

dcu

ltu

re–

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agin

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gis

tics

,sc

hed

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abil

ity

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em

anag

emen

t,cu

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eran

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lier

rela

tion

man

agem

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chan

ge

ofin

tern

alm

ind

set,

rem

ovin

gb

ehav

iou

ral

silo

s,fo

ster

ing

par

tner

ship

Bet

ter

avai

lab

ilit

yp

erfo

rman

ceIm

pro

ved

resp

onsi

ven

ess,

imp

rov

edd

eliv

ery

per

form

ance

and

incr

ease

dfu

ture

bu

sin

ess

Cu

stom

erop

erat

ion

sst

rate

gy

Par

tner

ship

:n

eed

top

artn

erw

ith

wh

ole

serv

ice

pro

vid

eror

gan

isat

ion

rath

erth

anon

lya

“lit

tle-

bit

”at

the

bas

e,b

uil

din

gjo

int

del

iver

yte

am

Bet

ter

avai

lab

ilit

yp

erfo

rman

ceat

red

uce

dco

stan

dri

sks

Imp

rov

edco

mm

un

icat

ion

,re

spon

siv

enes

s,d

eliv

ery

per

form

ance

and

red

uce

dco

sts,

risk

s

Con

trac

td

efin

itio

nIn

cen

tiv

es:n

eed

tob

ed

esig

ned

tore

sult

into

win

-win

situ

atio

nfo

rb

oth

par

ties

,co

stan

dri

sks

shou

ldb

esh

ared

equ

itab

ly(a

ssh

own

inT

PP

Ity

pe

arra

ng

emen

t)

Bet

ter

avai

lab

ilit

yp

erfo

rman

ceR

edu

ced

risk

and

bet

ter

per

form

ance

KP

Is:s

hou

ldb

ed

esig

ned

afte

rco

nsi

der

ing

fact

ors

asca

pab

ilit

y,

cust

omer

affo

rdab

ilit

y,

env

iron

men

ts,

sev

ere

con

dit

ion

sof

usa

ge

and

un

cert

ain

ty;

the

flex

ibil

ity

ind

ecid

ing

the

ran

ge

isal

soim

por

tan

t

Bet

ter

avai

lab

ilit

yp

erfo

rman

ceB

ette

rp

erfo

rman

ce

Table IV.Attributes for effectiveservice delivery across

the two contracts


offerings

599

service provider and most importantly it helps in delivering the target performance leveland hence the payments received. All respondents feel the need to build a congenialcustomer-service provider-supplier relationship is essential for successful operations ofsuch contracts. Use of integrated customer-service provider team, understandingcustomer’s processes and inventory ordering patterns are essential factors for successfuldelivery of contract. Effective contract design including linking customer’sresponsibility to the contract KPIs is an important element of operations strategy.

The service delivery process for such contracts is not studied in contemporaryliterature. This paper presents empirical evidence from case study findings on theoperations strategy for successful service delivery. The study on customer operationsstrategy, contract definition, performance assessment and organisational readinesshelps in understanding the operations strategy elements for effective delivery ofperformance-based contracts. This is one of the most important contributions of thispaper. The findings for both the contracts show the challenges of such contracts asmultiple customers, external environment risks, co-production risks, incentive risks,KPI measurability problems and information integration.

7. ConclusionThis research develops an operations strategy conceptual framework after conductinga detailed literature review. The research uses defence industry example to show theadded complexity of the service offerings, the constraints of operations as using GFAand intricate contractual settings governing the delivery performance. Since the pointof use is separated in time and space from the point of delivery, neither the commercialcustomer nor the supplier has any knowledge of the actual operating environment ofthe equipment. As there is no way to judge and incentivise the contractors, someinnovative way of measuring their performance is developed as cost saving andsharing. This entails a whole new set of operations strategy dimensions. This paperreports these sets of strategic dimensions and elements.

This paper has set out a series of indicative characteristics for servitisedmanufacture. First, in CfA, the service provider needs to be proactive and flexible. Theservice provider has to be ever-ready to make extra investment in additional resourcesand process improvement to ensure better performance. The capacity planning has tobe flexible as the contractor has no visibility of frontline usage. Second, the contractorhas to adopt joint operations strategy with supplier and customer. There should beend-to-end full visibility of the entire contract. Third, both parties in the contract haveto make some sacrifices, which cannot be accounted in financial terms. For example,the contractor carries out much work beyond contract scope to facilitate smoothdelivery of availability. The final element of success is the configuration of the contractincentives and performance indicators.

The contribution of this paper is twofold. First, it proposes a set of theoreticaloperations strategy constructs for effective and efficient delivery of performance-basedindustrial service contracts. The framework is a contribution to PSS literature whereoperations strategy area is quite under-researched. Second, this paper provides a basisto construct a set of guidelines for devising operations strategy for effective delivery ofperformance-based service contracts.

Although this study is based on two case studies in defence sector, we believe ourresults can be of use to a wider set of organisations offering outcome-based service

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600

offering. One limitation of the study is the lack of consideration of the service network,which actually forms a bigger part of the service delivery process. Future work may lookinto the impact of service network on the customer and contractor operations strategy.Quantitative techniques such as analytical modelling or simulation can be used toactually find the impacts of changes in various elements on the service performance.

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Further reading

Cohen, M.A., Agrawal, V. and Agrawal, N. (2006), “Achieving breakthrough service deliverythrough dynamic asset deployment strategies”, Interfaces, Vol. 36 No. 3, pp. 259-71,Perspectives, available at: http://opim.wharton.upenn.edu/fd/files/Dynamic_Asset_Deployment_White_Paper.pdf (accessed 12 February 2009).

Corresponding author:Partha Priya Datta can be contacted at: [email protected]


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