Management Consultants Leading thinking for lasting results Aerospace and Defense Industry Benchmarking Survey Results 2005 AIA Product Support.

ManagementConsultants

www.prtm.com

Leading thinking for lasting results

Aerospace and Defense Industry Benchmarking Survey Results

2005 AIA Product Support Conference

November 9th, 2005

For further information, contact: Mike Finley, DirectorNed Glattly, PrincipalTony Gonçalves, Manager

PRTM1000 Thomas Jefferson St., NWSuite 600Washington, DC 20002

Tel: (202) 625-7200Fax: (202) 625-7256

[email protected] [email protected]@prtm.com

2 ManagementConsultants

© Copyright 2005 PRTM

Findings and insights on performance-based logistics in the A&D industry

Why benchmark

How A&D industry supply chains are performing

Findings on the state of PBLs

What it means to be ‘Performance-Based’



Seminal study of A&D industry PBLs and their associated supply chains

OSD and AIA sponsored

Goals of the study Develop a measure of PBL progress thus far

Understand which PBL practices lead to superior supply chain performance and which do not

Develop recommendations and a path forward to improve future PBLs

Provide readouts to participants with their individual results

Over-arching GoalValidate case for moving overall industrial base up the PBL maturity scale

Government win: better weapons system performance

Industry win: shareholder value



A&D PBL supply chain benchmarking provides insight into PBL value

PBLs align the supply chain building blocks… Organizations

Practices

Information

Alignment and process maturity lead to logistics performance

Maturity and performance leads to uplift Greater profits for industry and revenue from expanded service offerings

Better performance and lower costs for government



The study is based on the DoD standard maturity model

Co

ntr

act

Sco

pe

Wea

po

ns

Sys

tem

s S

cop

e

Component

PlatformPerformance Outcome

Stage 1 Stage 2 Stage 3 Stage 4

Delivery Speed

OperationalAvailability

MaterialAvailability

MissionAssurance

MissionPerformance

Weapon System

PerformanceLogistics

Performance

DistributionPerformance



Benchmarks allow improvement in practices leading to performance improvement

Interpretation of performance drivers and practices

Understanding of current practices and their impact on key metrics

Development of hypothesis for potential improvement areas

Understanding of performance gaps and path to close

Supply Chain Performance Versus Comparison Population

KeyPerspectives

Metrics

0% - 20%

MajorOpportunity

20% - 40%

Disadvantage

40% - 60%

Median

60% - 80%

Advantage

80% - 100%

Best-in-Class

YourOrg.

On-Time Delivery to Request %68.8% 88.2% 87.1%

On-Time Delivery to Commit %74.7% 95.0% 94.2%

Order Fulfillment Lead Time11.0 6.4 8

Customer-facing Metrics:

Upside Production Flexibility42.0 10.8 10

Total Supply-Chain Management Cost9.0% 3.8% 1.2%

Cash-to-Cash Cycle Time93.6 42.7 15.4

Internal-facingMetrics:

Inventory Days of Supply74.9 37.7 9.4

Net Asset Turns2.0 10.8 5.5

**There are between 25 – 30 organizations meeting the current criteria**

This report uses the following Categories:Industry: Electronic Equipment = XYZ Co.

Supply Chain Performance Versus Comparison Population

KeyPerspectives

Metrics

0% - 20%

MajorOpportunity

20% - 40%

Disadvantage

40% - 60%

Median

60% - 80%

Advantage

80% - 100%

Best-in-Class

YourOrg.

On-Time Delivery to Request %68.8% 88.2% 87.1%

On-Time Delivery to Commit %74.7% 95.0% 94.2%

Order Fulfillment Lead Time11.0 6.4 8

Customer-facing Metrics:

Upside Production Flexibility42.0 10.8 10

Total Supply-Chain Management Cost9.0% 3.8% 1.2%

Cash-to-Cash Cycle Time93.6 42.7 15.4

Internal-facingMetrics:

Inventory Days of Supply74.9 37.7 9.4

Net Asset Turns2.0 10.8 5.5

**There are between 25 – 30 organizations meeting the current criteria**

This report uses the following Categories:Industry: Electronic Equipment = XYZ Co.

Quantitative Performance Scorecard

DOMINANT PRACTICESSupply Chain & IT Practices Assessment

Stage 1: Functional Focus

Stage 2: Internal Integration

Stage 3: Cross-Enterprise

CollaborationStage 4: eClass

Functionality

PLAN Strategy

Demand Planning

Supply Planning

Demand/Supply Balancing & Decision-making

SOURCE Strategy

Commodity & Process Management

Supplier Development / Management

Organization & Infrastructure

MAKE Manufacturing Strategy

Production Scheduling

Material Issue, Movement and Tracking

Manufacturing Process Control

DELIVER Enable

Order Entry & Scheduling

Warehousing, Transportation and Delivery

Invoicing and Cash Collection

OVERALL Supply Chain Strategy

Supply Chain Performance Management

Supply Chain Processes

Supply Chain Organization

= Best in Class = Median = XYZ Co.

DOMINANT PRACTICESSupply Chain & IT Practices Assessment

Stage 1: Functional Focus

Stage 2: Internal Integration

Stage 3: Cross-Enterprise

CollaborationStage 4: eClass

Functionality

PLAN Strategy

Demand Planning

Supply Planning

Demand/Supply Balancing & Decision-making

SOURCE Strategy

Commodity & Process Management

Supplier Development / Management

Organization & Infrastructure

MAKE Manufacturing Strategy

Production Scheduling

Material Issue, Movement and Tracking

Manufacturing Process Control

DELIVER Enable

Order Entry & Scheduling

Warehousing, Transportation and Delivery

Invoicing and Cash Collection

OVERALL Supply Chain Strategy

Supply Chain Performance Management

Supply Chain Processes

Supply Chain Organization

= Best in Class = Median = XYZ Co.

Qualitative Practice and IT Assessment

Notional examples for illustrative purposes only

Practice Maturity… …Enables Performance Improvement

Notional Data

Notional Data



Practice Maturity

Discrete supply chain processes and data flows well documented and understood

Resources managed at department level and performance measured at functional level

Stage 2:Internal

IntegrationStage 1:Functional

FocusCompany-wide process and data model continuously measured at the company, process, and diagnostic levels

Resources managed at both functional and cross-functional levels

Strategic partners throughout the global supply chain collaborate to:

• Identify joint business objectives and action plans

• Enforce common processes and data sharing

• Define, monitor,and react to performance metrics

IT and eBusiness solutions enable a collaborative supply chain strategy that:

• Aligns participating companies’ business objectives and associated processes

• Results in real-time planning, decision- making, and execution of supply chain responses to customer requirements

Stage 3:External

Integration

Stage 4:Cross-Enterprise

Collaboration

Understanding stage of maturity helps move toward world-class performance levels

Early Stage Mature



Results in brief

PBL Supply Chains vs. traditional aerospace and industrial (A&I) supply chains Have lower costs as a percent of revenue

Exhibit more mature practices

Are challenged by customer speed requirements

Cost performance and practice maturity are highly correlated

Opportunities for improvement abound

Sharing general results

Survey sponsors receive more specific feedback

Individual participants anonymous due to non-disclosure agreements

Detailed individual feedback to participants

Survey responses indicate that A&D PBL supply chains are demonstrating superior performance in most areas



Survey participants describe significantly more mature practices than similar A&I supply chains

1.5

2

2.5

3

3.5

4

Pra

cti

ce

Ma

turi

ty S

co

re

(1-4

)

Strate

gy

Deman

d Pla

nning

Supply

Plannin

g

Deman

d/Supp

ly B

alan

cing

Enable

Order

Entry

& S

ched

ulin

g

S.C. P

roce

sses

Whse

, Tra

ns. &

Del

iver

y

S. C. O

rg.

Current Practices and IT Assessment

Survey Participants A&I Supply Chains

PBLs have relatively more mature planning processes and Supply Chain organizations

Order management is the only area where PBLs trail the rest of industry

4 = Collaborative3 = External Integration2 = Internal Integration1 = Functional Focus



1.5

2

2.5

3

3.5

4

Pra

cti

ce

Ma

turi

ty S

co

re

(1-4

)

Strate

gy

Deman

d Pla

nning

Supply

Plannin

g

Deman

d/Supp

ly B

alan

cing

Enable

Order

Entry

& S

ched

ulin

g

S.C. P

roce

sses

Whse

, Tra

ns. &

Del

iver

y

S. C. O

rg.

Emerging Practices and IT Assessment

Survey Participants A&I Supply Chains

Survey participants are targeting more mature practices than similar A&I supply chains

PBLs are satisfied with order and supply chain processes and do not plan to growth in these areas

PBLs want to create very mature distribution capabilities and Supply Chain organizations

4 = Collaborative3 = External Integration2 = Internal Integration1 = Functional Focus



PBLs out-perform A&I supply chains on cost…,but encounter high customer expectations

0%10%20%30%40%50%60%70%80%90%

100%

On TimeDelivery to

Request

On TimeDelivery to

Commit

Survey Participants

A&I Supply Chains

0%

10%

20%

30%

40%

50%

60%

70%

80%

Supply-ChainMgmt Cost

as % ofRevenue

COGS as %of Revenue

Survey Participants

A&I Supply Chains

Note: Other A&D Supply Chain assessments from PRTM historical benchmarking database

Speed Gap Cost AdvantageHigh customer expectations



More mature practices have 42% lower supply management costs

Supply Chain Management Cost as a % of Revenue

Top Performing Supply Chains

Most Mature Practices

Practice Maturity

Top Performers

All Others

Internal Integration

External Integration

+

86% Overla

p



Participants see Government as less keen on more mature PBLs

4%8%

10%

19%15%

32%27%

23%

43%

18%

0%

10%

20%

30%

40%

50%

No Stage Stage 1 Stage 2 Stage 3 Stage 4

Desired PBL Contract Type Mix(as viewed by participants)

Industry Government

Participants were asked to describe both their & the government’s ideal mix of PBL contracts



Participants view Government acceptance as the primary barrier to accelerating use and maturity of PBLs

When asked to rank the top 6 barriers to accelerating use of PBLS

(1 = most important; 6 = least important)

… 71% Ranked education of Government employees as number 1 or 2

… 57% Ranked multi-year funding as priority 1 or 2

… 0% Ranked education of industry employees as number 1 or 2

100% of participants said industry is more willing than Government to use Mission Assurance PBLs !



The study confirms known PBL challenges

Observed ExamplesPayment and incentives are not well aligned to outcomes

Lots of metrics, often not tied to payment

PBL with 5 different performance metrics, but only one used as basis of payment

Government owns, but industry manages inventory

No incentive to right size inventory

<10% of PBLs transfer ownership of inventory to industry, but 100% transfer responsibility

Contract lengths were too short

Need time to invest appropriately

Half of the respondents had contracts of 3 years or less

Industry has broad responsibilities, but government often retains decisional control

Value trade-offs are sub-optimal without authority

Less than 18% had sole responsibility for the major value-chain activities: repair, configuration, and inventory



PBL contract revenue

2% 0%

40%

29%

6%

24%

52%47%

0% 0%0%

10%

20%

30%

40%

50%

60%

No Stage Stage 1 Stage 2 Stage 3 Stage 4

Revenue Classified by PBL Contract TypeNumber of Contracts by PBL Type

PBLs accounted for ~35% of the participants’ total revenue

Relative Annual Value per PBL by

Type

Stage 1

Stage 2

Stage 3



Maturity classification vs. payment

Evaluation of PBL Maturity Based on Payment Basis

0%18%

29%

53%

0%10%20%30%40%50%60%70%80%90%

100%

Stage 1Stage 2Stage 3Stage 4

PBL Maturity Based on Reported Contract Type

47%

24%

29%

0%

0%10%20%30%40%50%60%70%80%90%

100%

Stage 1

Stage 2

Stage 3

Stage 4

More than 50% of PBLs saw themselves as more mature by one stage than what the payment basis would suggest



The case for inventory ownership

PBL Inventory Ownership

>90%<10%

Government Industry

Industry has little reason to improve reliability when they can buy it with ‘free’ inventoryThis type of arrangement may actually encourage more government-owned inventory

Weapons System Performance Levers

Supplier-Owned Gov’t-Owned

Cost to Supplier

Perf. Impact

Cost to Supplier

Perf. Impact

Increase inventory investment $ - $$ n/a

Invest in reliability improvement $$$ $$$

Decrease repair cycle time $$ $$

An AIA-Government working group on inventory ownership would facilitate innovative ways to address the inventory challenge



Average PBL life is only five years, even with options

Survey Respondent PBL Base Contract Length

(in years)

0% 20% 40% 60%

0

1

2-3

4-5

Survey Respondent PBL Option Length

(in years)

0% 20% 40% 60%

0

1

2-3

4-5

Average Base

~3.2 years

Average Option

~1.9 years

Short option periods discourage continuous improvement



Contract lengths are often too short to create an incentive for industry to invest to create greater value

Cos

tTraditional vs. Performance-Based Contract

Providers’ profits are higher (Area between the lines is bigger with PBL)

Total Cost for the Government is lower

Investment to improve reliability

TermTraditional Gov’t Cost PBL Gov’t Cost

PBL Industry CostTraditional Industry Cost

Industry Profit

Average PBL Base Period

Term- 3 ¼ yrs

Investment

Recovery Period

Time creates incentives to invest to reduce costs

Obsolescence may offset some cost improvements anticipated at renewal



More value available

Government is missing the opportunity to unlock more value in terms of weapons system performance and life cycle costs

53%

18%

0%

10%

20%

30%

40%

50%

60%

% Reported as Stage 3% Reported with Inventory, Configuration, & Repair

Only a third of the reported stage 3 PBLs were

responsible for the major value-chain activity drivers of

operational availability



What it means to be performance based

Warfig

hter

Warfig

hter

Valu

eV

alue

MissionAssurance

OperationalAvailability

MaterialAvailability

1. Shared Value Creation1. Shared Value Creation““Making the pie bigger…”Making the pie bigger…”

2. Performance Incentives2. Performance Incentives““Driving behavior…”Driving behavior…”

3. Performance Period3. Performance Period““Leveraging the learning curve…”Leveraging the learning curve…”

4. Payment Basis4. Payment Basis““Paying for performance…”Paying for performance…”

5. Value Chain Ownership5. Value Chain Ownership““Defining accountability…”Defining accountability…”5. Value Chain Ownership5. Value Chain Ownership

““Defining accountability…”Defining accountability…”

DeliverySpeed

Performance ObjectivesPerformance ObjectivesP

BL

Ten

ets

PB

L T

enet

s

The PBL maturity framework provides a basis to explain the gaps in performance by creating a common lexicon and reference model



Synchronizing and aligning the tenets to the performance objective desired creates value for industry and the warfighter

The PBL Maturity Framework provides a way to break down a PBL into it’s critical parts and

A-B: Alignment value creation

A-C: Scope value creation

A-D: Scope & alignment value creation

Ali

gn

men

t

Performance Objective

Delivery Speed

Operational

AvailabilityMaterial

Availability

MissionAssurance

Stage 1 Stage 2 Stage 3 Stage 4

Shared Shared Value CreationValue Creation

SharedSharedValue CreationValue Creation



PerformancePerformanceIncentivesIncentives



PerformancePerformanceIncentivesIncentives PerformancePerformance

PeriodPeriodPerformancePerformancePeriodPeriodPerformancePerformance

PeriodPeriodPerformancePerformancePeriodPeriod

Payment BasisPayment BasisPayment BasisPayment Basis

Payment BasisPayment BasisPayment BasisPayment Basis

Value-ChainValue-ChainOwnershipOwnership




Value Scope

Valu

e Creatio

n

A C

D

B

Changing the objective creates more potential value, greater value is not automatic



Both government and industry have great opportunities to improve future performance-based relationships

Gov’t Industry

Alignment

Train contracts personnel on PBL concepts and metrics All payments must be tied to desired performance metric

Leadership must continue to push for more mature PBLs – Stage 1’s should be challenged

InventoryUse working groups to create collaborative inventory models

Longer partnershipsCreate incentives for continuous performance and cost improvements in base and option periods

Price option year risk when longer periods are needed to recoup investments

Value-Chain

Transfer authority & responsibility – industry must control all the necessary levers to maximize value and performance

Management Consultants Leading thinking for lasting results Aerospace and Defense Industry Benchmarking Survey Results 2005 AIA Product Support.

Documents