The Defense Logistics Agency is expanding its performance based contracts by using metrics goals to incentivize companies to make better products and lower the cost of program sustainment.
Performance based logistics (PBL) contracts pay for outcomes rather than for an object or service.
“Instead of the traditional contract that we’re familiar with in DLA in terms of buying parts, we’re actually buying a performance outcome that the vendor can meet, and through those outcomes we are measuring the performance through metrics that are agreed upon in the contract,” said Carlo Montemayor, DLA’s program manager for the enterprise PBL effort. “There are also incentives and disincentives depending on how well they perform to those metrics.”
Currently most of DLA’s PBL contracts are lead-time based for materials. For example, the military wants to keep its troops well stocked with supplies. To keep the troops supplied the DLA needs to have enough inventory to send to troops when they need it. Holding inventory, however, is expensive. It takes a lot of real estate to hold tons of supplies. PBL contracts allow DLA to maintain fewer depots, but keep the troops stocked. It does this through metrics. The company takes in data on the usage of each material and resupplies those items at the rate they are demanded. That way, DLA doesn’t need to hold everything all at once in its depots because it is constantly being resupplied by the company before the item runs out.
DLA wants to break out of this traditional use of PBL into one that is based on the performance of the actual product.
Another example: a helicopter will need maintenance every 5,000 miles it flies and that involves DLA buying parts. The expanded PBL contracts would incentivize a company to make a helicopter that can go for 10,000 miles without maintenance.
“We are looking to broaden the reliability and availability of those [products] so that the warfighter is supported more and doesn’t have to depend as much on the overhaul [of the products] when they go back into the depot,” said Rick Teal a procurement analyst for DLA. “That’s where the savings in cost comes from because the demand for the components that goes on the [product] lowers. You also have to have the incentive for industry to be willing to make the investments in those improvements.”
A recent report from the Center for Strategic and International Studies stated that DLA was potentially missing out on $1 billion in savings by not taking full advantage of PBLs.
“I can’t name one weapons platform that’s supported entirely by government. Every single system we have has some role for industry. All we are talking about with PBL is the business arrangement for that portion of the support,” said Lou Kratz, Lockheed Martin’s vice president for logistics and sustainment during an October speech. “You can pay industry for failure and we’ll sell you all the parts you want, we’ll sell you all the engineering support you want …. Or we can change the business environment and buy for success.”
But changing that business environment isn’t as easy as it sounds for DLA. The agency needs the cooperation of both its customers — the military services — and industry.
While making a better product benefits the warfighter with better items, the government with cost savings, and industry with a better product, it’s not always feasible.
Industry has to make sure it can innovate and still reach the profit margin it needs. The military services also have to be open to using PBL contracts to sustain weapons systems.