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Performance-Based Logistics 
Story by Beth Reece 

The more often a part breaks, the more the supplier’s cash register rings. This used to be the norm under traditional contract agreements between the Defense Department and commercial industry. But a new business model that gives contractors partial responsibility for material readiness is expected to yield a 15 to 20 percent savings for DoD without sacrificing industry’s profit.


The military services are already using the model, called performance-based logistics, to improve support for such components as aircraft engines and tires. Now, the Defense Logistics Agency is working to combine multiple service contracts for similar items into a single PBL arrangement that supports all the services.


“If the services have their own PBLs, then they still have separate supply chains, separate warehouses and separate repair processes. DLA has the opportunity to bring all of these together and save the services a great deal of money,” said Gerry Tonoff, lead strategist for DLA Acquisition’s PBL Program Office.


Under traditional contract structures, the military services are responsible for determining the type and quantity of parts they need, as well as making repairs, while the contractors only have to supply parts. PBL contracts differ by putting contractors in charge of knowing what parts are needed for the types of repair work.


“The inherent incentive for the supplier is that if they can make equipment more reliable so that it spends less time at the shop for repairs, their costs will go down and their profit margin will increase. The military has already seen a rise in readiness rates for equipment under these types of contracts,” said Navy Capt. John Spicer, who oversees DLA’s PBL Program Office.


Performance-based logistics contracts comply with legislation mandating that at least 50 percent of repair work is done at military maintenance facilities.


“We’re not pulling work out of our depots. Most of the work is done through what we call a public-private partnership, and there are various versions of that, but the most successful PBLs have been done where the depot is essentially a subcontractor to the industry partner,” Tonoff said.


Despite an initial fear of job losses, mechanics at military depots agree the arrangement leads to far fewer backorders and quicker turnaround times, Spicer added.


“Industry will, in many cases, have our artisans overhaul an entire unit from front to back because they know it will increase reliability,” he said. “The artisans are very happy because they’re getting to do repairs the way they always wanted to.”


Tonoff and Spicer have advocated performance-based logistics since the late 1990s, when they served on a team at Naval Inventory Control Point Philadelphia that established one of the military’s first PBL contracts. The contract was designed to increase the availability of auxiliary power units, self-contained generators that are used to start aircraft engines. The readiness rate for the units should have been at 85 percent, but had dropped to 60 percent, and in some cases even lower, Tonoff said.


The Navy went to commercial airlines in search of a solution and noticed Southwest Airlines’ maintenance service agreement with commercial industry worked well for both the airline and its suppliers. The agreement entailed Southwest paying a fixed amount of money per flight hour with the expectation that repair parts would always be available when needed.


After adjusting the model slightly so it applied to military logistics, the Navy awarded a PBL contract for logistics support of its auxiliary power units to Honeywell in June 2000.


“Honeywell increased the reliability and availability of APUs for less than we previously paid, and repair time quickly dropped to about half of what it used to be,” Spicer said.


DLA is currently working to combine separate service contracts for Honeywell APUs, wheels, brakes and other components into one PBL contract. The effort is expected to save DoD about 20 percent of what it’s now paying, he added.


The agency is also looking for similar savings for the T700 aircraft engine used in several helicopters.


“There are nine contracts among the services to support that one aircraft engine, plus some DLA contracts. That sounds like someone put together a bunch of contracts without thinking it through, but nobody did it for nefarious reasons. Somebody saw a problem and put a contract in place to solve it,” Spicer said. “As long as there’s plenty of money to go around, industry is happy to do business that way. But now, they see the budget is coming down and they need to partner with us in creating efficiencies.”


 DLA officials expect to soon finish training employees at primary-level field activities on the benefits of PBL contracts and the steps required to create them. But the shift to a joint solution will require additional collaboration with the services, DLA Troop Support Deputy Commander Richard Ellis said.


Like Tonoff and Spicer, Ellis helped create PBLs for Navy Inventory Control Point Philadelphia during the end of his active-duty career.


“The direction back then was for us to work these PBLs across the services, but we had some real challenges because each service approached PBLs from a different perspective,” he said.


While the Air Force wanted to maintain control of what got repaired and when, for example, the Navy wanted the contractor to make those decisions so that if the contractor failed to meet requirements the service wouldn’t be at fault, he continued.


Finding a common solution for all of the services is more important now than ever, Ellis said, “especially in this budget-constrained environment we’re in.”


Transitioning to a joint-service, performance-based logistics support strategy will require a culture change for DLA employees and customers alike, Tonoff agreed.


“But we know it’s a successful business model,” he said, “and we’ve seen the proof that it benefits both DoD and industry.”





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Air Force Airman 1st Class Dwayne Quesenberry (foreground) operates an MJ-1 jammer as Air Force Airman 1st Class Bryan Martin and Air Force Staff Sgt. Jason Logue guide a training missile from an F-16 Fighting Falcon aircraft. Performance-based logistics could help improve support for such military equipment.

— Photo by Air Force Tech. Sgt. Caycee Cook

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Military mechanics such as Navy Petty Officer 2nd Class Mark Gill (left) and Navy Seaman Jon Blankenship will be able to turn around equipment repairs faster with performance-based logistics. The arrangement gives contractors partial responsibility for material readiness while 50 percent of the repair work remains at military maintenance facilities.

— Photo by Navy Seaman Billy Ho

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One of the Navy’s first performance-based contracts was awarded to Honeywell for support of auxiliary power units such as the one Air Force Senior Airman David Holley is replacing in an E-3 Sentry airborne warning and control system aircraft in Southwest Asia.

— Photo by Air Force Master Sgt. William Greer

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DLA is working to combine nine service contracts for this T700 aircraft engine into a single contract that supports all the services.

— Photo by Roy Heitman