For over fifteen years, performance-based logistics (PBL) contracting has been used to reduce weapon system sustainment costs and increase system reliability. In its simplest formulation, PBL “explicitly identifies what is required, but the contractor determines how to fulfill the requirement.” Often, the most significant improvements occur relatively early on in the PBL program. Typically, PBL programs evolve along a common trajectory. With new systems, cost-reimbursement contracts are used in order to provide the government customer and the provider with a cost baseline. Once the costs, risk factors, and system failure modes and rates have stabilized, the program generally transitions to the use of fixed-price contracts where providers are paid a fixed cost or fixed rate (e.g. per hour, per mile) so long as operational readiness is achieved at the specified level(s). Over time, the provider makes improvements to its supply chain, logistics networks, operations, and the system itself in order to reduce its costs and maximize profitability. In the “terminal stage” of its evolution, the exemplary PBL is characterized by high availability, reduced inventories, and efficient sustainment processes. This research examines three PBLs that reached this stage, including one program that reverted to the use of cost-plus contracts in an attempt to reduce costs. We found that long-running PBLs continue to deliver value, high reliability, and improved performance, and that distortions to the PBL paradigm (i.e., reverting to more transactional approaches) are unwarranted and may lead to unintended consequences that include higher future costs and decreased system readiness.
School Authors: William Lucyshyn
Other Authors: Shao-Peng Chen, Peter Sandborn