Importance of Supplier Relationship Management in Contracting for Large Weapon System Sustainment 1 1 Breakout Session 702 Jim Wright Jonathan Selter

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Importance of Supplier Relationship Management in Contracting for Large Weapon System Sustainment

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Breakout Session 702

Jim Wright

Jonathan Selter

Jim McIntosh

July 21, 2010

10:00am – 11:45am

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Table of Contents

• Executive Summary

• The Need for SRM in Weapon System Sustainment

• The Tenets of Weapon System SRM

• Black Hawk SRM Case Study

• Concluding Thoughts

World class SRM are based on open customer-supplier communications…

The Need for Weapon System

SRM

The Tenets of Weapon System

SRM

Few suppliers are currently managed at the Cross Platform, LCMC or AMC level

Item- or subsystem-level management leads to an inefficient, decentralized and tactical approach to managing suppliers that can be alleviate through SRM

World class SRM is based on open communication, pro-active supply chain management and collaboration

SRM based on these principles increases supplier performance, reduces risk and improves the value of the supplier relationship

Black Hawk SRM Case Study

The key success factors of the Black Hawk SRM program are:- Collaborative development of metrics and scorecards- Careful weighting of scorecards KPIs- Identification of appropriate performance targets

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Table of Contents






Item

Subsystem

Platform

Cross Platform

LCMC

AMC

…but few suppliers are currently managed at the Cross Platform, LCMC or

AMC level…

…with the majority of suppliers being managed at

the Subsystem or Item level

Weapon System suppliers can be managed at several points within the Army sustainment hierarchy…

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Item- or Subsystem-level management creates a complex system with numerous points of contact between the customer and the supplier

Item- or subsystem-level management leads to an inefficient, decentralized and tactical approach to managing suppliers

Within a single platform, multiple Item Managers have individual relationships with supplier POCs

Looking across multiple platforms, numerous Item Managers within the sustainment enterprise have individual relationships with supplier POCs

Existing weapon system acquisition… …is decentralized and tactical

Supplier A

Item Managers

Platform

Supplier B Supplier C

Suppliers

These inefficient can be alleviated through an enterprise-level Supplier Relationship Management Program

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Table of Contents






World class SRM is based on open customer-supplier communications…

Description

Existing SRM Practices

Open Communication

Periodic communication with suppliers to share information and identify opportunities for supply chain improvements

Information-sharing only as needed, with communication largely focused around performance appraisals

Operational and upstream supply chain data largely not shared

Best-in-ClassSRM Practices

Open and honest information sharing to create value and allow collaborative supply chain improvements

Suppliers are considered to be supply chain partners, with a collaborative rather than combative relationship

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…pro-active supply chain management…

Description


Pro-Active Supply Chain Management

Identify and measure factors that can transform supply chain management from a reactive to a pro-active model

Mainly reactive, if any, consideration of supplier indicators, such as finances and facilities

Often not considered a part of Supplier Relationship Management programs


Monitor factors (operational, financial, economical, environmental etc.) that are leading indicators of future supply chain disruptions

Mitigate and/or solve supply chain disruptions before the occur

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…and customer-supplier collaboration

Description


Collaboration

Work collaboratively with suppliers to identify ways to drive value across the supply chain

Share best practices and work for both customer and supplier cost savings

Little collaboration and minimal effort to jointly identify improvement opportunities

Interactions focused on price negotiations and/or performance management


Focus on pursuing cost savings opportunities that benefit both the client and the suppliers

Regular meetings with supplierCreates incentives for all parties to participate

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An SRM program based on these principles can help the sustainment enterprise capture three primary benefits

• SRM programs improve supplier performance through- The incorporation of

Performance Incentives into contracts and supplier relations

- Better communication of customer needs, leading to Service Quality Optimization

• SRM programs can help enterprises with two dimensions of supply risk- The risk of a supplier

becoming insolvent (Supplier Risk)

- The risk of disruption in the supply of a key part or raw material (Supply Disruption Risk)

• SRM outreach fosters greater collaboration, knowledge sharing and information sharing, allowing- Supply Chain Visibility

into the upstream supply chain

- Joint Innovation to collaboratively improve performance

Supplier Performance Supply Risk Relationship Value

Improved Supplier Performance

Risk Assessment & Mitigation

Increased Relationship Value

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Table of Contents




• Black Hawk SRM Case Study- The Road to SRM- SRM Program Design


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The Black Hawk helicopter is one of Army’s most important weapon platforms

• Army’s primary transport helicopter, providing dramatic improvements in troop capacity and cargo lift capability compared to the UH-1 Series "Huey"

• Provides air assault, general support, aeromedical evacuation, command and control and special operations support

• Black Hawks continue to serve in Afghanistan and Iraq

Description and History

Key Facts

Deployed 1979

Replaces UH-1 Huey

Speed 150 knots

Capacity 11 combat troops

Crew 4 (2 crew chiefs; 2 pilots)

Armament 2x7.62MM machine guns

Army Fleet 1,471

Navy Fleet 289 (Sea Hawk variant)

USAF Fleet 101 (Pave Hawk variant)

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The path toward SRM began with an analysis of the Black Hawk program

Help Black Hawk Program Management Office analyze Black Hawk Sustainment Sourcing for future sourcing opportunity identification

Overview

…supplied by 179 unique vendorsThe team identified 816 parts across

the seven Black Hawk systems…

System DescriptionNumber of Suppliers

Airframe 145

Turbine Engine 32

Engine 22

Alt. Turbine Engine 7

Airframe Components 12

TACSAT 2

Clearance Vehicle 4

System DescriptionNumber of

Parts

Airframe 703

Turbine Engine 65

Engine 22

Alt. Turbine Engine 1

Airframe Components 18

TACSAT 2

Clearance Vehicle 5

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The Black Hawk analysis uncovered three supplier management challenges

Challenge Details Implication

Large Number of Parts

• 819 unique parts relate to the Black Hawk platform

• Parts managed individually or in small numbers by individual item managers

• Relationships within a platform managed by multiple item managers

Large Number of Systems

• The Black Hawk platform includes seven unique systems, (e.g. Airframe and Engine)

• If multiple parts are managed jointly, they tend to be managed at the weapon system level

• Relationships across system managed separately by individual systems

Large Number of Suppliers

• The Black Hawk program includes suppliers that provide spare part and repair services

• Across both categories the Black Hawk program manages 179 vendors with 461 contracts

• Suppliers are managed by several stakeholder within the Black Hawk program office

Spend for each Black Hawk supplier was managed by a series of silos within the program office

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The selection of an SRM pilot vendor began with the segmentation of sustainment suppliers

SUPPLIER SEGMENTATION MATRIX• Each quadrant suggests a different

supplier relationship strategy- Standard Suppliers: suppliers of

low-cost, off-the-shelf items, with short lead teams and multiple sources of supply

KEY FACTS & INSIGHTS

Standard Suppliers

KeySuppliers

Commodity Suppliers

Strategic Suppliers

Spend

Sw

itch

ing

Co

sts

Little or no SRM outreach

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supplier relationship strategy- Commodity Suppliers: suppliers of

low-cost, low-complexity, with short lead teams and multiple sources of supply


Standard Suppliers

KeySuppliers

Commodity Suppliers

Strategic Suppliers

Spend

Sw

itch

ing

Co

sts

Hands-offPerformance Management

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supplier relationship strategy- Key Suppliers: suppliers of high or

medium-cost, high-complexity, with long lead teams and limited sources of supply


Standard Suppliers

KeySuppliers

Commodity Suppliers

Strategic Suppliers

Spend

Sw

itch

ing

Co

sts

CollaborativeSupplier Development

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supplier relationship strategy- Strategic Suppliers: suppliers of

high-cost, high-complexity, with long lead teams and few, if any, alternative sources of supply


Standard Suppliers

KeySuppliers

Commodity Suppliers

Strategic Suppliers

Spend

Sw

itch

ing

Co

sts

Strategic Partnership

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SUPPLIER SEGMENTATION MATRIX• A majority of weapon system suppliers

were determined to be Key Suppliers or Strategic Supplies- Weapon system parts are technically

complex- Weapon system parts are high-cost

items- Weapon system parts have long lead

times- Weapon system parts have few

sources of supply


Standard Suppliers

KeySuppliers

Commodity Suppliers

Strategic Suppliers

Spend

Sw

itch

ing

Co

sts

Because the majority of weapon system suppliers are Key Suppliers or Strategic Suppliers, there were several viable candidates for an SRM pilot

“Vendor D” was determined to be a Key Supplier because of its medium spend and high switching costs

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…and high Sole Sourced spend indicated extensive switching costs

“Vendor D” is AMC’s fourth largest helicopter vendor…

CompetitiveSourced

18.3%

Sole Sourced81.7%

AMC HELICOPTER SPEND (2008)BY VENDOR

VENDOR D SPEND (2008)BY SOURCING TYPE

Vendor A Vendor B Vendor C Vendor D Vendor E

As a Key Supplier, Vendor D’s SRM outreach was designed around collaborative supplier development

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More than 95% of “Vendor D’s” helicopter spend occurred on contracts that expire before FY12

FY12+Expiration

3.3%

FY10/ FY11Expiration

47.8%

FY08/ FY09Expiration

48.8%

“VENDOR D” HELICOPTER SPEND (2008)BY CONTRACT EXPIRATION

• Contracts expiring in FY08 and FY09 covered 59 NSNs, which collectively support each of the four helicopter platforms

• Contracts expiring in FY10 and FY11 cover 10 NSNs, which collectively support each of the four helicopter platforms

• Contracts expiring in FY12 or later cover 5 NSNs, which collectively support each of the four helicopter platforms


The vast majority of “Vendor D’s” spend occurs on contracts that expire in the short term, allowing new contracts to support an SRM program

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Table of Contents






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Supplier scorecards are typically part of performance management SRM, but they can be useful supplier development tools

Because “Vendor D" was determined to be a Key Supplier, the SRM pilot will focus on continuous improvement through supplier development

Focus on Joint performance monitoring to drive collaborative improvement

Supplier Development

• Identify, prioritize Key Performance Indicators

• Set Performance Targets

ScorecardDevelopment

• Regular assessment of performance in conjunction with supplier

ScorecardAssessment

• Continuous monitoring• Joint improvement

identification

ScorecardAssessment

Focus on assessing past performance to inform supplier selection decisions

Performance Management

• Identify, prioritize Key Performance Indicators

• Set Performance Targets

ScorecardDevelopment

• Infrequent, internal review of past performance

ScorecardAssessment

• Short-term improvement• Data for supplier

selection decisions

ScorecardAssessment

Army Goals and Performance Indicators

AMC Goals and Performance Indicators

LCMC Goals and Performance Indicators

PMO Goals and Performance Indicators

Goals and performance indicators from all stakeholders must be

captured and assessed

The supplier scorecard for “Vendor D” will be developed collaboratively

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Example Performance Scorecard

Quality

PO Requirements Met

Incoming Quality

Quality Documentation

Delivery

Delivery Timeliness

Accurate Delivery

Accurate Documentation

Cost

Competitive Pricing

Cost Reduction Actions

Cost Controls Tracking

• Stakeholders meet to prioritize, weight and tier performance indicators

• Stakeholders determine appropriate performance targets for each performance indicator

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Vendor D’s scorecard will target each of three primary SRM benefits with several Key Performance Indicators (KPIs)


Quality

PO Requirements Met

Incoming Quality


Delivery

Delivery Timeliness

Accurate Delivery


Cost

Competitive Pricing



Example Risk Scorecard

Finances

Market Share

Order Backlog

Profit Margins

Facilities

Adequate Capacity

Adequate Equipment

Regulatory Requirements Met

Example Relationship Scorecard

Ordering

Ordering Review Procedures

Return Procedures

Timely Ordering

Service Quality

Complaint Handling Process

Timely Communication

Customer SatisfactionWeighting and tiering KPIs allows scorecards to reflect the diversity and relative importance of stakeholders involved in a supplier relationship

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The team will also select appropriate performance targets for each of the KPIs on “Vendor D’s” supplier scorecard

KPI Just-in-Time Target

Traditional Target

% Not too Early 96.0% 90%

% Not too Late 99.5% 90%

• Manufacturers with a just-in-time business model will have more stringent delivery needs than more traditional manufacturers, leading to different performance targets for the same KPI


Quality

PO Requirements Met

Incoming Quality


Delivery

Delivery Timeliness

Accurate Delivery


Cost

Competitive Pricing



KPI Aerospace Target

Manufacturing Target

% Defects 99.5% 95.0%

• Aerospace manufacturers have higher performance requirements than other manufacturing firms, leading to different performance targets for the same KPI

The selection of KPIs is crucial to a successful SRM program, as there is generally a trade-off among the different KPIs

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Table of Contents






The SRM program outlined above requires a fundamental change in how supplier relationships are viewed

Open Communications

Pro-Active Management

Increase the amount of information that is shared with suppliersOpen communication is necessary for pro-active management

and collaboration

Use SRM tools to identify supply chain problems before they occur

SRM can facilitate risk management and transform supply chain management into a pro-active, strategic function

Collaboration

View suppliers as partners in supply chain managementCollaborative problem solving can be more effective than

individual effortsWin-win solutions are possible

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Questions?

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Importance of Supplier Relationship Management in Contracting for Large Weapon System Sustainment 1 1 Breakout Session 702 Jim Wright Jonathan Selter