Service Matters from MCA Solutions

Traditional Supplier collaboration is transaction-based.  As the article "Enabling Collaboration," in Aviation Week describes, supplier collaboration in its basic form is a valuable tool for communicating orders and forecasts to suppliers and receiving a commitment, shipment notification or exception back from the supplier.  However in the aftermarket supply chain space, are traditional collaboration tools sufficient to meet the unique challenges of collaborative planning in this environment which is much more challenging than finished good production planning?

What are the critical attributes of collaboration platform for the aftermarket supply chain? 
Some of the challenging characteristics of the service supply chain to be addressed by a prime service provider and its suppliers include: demanding contracts with performance-based service level commitments, large numbers of parts with intermittent demand driven by unpredictable product failures, and global supply networks that must be highly responsive to restore product uptime. 

In response to the needs of key aftermarket service leaders, MCA has developed a process and next generation platform for customer collaboration that addresses these challenges.  Here are some key elements of a successful aftermarket collaboration framework:

• Shared incentives:  Aftermarket service contracts may specify a demanding customer-focused metric such as part fill rate, response time to repair, or equipment uptime.   If the prime's supplier has incentives for performance that are aligned with the objectives of both the prime service provider and the end customer, it is possible to create a "win-win" outcome where the supply chain moves towards an optimal solution.
• Secure information sharing: Information to enable advanced collaboration goes beyond orders and shipments and must include detailed product information such as failure rate observed in the field, supersession data, , customer forecast and causal data  that can help achieve mutual objectives.  Maintaining security and partitioning data to the appropriate suppliers is critical to a successful relationship.
• Coordinated decision making:  When each supplier optimizes its sub-set of the supply chain in isolation there are material flow and information lags which lead to a "bullwhip effect" across the supply chain.  To help alleviate this, the prime supplier must coordinate optimization across all of the suppliers and allocate metrics, appropriate service levels, and planning priorities through a global view of the supply chain and with the end customer objectives in mind.
• Supplier asset ownership:   The trend of Performance Based Logistics contracts has been to shift ownership away from the end customer and closer to the service provider and, by extension, onto its suppliers.  Determining who should own what level of inventory and providing the appropriate information to facilitate effective management of this is a critical decision that requires cooperation and trust.
• Closed loop performance management:  Appropriate performance metrics that monitor compliance to the contract terms are required across the extended supply chain.  The mechanism not only to monitor exceptions to performance, but to act upon and correct them on a real time basis, must be tightly integrated with the planning process.

Going from "combative" to "super collaboration" requires more than a "transaction-focused" collaborative IT tool.  MCA's planning and collaboration solution includes a consistent set of models to support planning, allocation, and execution decisions.   This platform allows sharing of information that includes the product structure and location hierarchy; and coordinated decision making across a complex network in different planning horizons, ranging from long term strategic and medium term tactical to short term event planning.

To ensure success, the collaborative process and platform must share risks and rewards across all of the parties to create a "win-win," with clearly defined outcomes for performance with a long-term view that generates an atmosphere of trust among all of the parties.

Last week, Supply Chain Brain featured an insightful article titled "Service Parts Management-Delivering Value in a Topsy-Turvy Market," by Will McNeill, an AMR Research (now a division of Gartner) analyst who does great coverage of service lifecycle management topics.  The article was bullish on the potential of the market, stating "We continue to see companies adopting service parts management software successfully, saving millions of dollars in inventory costs."

AMR says that the service parts management market weathered the storm better than most software markets in 2009, but still saw a 6 percent to 8 percent downturn.  MCA actually did see an upturn in revenue in 2009 and an increasing interest in aftermarket service and suspect the market downturn may be due to consolidation of some of the players in the market.  We do agree with the AMR statement that the industry suffered the downturn better than most because of the "quantifiable benefits delivered through the use of service parts management software." 

McNeill highlights two notable trends in the market.  The first is tighter integration of service parts management functionality with order management. As spares forecasting is driven by an understanding of customer demands, it's certainly true that a service parts planning solution must be tightly integrated with order management..  Equally important from our perspective,  is that customer service and order fulfillment strategies are aligned with service parts planning as follows:

• The expectations set in customer contracts for service levels may vary by customer, location and product group and should drive the stocking levels in the planning process
• The logic for fulfillment of customer orders and for positioning parts must share a common view of the customer.  This means that the assignment of the customer forecast in the planning process must use the same information as in the fulfillment process, both for the primary assignment, and for the emergency fulfillment in case of stockout.

This approach to customer-driven planning was described in our recent Service Matters entry "Inventory Optimization and Service Level Planning from SP Plan"

The second trend is the incorporation of service parts management into performance-based logistics.  McNeill notes that the incorporation of service parts logistics into performance-based contracting is extending past its origin of A&D into automotive, high tech, medical devices, and other verticals where contracts that sell the use or uptime of a product are increasingly common.  MCA has been working with Boeing Integrated Defense Systems since 2002 and Lockheed Martin Aeronautics since 2004 and is helping to support some of the largest military PBL programs.  Capabilities developed specifically for MCA's A&D customers are now being used by our customers in a broad range of industries. These capabilities include:

• The ability to optimize inventory to product uptime, fill rate, customer wait time, and budget constrained objectives
• The ability to perform rapid what-if scenario planning to understand the cost to support a new contract, and to test the impact of changing service level, lead time, and product reliability on inventory level and support cost

While many manufacturers have incorporated performance-based contracting (PBC) into their support offering, the results have been kept confidential and the benefits are often anecdotal.   As discussed in another Service Matters post, research done by MCA founder Morris Cohen at Wharton has helped to demonstrate the positive impact of PBC and the shared benefits for support providers and their customers.

Investment in service parts management solutions has shown tremendous return. As thought leaders such as AMR publicize the opportunity for saving and better customer service in articles like this one, we will likely see acceleration in the adoption by corporate executives who are increasingly recognizing the potential of aftermarket service. 

There is significant anecdotal evidence that Performance-Based Logistics (PBL) contracts are effective; however, studies from the GAO and others highlight the pressing need to improve the management of existing PBL programs and to develop more realistic business cases to assess the costs, benefits, and risks.  A recent report from the Lexington Institute and a quantitative study from the Wharton School are helping to answer the question: Do PBL contracts provide value to both suppliers and customers?

The report from the Lexington Institute titled "Performance-Based Logistics:  A Primer for the New Administration," describes the challenge that the Obama administration faces in decreasing defense spending while maintaining a strong military. 

The Institute, who "strives to find non-governmental, market-based solutions to public policy programs," states that "the administration can have a significant, early impact on national security by directing the Department of Defense to move forward aggressively on PBL."

Since the Department of Defense began implementing PBL in 2001 through Performance-Based Agreements (PBA's), the services have seen a marked increase in the availability of equipment and systems to our military in combat, and a study of 23 PBA's showed an average savings of $21 million.

PBL programs from Boeing IDS and Lockheed Martin Aeronautics, who have implemented MCA's PBL solution across several platforms, are noted as dramatic success stories, but PBL contracts have been implemented across only a small percentage of the hundreds of major weapon systems managed by DOD.  The report makes an argument that the DOD needs to redouble its effort to institutionalize PBL in its logistics and sustainment activities by clearing up lingering uncertainties about PBL effectiveness and defining and documenting the business case.

To better understand the case for PBL, MCA founder Morris Cohen, and his colleagues at the Wharton School have been doing extensive research on PBL to determine effectiveness and quantify its benefits.  In a recent study performed with a major aerospace manufacturer the team looked at 5 years of reliability data based on MTBR (Mean Time Between Removal) in contracts that were executed as either Time & Material (T&M) contracts or Performance-Based Contracts (PBC).  After isolating the impact of contract type from other factors such as contract choice and type of product, the results showed with high confidence that there is a significant correlation between choice of a PBC contract and an increase of product reliability of 10% to 25% in comparison to T&M contracts.  Analysis of the data shows that, all else being equal, PBC increases the MTBR of a product by 790 flying hours in the five-year observation period.

The study is significant in that it's the first to test and validate the reliability improvement hypothesis for performance-based contracting based on transactional data, and it makes a step in closing the gap between theoretical modeling and empirical evidence.  

MCA remains committed to continuing to provide tools to improve the effectiveness of PBL contracts, and we look forward to hearing from our readers on their experiences with PBL contracts and what could make them more effective.

To learn more from Dr. Cohen on the details and implications of the Wharton study, you can contact him at cohen@wharton.upenn.edu.