Supply Support Performance Measures – Part 2

In the last article we looked at the various performance measures we can use for Supply Support in Performance Based Contracts including grouping them into 3 main types; demand satisfaction performance measures, inventory holding performance measures and customer wait time performance measures.  In this article we are going to look at demand satisfaction performance measures in more detail.

Demand Satisfaction Performance Measures

At the highest level of integration with the buyer’s business demand satisfaction performance measures focus on contracting for satisfaction of the buyer’s demand.  These represent by performance measures such as Demand Satisfaction Rate (DSR) or DIFOT which is simply the number of successful demands as a percentage of total demands (e.g. 98% DSR means the seller satisfied 98% of buyer demands based on the right number, type and delivery location of all items within the agreed timeframe).

A demand satisfaction performance measure gives the seller freedom of how to meet the demand in terms of quantity and location of items being demanded whether through:

  • just in time procurement, manufacturing or repairs;
  • holding stock in single or multiple warehouses; and
  • whether to allow sharing of stock between buyers using the same items (e.g. pooling spares).

However, to do this, the seller must have a good understanding of buyer demand profile, and importantly, the demand profile must be stable and accurate. The seller then uses this information, through a process called “spares determination” which typically involves dedicated software tools such as OPUS10, to balance the number and location of items vs. total cost of the inventory (including storage).

So while demand satisfaction performance measures seem a good outcome for both buyer and seller, the same aspects that makes it attractive also causes limitations that need  consideration.

Specifically, what if we only have limited knowledge on the buyer demand profile resulting in high level of uncertainty and inaccuracy?  For example, what if the seller bases their support on 50 demands per month, however, they are getting 100 demands per month?  Does the buyer expect that the seller can support this and if not, can the buyer apply commercial consequences (e.g. withholding profit) for a failure to satisfy these demands?  What about if it is the other way around with the seller expecting 100 demands but only getting 50 demands.  Does the buyer expect the seller to give back this reduction in cost?  At first glance you may think this is OK since the seller is easily meeting the demand satisfaction requirements.  However, what if those extra (spare) items have a shelf-life, like food, or become obsolete like ICT items (e.g. laptops and mobile phones)?  The reduced consumption now leads to waste and was this considered in the seller’s pricing or is this a cost for the buyer?

Additionally, unless the overall performance measure hierarchy includes lower level supply support performance measures, by only using demand satisfaction performance measures the buyer has limited insight and confidence into future performance.

Finally, while the buyer may agree to a very high level of satisfaction (e.g. 98%) this allows 2% failed deliveries.  But what if those few deliveries result in a severe or catastrophic consequence such as the only reason a large expensive container ship in port cannot leave or a passenger airline cannot make it’s scheduled departure? So what happens now?

The use of demand satisfaction performance measures sometimes requires that either the seller is given certain protections (e.g. if buyer demands go above a certain level they are not held accountable) or the seller places a higher price on the delivery of items reflecting this dependency, which in some circumstances, may make it unaffordable to the buyer.  In these situations, it is important that both buyer and seller understand the conditions placed on the performance measure.

Success in using demand satisfaction performance measures is highly dependent on knowledge, accuracy and certainty of the buyer’s demand profile. Given this dependency is best to use demand satisfaction performance measures where there is certainty and stability of demands.  Additionally, demand satisfaction performance measures are best used for higher numbers of demands where there are no severe consequences for small numbers of failed delivery.  Otherwise, the PBC practitioners should consider the next two types of Supply Support performance measures.

In the next and final article in this series (Part 3), we’ll look at the remaining 2 groups of Supply Support performance measures (inventory holding performance measures and customer wait time performance measures) and give a simply diagram summarising which ones you should use and when.

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International Association of Contract and Commercial Management (IACCM) “Ask the Expert” Presentation

For those of you who were unable to make it to my “Ask the Expert” webinar presentation on Performance Based Contracting on Wednesday 9thMay 2018 kindly hosted by the International Association of Contract and Commercial Management (IACCM), you can see the recording and slides via the following link .

A special thanks to Jennifer Goddard, who hosted me and ran the IT perfectly, and Mark Heminway, for putting all the advertising and notifications together.  Thanks to both of you for helping me.  It ran perfectly.

If you have a further interest in the topic of Performance Based Contracting please check out my blog at www.performancebasedcontracting.com which has more information and case studies, or feel free to contact me.

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International Association of Contract and Commercial Management (IACCM) “Ask the Expert” Presentation

I will be delivering a webinar presentation on Performance Based Contracting (PBC) as part of the International Association of Contract and Commercial Management (IACCM) “Ask the Expert” series this Wednesday 9th May 2018 from 1200 – 1300 Australian Eastern Standard Time.

Based on my 12+ years of domestic and international PBC experience for buyers and sellers alike, and my regular articles on this site, the presentation will talk about Performance Based Contracts including what they are, what benefits they provide, how they work and some key success factors to consider when setting up and managing a PBC.

You can reach the webinar via the IACCM website via the following link.  For those unable to be at the presentation I will make it available in the near future on this site.

I hope to see you there.

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Case Study – Performance Based Contracting Offer Definition and Improvement Activity (PBC ODIA)

One technique becoming more common during tendering for high value and / or high complexity Defence equipment acquisition and sustainment is a multi-stage tendering process.  The later stage of this process takes one or more tenderer (potentially down selected from a larger group of tenderers) through interactive discussions between buyer and seller(s) to explore and refine both the needs and the solution(s) being offered.  This is critical where there is uncertainty in the exact buyer’s needs since a conventional procurement process would traditionally limit this interaction and exploration of need(s) and solution(s).  So why am I bring this up on a PBC Blog?

Many years ago, as part of a buyer procurement team acquiring a new capability, we specifically included a PBC element in the ODIA for two reasons.  Firstly, to allow the buyer better insight and therefore confidence of the seller’s proposed solution.  To do this, the buyer set the same 3 performance scenarios (one good, one poor and one bad performance scenario) and then had each of the sellers describe how they how manage these events and what consequences would occur be based on the PBC offered.  Secondly, to allow the seller a mechanism to discuss areas of ambiguity or uncertainty in the buyer’s need(s) since this can drive cost in seller’s solutions.

In this case one of the tenderers, well-known to the buyer and having a lot of experience in Defence PBCs, indicated that they thought the buyer’s PBC was not fair resulting in many ‘non-compliances’ with the buyer’s PBC clauses (i.e. in their tender response they stated, if selected as the preferred tenderer, they would not agree to specific PBC clauses).  Given the seller’s experience and no other tenderer had this concern the ODIA process asked this tenderer to describe their concerns based on calculation of the 3 performance scenarios.

The tenderer working through the performance scenarios highlighted a number of events that would result in the overall performance score being a negative number (i.e. be below 0%).  In this circumstance, regardless of whether the seller fixed the performance issue, the overall performance score was a negative number.  While I have seen performance management frameworks that are very sensitive to performance events, in this circumstance this was not one of those.

With both buyer and seller trying to understand how this was occurring we discovered that inside one of seller’s calculations of performance there was a simple mathematical error; a ‘-‘ instead of a ‘+’.  Once this error was fixed the seller’s concern disappeared.  Given this discovery the tenderer asked whether they could come back the next as part of their larger scheduled OIDA sessions for another PBC discussion.  The next day the tenderer came in with a simple response.  They now were happy with the PBC arrangement in the contract, had no non-compliances and thanked the buyer’s team.

While I have highlighted this as a seller’s misunderstanding, I have equally seen errors in buyer’s PBCs being identified by sellers; no one is immune to this.

In summary this case study highlights 2 lessons.  Firstly, it is important that no matter how experienced both buyer and seller are, they need to fully understand how the PBC will work, including what consequences apply, by testing it against at least 3 scenarios; one based on good performance (all ‘green’), one based on poor performance (mix of ‘green’ and ‘amber’) and one based on bad performance (lots of ‘red’).  Secondly, it provides the buyer and seller a mechanism for discussing aspects of the PBC that drive costs such as performance levels, business rules (e.g. performance exclusions), etc. including any misunderstandings.  By having an interactive dialogue we can only end up with a more successful PBC for both buyer and seller, who doesn’t want that outcome!

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Supply Support Performance Measures – Part 1

“When we talk about ‘smart transportation,’ it is more than moving cargo from A to B. Digitization within transport and logistics means seamless service to our customers, visibility in the supply chain, and driving a more efficient business.”

Soren Skou

In this final article on complex materiel performance measures for Performance Based Contracts (PBCs) I am going to look specifically at Supply Support performance measures.  While many of you reading this may ask why cover this since these performance measures are relatively simple and well-known, such as Delivered In Full On Time (DIFOT), there are a number tricks and traps to catch those new to this field which I’d like to cover.

Firstly, we need to define Supply Support performance measures since many people include performance measures that capture other aspects such a maintenance and staffing.  However, I have defined these more generally as Supportability performance measures (see Supportability Performance Measures).  My preference when referring to Supply Support performance measures is the Australian Standard in Defence Contracts (ASDEFCON) definition:

Supply means the comprehensive function of providing Products and Services needed by users at the time and place required, and includes identification, requirement determination, procurement, receipt, inspection, storage, distribution, stock recording and accounting, reclamation and disposal.

Using this definition Supply Support performance measures look at the timeliness, completeness and accuracy of orders (demands) for items, whether they be repairable items (e.g. a vehicle engine or large office printer) or consumable items (e.g. vehicle tyres or printer paper).  However, given the comprehensive scope of work in this definition it is unlikely that all sellers will be involved to the same degree.  For example, some sellers will simply deliver an item on demand based on agreed lead-times.  However, other sellers may be in deeply embedded in the buyer’s business undertaking inventory management using sophisticated spares modelling to find the right balance of quantity and location of items vs. cost of the inventory vs. downtime waiting for an item.  So what are Supply Support performance measures?

While there are many Supply Support performance measures available to the PBC practitioner these can be grouped into 3 main types:

  1. demand satisfaction performance measures;
  2. inventory holding performance measures; or
  3. customer wait time performance measures.

Given each of these groups of performance measures have different focus and application, in the next article we will explore each in turn including when to use (and not to use) and some common performance measures for each.

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Supportability Performance Measures

“If you don’t understand how to run an efficient operation, new machinery will just give you new problems of operation and maintenance. The sure way to increase productivity is to better administrate man and machine.”

Edwards Deming

In earlier articles I described how to consider availability (see Availability in PBCs – Part 1 and Part 2) and reliability (see Reliability in PBCs – Part 1 and Part 2) in Performance Based Contracts (PBCs). In this companion article, we are now going to look at supportability and how we describe it within our PBCs.

Similar to availability and reliability, considering supportability of a system or service is one of the highest priorities for both buyer and seller and therefore typically a Key Result Area (KRA) in our PBC performance measure hierarchy.  But what is supportability and how do we describe it within our PBC?

One possible definition is the United Kingdom Defence Standard 00-44 that defines supportability as “A measure of the degree to which all resources required to operate and maintain the system/equipment can be provided in sufficient quantity and time.”  Importantly, this definition highlights a difference focus between availability / reliability and supportability; that of resources and timing.

Availability and reliability performance measures are about the ‘current mission’; the now.  Firstly, is the piece of equipment ready to use now and secondly, is the equipment reliable when I start using it so it won’t break before I can complete the ‘current mission’.

Different to this, supportability is about the ‘next mission’; the future.  So after using equipment to deliver mission success (the outcome), supportability is focusing on whether the buyer can reuse the equipment again for the next mission, the mission after that, and the mission after that, etc.  This reuse could be the result of maintenance (e.g. repairing broken elements such broken parts), replenishment (e.g. refilling used elements such as fuel and oil) or replacement (e.g. getting a completely new or refurbished piece of equipment).

Based on this definition many supportability performance measures reflect non-operational areas such as timeliness, quantity and resourcing of engineering, maintenance and supply (logistics) support.  Focusing on these elements gives the buyer confidence that the seller can deliver long-term mission success (i.e. availability and reliability).

Some examples of supportability performance measures include:

  • Engineering Support performance measures such as Engineering Backlog and Outstanding Corrective Action Reports that measures the engineering support systems ability to complete engineering actions in a timely and quality manner including closing out audit reports;
  • Maintenance Support performance measures such as Mean Time To Repair (MTTR), Mean Maintenance Time and Maintenance Mix that measures the repair times and percentage mix between preventative (scheduled), corrective (unscheduled) and emergent (appears when undertaking preventative or corrective maintenance) maintenance;
  • Supply Support performance measures such as Demand Satisfaction Rate (DSR) and Delivered In Full On Time (DIFOT) that measures the Supply Support system’s ability to deliver equipment and parts as requested;
  • General Support performance measures including areas such as training course satisfaction, number and length of staff vacancies, turn-over rate of staff including key staff, and competency / training of staff that measures the seller’s ability to deliver training outcomes and attract and keep quality staff, which is critical for specialised fields and / or remote localities.

In summary, while supportability performance measures in isolation give very little insight into the seller’s ability to deliver the buyer’s outcome, like availability and reliability, including supportability performance measures in PBC performance measure hierarchies give value insight and therefore confidence into the seller’s ability to consistently deliver outcomes over the long-term.

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Revisiting Performance Based Contracts vs. Outcome Based Contracts vs. Relational Contracts

When a man’s suit fits, when the construction is beautiful, when the sewing and fabrics are there… in the end, you’ll look the best in it.

John Varvatos, American Designer

In a previous article (see Performance Based Contracting vs Outcomes Based Contract vs Relational Contract) I said that from my perspective there is no difference between Performance Based Contracts and Outcomes Based Contracts.  Moreover, in the same article I said for “Generation 3 PBCs”, that these also included relational contracting features.

Since this article there has is continuing emphasis by some organisations and advisors towards “Outcome Based Contracts”, including saying these were different to PBCs.  As such, I wanted to revisit this in light of the continued discussion on the similarities and differences.

Firstly, we need to understand what we mean by outcome.  Typically, supporters of Outcomes Based Contracts say it is about simply having buyers define the desired outcome and letting sellers tender their innovative solutions independent of the buyer telling them how.  Using this definition, an outcomes based contract can have PBC elements (i.e. a well-considered and defined risk-reward structure that drives the seller to deliver the buyer’s outcome) in addition to relational elements (i.e. a relational / behavioural charter, no fault dispute resolution clauses, etc.).  Alternatively, an outcomes based contract could simply be a conventional contract based on well-known and standard commercial principles using deliverables and milestones for payment.

In some of the commercial arrangement I have dealt with we have very deliberately separated the buyer’s outcome from the contract outcome.  In this case, the buyer’s intended outcome, say putting a ship to sea, may include aspects outside of the direct control or even influence of the seller including the buyer’s own processes and staff, and third-party sellers.  We call this level the ‘enterprise’ to distinguish it from the contract level.  In this case so while both buyer and seller are clear about the enterprise outcome, which may include collaborative behaviours, it is not feasible to ask sellers to offer a contract solution, innovative or otherwise, for how to do this that doesn’t involve a significant exclusions / business rules or financial risk premiums making any solution unaffordable.

That said, we have developed many PBCs that, using different tiers of performance measures that link to different risk-reward structures (consequences).  You can find out more about how to do this from the following article (see When is a KPI not a KPI?).

So as with many things in life, it is not simply one or the other.  Outcomes based contracting focuses on describing the buyers need and how to solve it; in this case by not constraining the solution.  However, an outcomes based contract can include both performance and relational elements.  Alternatively, PBCs can focus on the delivery of outcomes, including enterprise outcomes, which include collaborative behaviours.

So in the future, when you are considering what type of commercial arrangement you want to use, whether outcomes based, performance based or relational, I urge you to think about what features you need as opposed to the label put on it.  Since like a well-tailored suit, it is skill of the tailor and quality of the material as opposed to the label that makes it a perfect fit.

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