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

2. Importance of Supplier Relationship Management in Contracting for Large Weapon System Sustainment Breakout Session 702 Jim Wright Jonathan Selter Jim McIntosh July 21, 2010 10:00am – 11:45am 1

3. 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

4. World class SRM are based on open customer-supplier communications… • 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 The Need for Weapon System 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 The Tenets of Weapon System SRM • 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 Black Hawk SRM Case Study

5. 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

6. Weapon System suppliers can be managed at several points within the Army sustainment hierarchy… AMC …but few suppliers are currently managed at the Cross Platform, LCMC or AMC level… LCMC Cross Platform Platform …with the majority of suppliers being managed at the Subsystem or Item level Subsystem Item Item- or Subsystem-level management creates a complex system with numerous points of contact between the customer and the supplier

7. Item- or subsystem-level management leads to an inefficient, decentralized and tactical approach to managing suppliers Existing weapon system acquisition… • 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 …is decentralized and tactical Platform Item Managers Suppliers Supplier A Supplier B Supplier C These inefficient can be alleviated through an enterprise-level Supplier Relationship Management Program

8. 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

9. World class SRM is based on open customer-supplier communications… Open Communication • Periodic communication with suppliers to share information and identify opportunities for supply chain improvements Description • Information-sharing only as needed, with communication largely focused around performance appraisals • Operational and upstream supply chain data largely not shared Existing SRM 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 Best-in-Class SRM Practices

10. …pro-active supply chain management… Pro-Active Supply Chain Management • Identify and measure factors that can transform supply chain management from a reactive to a pro-active model Description • Mainly reactive, if any, consideration of supplier indicators, such as finances and facilities • Often not considered a part of Supplier Relationship Management programs Existing SRM Practices • 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 Best-in-Class SRM Practices

11. …and customer-supplier collaboration 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 Description • Little collaboration and minimal effort to jointly identify improvement opportunities • Interactions focused on price negotiations and/or performance management Existing SRM Practices • Focus on pursuing cost savings opportunities that benefit both the client and the suppliers • Regular meetings with supplier • Creates incentives for all parties to participate Best-in-Class SRM Practices

12. 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 Supplier Performance • 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) Supply 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 Relationship Value Improved Supplier Performance Risk Assessment & Mitigation Increased Relationship Value

13. Table of Contents • Executive Summary • The Need for SRM in Weapon System Sustainment • The Tenets of Weapon System SRM • Black Hawk SRM Case Study • The Road to SRM • SRM Program Design • Concluding Thoughts

14. 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

15. Table of Contents • Executive Summary • The Need for SRM in Weapon System Sustainment • The Tenets of Weapon System SRM • Black Hawk SRM Case Study • The Road to SRM • SRM Program Design • Concluding Thoughts

16. 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 The team identified 816 parts across the seven Black Hawk systems… …supplied by 179 unique vendors

17. The Black Hawk analysis uncovered three supplier management challenges Spend for each Black Hawk supplier was managed by a series of silos within the program office

18. 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 KeySuppliers • Strategic Suppliers Switching Costs Standard Suppliers • Commodity Suppliers • Little or no SRM outreach Spend

19. 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 • Commodity Suppliers: suppliers of low-cost, low-complexity, with short lead teams and multiple sources of supply KEY FACTS & INSIGHTS KeySuppliers • Strategic Suppliers Switching Costs Standard Suppliers • Commodity Suppliers • Hands-offPerformance Management Spend

20. 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 • Key Suppliers: suppliers of high or medium-cost, high-complexity, with long lead teams and limited sources of supply KEY FACTS & INSIGHTS KeySuppliers • Strategic Suppliers Switching Costs Standard Suppliers • Commodity Suppliers • CollaborativeSupplier Development Spend

21. 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 • Strategic Suppliers: suppliers of high-cost, high-complexity, with long lead teams and few, if any, alternative sources of supply KEY FACTS & INSIGHTS KeySuppliers • Strategic Suppliers Switching Costs Standard Suppliers • Commodity Suppliers • Strategic Partnership Spend

22. The selection of an SRM pilot vendor began with the segmentation of sustainment suppliers 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 KEY FACTS & INSIGHTS KeySuppliers • Strategic Suppliers Switching Costs Standard Suppliers • Commodity Suppliers Spend Because the majority of weapon system suppliers are Key Suppliers or Strategic Suppliers, there were several viable candidates for an SRM pilot

23. “Vendor D” was determined to be a Key Supplier because of its medium spend and high switching costs “Vendor D” is AMC’s fourth largest helicopter vendor… …and high Sole Sourced spend indicated extensive switching costs AMC HELICOPTER SPEND (2008) BY VENDOR VENDOR D SPEND (2008) BY SOURCING TYPE As a Key Supplier, Vendor D’s SRM outreach was designed around collaborative supplier development

24. More than 95% of “Vendor D’s” helicopter spend occurred on contracts that expire before FY12 “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 FY11cover 10 NSNs, which collectively support each of the four helicopter platforms • Contracts expiring in FY12 or latercover 5 NSNs, which collectively support each of the four helicopter platforms KEY FACTS & INSIGHTS 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

25. Table of Contents • Executive Summary • The Need for SRM in Weapon System Sustainment • The Tenets of Weapon System SRM • Black Hawk SRM Case Study • The Road to SRM • SRM Program Design • Concluding Thoughts

26. Supplier scorecards are typically part of performance management SRM, but they can be useful supplier development tools Performance Management Supplier Development Scorecard Development • Identify, prioritize Key Performance Indicators • Set Performance Targets • Identify, prioritize Key Performance Indicators • Set Performance Targets Scorecard Development • Infrequent, internal review of past performance Scorecard Assessment • Regular assessment of performance in conjunction with supplier Scorecard Assessment Scorecard Assessment • Short-term improvement • Data for supplier selection decisions Scorecard Assessment • Continuous monitoring • Joint improvement identification Focus on assessing past performance to inform supplier selection decisions Focus on Joint performance monitoring to drive collaborative improvement Because “Vendor D" was determined to be a Key Supplier, the SRM pilot will focus on continuous improvement through supplier development

27. The supplier scorecard for “Vendor D” will be developed collaboratively Army Goals and Performance Indicators • Stakeholders meet to prioritize, weight and tier performance indicators • Stakeholders determine appropriate performance targets for each performance indicator 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

28. Vendor D’s scorecard will target each of three primary SRM benefits with several Key Performance Indicators (KPIs) Weighting and tiering KPIs allows scorecards to reflect the diversity and relative importance of stakeholders involved in a supplier relationship

29. The team will also select appropriate performance targets for each of the KPIs on “Vendor D’s” supplier scorecard • Aerospace manufacturers have higher performance requirements than other manufacturing firms, leading to different performance targets for the same KPI • 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 The selection of KPIs is crucial to a successful SRM program, as there is generally a trade-off among the different KPIs

30. 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

31. The SRM program outlined above requires a fundamental change in how supplier relationships are viewed • Increase the amount of information that is shared with suppliers • Open communication is necessary for pro-active management and collaboration Open Communications • 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 Pro-Active Management • View suppliers as partners in supply chain management • Collaborative problem solving can be more effective than individual efforts • Win-win solutions are possible Collaboration

32. Questions?