Performance Based Logistics: A New Business Paradigm Naval Inventory Control Point Performance Based Logistics: A New Business Paradigm Director, Integrated Logistics Support 3 October 2002 Ready. Resourceful. Responsive!

Agenda PBL Background Acquisition Process Business Case Analysis Statutory Requirements Awarded PBLs PBLs on the Horizon Lessons Learned Take-Aways

PBL Background Concept: Comply with USC Title 10 CORE Statues: Single Supplier / Integrator (Commercial or Organic) Provide Fleet Improved Weapon System Support Through: Cost: Reduced Total Ownership Obsolescence Management Reliability Improvement/Tech Refreshment Availability Improvements Comply with USC Title 10 CORE Statues: Partner with Government (e.g. Depots) Must pass Business Case Analysis (BCA): Sound Business Decision Merits Must Stand-up to Audit Reduced Total Cost to the Fleet

PBL Background A Necessary Transformation A Fundamental Change in the way NAVICP provides Weapons System Support!!! Philosophy Drives Perspective ICP Role Results Manage Supplies Focus Exclusively on Supply Availability More Infrastructure Higher Total Costs No Incentive to Improve Reliability or Quality Inventory Based Lowest Price Historically Change Driven by: Fewer Resources, Acquisition Reform, & Technology Advances Focus on Customer Service, Reliability and Readiness Less Infrastructure Lower Total Costs Increased Reliability Higher Quality Manage Suppliers Performance Based Best Value Today The Result... High Yield Logistics

PBL Background A Necessary Transformation Buying Performance … Not Parts Roles Guaranteed Warehousing Obsolescence Availability Management Inventory Mgmt Transportation Reliability Improvement Engineer/Technical Warranties Configuration Support Control Piece Part Support Purpose Cultivate Long Term Partnerships With Industry Leverage Commercial Supply Chain Solutions Reduce Cost Lower Response Time Lighter Logistics Tail Increase Availability

PBL Background The Support Spectrum PBL Support Spectrum Traditional MSP PBL-O PBL-C Full PBL CLS ORGANIC SUPPORT Increasing supplier responsibilities COMMERCIAL SUPPORT Mini-stock point Commercial Off-the-shelf “Full Service” Contractor Logistics Support Warehousing Rqmts Determination Some Level of Repair Warehousing Rqmts Determination Wholesale Ownership Config Mgmt Some Obsolescence Mgmt Some Repair / Overhaul / Replace Warehousing Rqmts Determination Wholesale Ownership Config Mgmt Obsolescence Mgmt Reliability Guarantees Eng / Tech Support Govt / Industry Partnership Repair / Overhaul / Replace Vendor Manages ILS Elements

Acquisition Process PBLs: One Size Does NOT fit All …Each is Unique! Contract Type: Fixed, Cost, Both, …Hybrid Requirements, IDIQ Length: 5–15 Years; Base & Option(s) Metrics: Cost, Availability, Reliability, Availability Incentive: Profit (Monetary, Non-Monetary, Gain Sharing Risk Sharing: Ramp-up Periods Exit Provisions Cultivate Long Term Partnerships: Promote Supplier Investment Technology Infusion Enable Supplier ROI Leverage Best Business Practices Supply Chain Management Warehousing Forecasting Other? Obsolescence Management Reward Performance Metrics: Meaningful and Measurable Joint Review Boards Manage Supplier NOT Supplies Procuring the Performance End-State …NOT the How To

Acquisition Process Candidate Selection FLEET New Items Commercial for Life Obsolescence Challenges Low Reliability Poor Availability High Cost/High Demand NAVICP Targets SYSCOM (Program Office) OSD (ACAT I, II, and New Start Programs) DON APR 02 MEMO Industry

Acquisition Process Systems… earlier is better Mission Need Identified HSC Selects OEM Full Rate Production E&MD IOC MSD Ideal Traditional The earlier in a system’s life cycle that we implement a PBL solution, the better The 3 examples you are about to see come from our Common Aircraft Systems Integrated Weapons Systems Team and show how we are able to do more to improve the performance received by the Fleet when we implement a PBL solution earlier... All of these systems are used on numerous aircraft RINU/AHRS NGS ALR-67 (V)3 SCADC

Acquisition Process Targeting Legacy Systems Cost-Performance Matrix - Top 200 Aviation Systems Median = 0.033 AAS-38 F-18 FLIR High P-3 Prop H-53 MRH APG-65 F-18 Radar AWG-9 F-14 Radar APG-73 F-18 Radar H-53 Xmission ASN-92 INS (Common) APU AAR-50 F-18 Infrared APG-71 F-14 Radar F-18 MLG Cost Index = DCI F-18 Arresting Gear Cost APS-120 E-2 Radar Median = 0.79 AWG-9 Ctrls and Displays EA-6B Longitudinal Pitch Ctrl Surface E-2 Signal Processor Low Performance Index = RI + SI Good Performance Poor

Acquisition Process Integrated Process Team Work with all stakeholders early in the PBL formulation process to ensure that Core issues are being addressed: Is the system Core? Is there Navy/DoD core logistics capability? What is depot impact? What is Core strategy? Address Core compliance strategy in the J&A Obtain buy-in from ASN (RD&A) on strategy to address Core statute compliance early in PBL development process Initiate Congressional Notification as early as possible

Business Case Analysis Material Costs Procure Repair Proposal Material: Procure Repair Inventory Control Management OH Warehousing PHS&T Asset Visibility Engineering Other Other Costs Inventory Control Management OH Warehousing PHS&T Asset Visibility Engineering Other Business Case Analysis PBL Proposal Should Target Performance Improvements and Not Cost More Than Tradition Support

Statutory Requirements The 50/50 Rule 10USC § 2466 Not more than 50 percent of the funds made available in a fiscal year to a military department or a Defense Agency for depot-level maintenance and repair workload may be used to contract for the performance by non-Federal Government personnel of such workload for the military department or the Defense Agency. Any such funds that are not used for such a contract shall be used for the performance of depot-level maintenance and repair workload by employees of the Department of Defense Applied at the Service (DON) level

Statutory Requirements CLC Rule 10USC § 2464 Core Logistics Capabilities shall include those capabilities that are necessary to maintain and repair the weapon systems and other military equipment (including mission-essential weapon systems or material not later than four years after achieving initial operational capability, but excluding systems and equipment under special access programs, nuclear aircraft carriers, and commercial items) that are identified by the Secretary, in consultation with the Chairman of the Joint Chiefs of Staff, as necessary to enable the armed forces to fulfill the strategic and contingency plans prepared by the Chairman of the Joint Chiefs of Staff. If system is Core, DoD must have Core logistics capability

Statutory Requirements Congressional Notification Notification must address: 1. The competitive procedures used to award the contract 2. The cost/benefit analysis demonstrating savings 3. Conformance with 10 USC 2466 (50/50 rule) 4. Conformance with 10 USC 2464 (CLC requirement)

Awarded PBLs The Wave Of The Future Obligations $M NAVICP is a significantly different and smaller organization than it was only seven years ago. Public works, base support, human resources and key IT support functions have been regionalized or consolidated. Nbrs are on-board, EOY FY02 is YTD … started at 3060 .. now 3005 The Wave Of The Future

Awarded PBLs Aviation Successes Aircraft Tires F-14 Night Target System E-2 Mission Computer $266M obs over 15 years 23 types...17 platforms Inv mgmt / warehousing transportation Guaranteed availability 95% in 2 days CONUS / 4 days OCONUS First performance review… filled over 8000 reqn… 96.43% availability! $48.8M savings over 15 years $66M obs over 8 years Inv mgmt/warehousing Obsolescence mgmt Contractor manages wholesale (forward- positioned) ship stock Guaranteed availability 90% in 5 days…ipg1s in 2 days $33M savings over 8 yrs $16M obs over 5 years Contractor will manage piece part inventory Guaranteed availability 2 days reliability guarantee of 10,000 hours MTBF (15 year warranty, 5 years priced, 2 other 5 year periods are options loaner spares clause if reliability is not met $14M savings over 15 years

Awarded PBLs AEGIS Spy 1 Radar ARC-210 Radio 50 Person Life Raft $6.6M Obs over 5 years COTS replacement for MILSPEC item Vendor owned inventory Commercial technology Replacement for MK 6 25-Person Life Raft (2:1) Over 50% cost avoidance for CV/CVNs $35.9M Obs Over 5 Years Inv Mgmt/warehousing Config/Obsolescence Mgmt...MTBF Guarantees… Growth Incentivized Guaranteed Availability 85%/90% with Incentives… 2 Days Pri 1-3...5 Days Pri 4-15 $5.4M Savings over 5 years 4-year base contract w/ one 4-year option; $33.5M for 4-year base 1600 line items; Transitioned from a Mini Stock Point to Full PBL; minimum fill rate of 87% … Contractor Responsibilities: material requirements determination, requisition support, CONUS transportation and tracking, Class II ECP authority

On-Line Shipping & Inv Mgmt Awarded PBLs Auxiliary Power Unit Title 10 Compliant Supports C-2, F/A-18, S-3 and P-3. Public / Private Partnership Honeywell... Program Management NADEP Cherry Point... Sub-contractor performing touch labor 10-Yr Performance Based, Firm Fixed Price (5 year base & 5 one-year options) 25% - 45% Reliability Improvement Delivery Guarantees... 2 Days (IPG 1) Obsolescence Management Surge Capability...120% of Annual FH’s Product Support Engineering This is an example of the first partnership PBL awarded. In this type of PBL arrangement, the Navy places the contract with the commercial vendor, in this case Honeywell, who then subcontracts with the NADEP-in this case, Cherry Point – to do the actual repair work. This partnership PBL was four years in the making and supports APUs on four different platforms –C-2, F/A-18, S-3 and P-3. Features are 10 year performance based with delivery guarantees of 2 days for issue Priority Group One requisitions. Partnering is smart for a number of reasons: It satisfies Title 10 USC Core requirements, it is an effective use of depot expertise, it allows the depot to focus on touch labor (the contractor supplies piece parts), it encourages sharing of best business practices, and reduces repair turnaround times. Plus: On-Line Shipping & Inv Mgmt

Awarded PBLs F/A-18 E/F FIRST F/A-18E/F Integrated Readiness Support Teaming (FIRST) concept, an alternative support strategy emphasizing Government/Industry partnerships, risk management and shared accountability. Awarded May 01 Features: Guaranteed response time Teaming arrangement with three NADEPs Reliability improvements-targeted at 10% Streamlined configuration control and obsolescence mgmt Industry support for E/F peculiar WRAs, lower assemblies and piece- parts Reduced cycle time Reduced cost of ownership Integrated funding streams

PBLs on the Horizon F404 7R Components PBL Features 116 NIINs ... –400 / -402 series Availability / reliability incentives 20% surge requirement 5 year base Pre-Solicitation Conference /Competitive RFP Issued Two approved sources Orenda declined J&A modified / sent to ASN Next Steps Finalize BCA Complete PWS Alpha contracting ... Dec '02 Award Next step ... Consumables for I-level / whole engine repair

PBLs on the Horizon H-60 PBL Evolution Avionics Dynamic Components Tip-to-Tail - Lockheed Martin - Sikorsky - MHSCo - 42 Avionics - 14 major dynamic - 1331 total components components components - Awarded May 02 - Est. award Oct 02 - Est. award Dec 02 - $5M contract - $150M contract - $1.3B contract - Guaranteed - Guaranteed - Guaranteed response time response time response time - Obsolescence - Obsolescence - Obsolescence Management Management Management - $456K in savings - Firm-fixed price per - Firm-fixed price per flying hour flying hour - Guaranteed reliability improvements Here are two interesting initiatives that the Aviation folks are currently working on: The Avionics PBL (with LM) and the Dynamic Component PBL (with Sikorsky) are intended to be sequential “stepping stones” to the behemoth H-60 “Tip to Tail” initiative PBL. The Avionics PBL supports 42 avionic components commercially since BRAC closure of NADEP Pensacola. No actual organic capability exists. These systems are SH-60B peculiar and will be obsolete with advent of MH-60R, therefore there are no plans to fund establishment of depot capability. This PBL is being held up due to the depot core issue, which is near resolution. We expect that congressional notification should be released shortly with the award coming one month after release of the congressional notification. The Dynamic Component PBL is a sole source contract to Sikorsky for repair and management of fourteen major H-60 dynamic components. It is a fixed price per flying hour with incentives and anticipate award in April 02. The Tip to Tail PBL is for support of approximately 1331 Navy managed H-60 unique components by Maritime Helicopter Support Company (MHSCo) - a joint venture formed between Lockheed Martin and Sikorsky. MHSCo will enter into partnering arrangements with Navy and Army depots. Contract will be awarded in phases over a twelve-month period. Award estimated Dec 02. The F404 Time on Wing (TOW) PBL is viewed as a comprehensive, full service Time on Wing PBL that encompasses O-I-D level repair & supply chain management as optimum solution. The program goal is for single line of accounting and Time on Wing guarantees. As first phase to Time on Wing, NAVICP has broken out the 7R cog components. This initiative will provide immediate component availability boost to I level and is viewed as necessary first step to TOW.

Lessons Learned PBL process is time and labor intensive Work within Govt funding structure and BCA framework Rqmt is enhanced performance at less cost Teams must work at taking advantage of supply chain consolidation Initiatives underway to review BCA process… Day with Industry planned Can work… APU and Tire PBLs good case studies Challenge of aging and inherently unreliable systems Inserting technology upgrades… big cost issue Combining efforts with LECP program may provide opportunities Bring all corporate resources to the table Idea sharing across business areas Large private investment may be needed to make efforts work

Take-Aways NAVICP is teaming with Systems Commands and fleet customers to develop innovative support alternatives. NAVICP is making significant investments of NWCF and personnel to accomplish this goal. PBLs… Procuring the performance end state, not the how to