1 Logistics Conference & Exhibition May 20, 2004

2 Performance Based Logistics Procuring the Performance End-State …NOT Directing “How To” Buying Performance…Results and Outcomes vs. Resources  Provider Responsible for Final Result  Time on Wing and Reliability vs. Repairs and Parts  Managing Suppliers vs. Supplies  Leveraging Best Business Practices

3 DOD/DON PBL Policy  USD (AT&L) Memo 7 Mar 03: Future Logistics Enterprise (FLE) Identified as a USD (AT&L) Top Priority FLE Emphasizes Use of PBL to Improve Readiness  DoD Directive , 12 May 2003: PMs Shall Develop and Implement PBL Strategies That Optimize Total System Availability  DoD Instruction , 12 May 2003: PM Shall Work With the Users to Document Performance and Support Requirements in Performance Agreements Specifying Objective Outcomes.  Deputy SECDEF Memo 4 Feb 2004: PBL Being Implemented Sporadically…..Recommended a More Aggressive Approach Across the Services ……….Buy Availability and Readiness Measured by Performance….

4 DOD/DON PBL Policy The DoN has used numerous funding methodologies for executing PBLs. The majority PBLs have utilized the Navy Working Capital Fund as a funding source, which facilitates the use of single funding line and long-term contracts for PBL support. Additionally, the DoN has utilized various OM&N accounts to fund PBL. The Navy flying hour program, Naval aviation training program and fleet operating funds are examples of O&MN accounts used to directly fund PBL contracts. Current DoN funding sources provide adequate flexibility for PBL contract execution. Transfer of funding between DoN budget/accounts is not required.

5 Key Tenets of a Successful PBL  Profit Motive Coincides With Navy Performance Objectives  Procures an Outcome or Result  Solid Business Case Analysis  Provider Empowered to Fulfill Requirements  Complies With Title 10 USC  (May Include Public-Private Partnership)  Straightforward, Measurable, Fleet Approved Metrics  Transparent to the Fleet Optimizes Product Support and Total Ownership Costs

6 Why We Like PBL PBL Coincides With Cost-Wise Readiness and CNO’s Top Five Priorities/Goals:  Manpower- Lower Fleet Man-hours/Cannibalizations  Readiness- Higher Percentage of Aircraft Availability  Future Readiness- Availability Commitment/Reliability Growth  Quality of Service- Increased Parts Availability, Premium Transportation and Field Reps for Assistance  Alignment- Multi-Organizational/Multi-Competency IPTs Including OEM/Contractors With Common Goal PBL Coincides With Cost-Wise Readiness and CNO’s Top Five Priorities/Goals:  Manpower- Lower Fleet Man-hours/Cannibalizations  Readiness- Higher Percentage of Aircraft Availability  Future Readiness- Availability Commitment/Reliability Growth  Quality of Service- Increased Parts Availability, Premium Transportation and Field Reps for Assistance  Alignment- Multi-Organizational/Multi-Competency IPTs Including OEM/Contractors With Common Goal  F/A-18 SMS - Availability Was 65%... Now 98%  Tires - Availability Was 81%... Now 98%  ARC-210 Radio - Availability Was 70%... Now 85%  APU - Availability Was 65%... Now 90%+  F-14 LANTIRN - Availability Was 73%... Now 90%  H-60 Avionics - Availability Was 71%... Now 85%

7 General PBL Lessons Learned  Bring In ALL Stakeholders Early in the Process  Heavy Resource Investment Required for PBLs…Time & People  Establish a PBL IPT with Empowered Members  Develop a Few, Simple Metrics With Dependable Measurement Tools  Establish Trust and Work to Eliminate Adversarial Relationship Between Government and Contractors  Funding Profile Must Support Requirement   Evolving DOD PBL Processes and Policy  Get Senior Level Sponsorship

8 PBL Future Challenges  Reduced Flexibility of NWCF/FHP as More PBL Contracts are Awarded  Budget, Contracting (FAR, DFAR) Changes to Account For and Facilitate Implementation of PBLs  Cultural Change Required…...Through Training of Navy and Industry Personnel in PBL Concepts and Successes PBL Theory Generally Understood, However Implementation Still a Challenge

9 Backups

10  Four and 1/2 Year Firm-Fixed Price Contract Base Period; Five One Year Additional Ordering Periods  $510M, Largest Aviation Fixed Price PBL Contract…BCA Projects $79M in Cost Avoidances  Includes 36 F404 Major Sub-Assemblies Covering 1895 Engines  Covers the Overhaul of the Major Sub-assemblies Regardless of Quantity Repaired/Replaced  Provides Flying Hour and War Time Surge Flexibility  Measurable Performance Metrics (LRT, SMA and Durability) 85% Availability; Disincentives for Lower Than 75%, Incentives Up to 3% for 90% Availability (SMA 3 Year Average is 55%)  Public Private Partnership With NADEP Jacksonville- Leverages OEM “Best Practices” Efficiencies  GEAE Responsible for Depot TAT, Repair Parts, Inventory Management and Control, Workscoping, Attrition Replacement, Current Backorder Reduction Program  Wholesale Inventory Management and Storage F404 PBL (F/A-18A-D)

11 F404 PBL Results  57% Total Backorder Reduction Contract-to-Date  67% IPG1 Backorder Reduction Contract-to-Date  57% Total Backorder Reduction Contract-to-Date  67% IPG1 Backorder Reduction Contract-to-Date Exceeding Expectations! Improving F404 Availability While Reducing $/EFH Cost!

12 F/A-18E/F Integrated Readiness Support Teaming (FIRST)  3,800 E/F Unique WRAs, Associated SRAs and E/F Unique Maintenance Significant Consumables  76% of E/F Systems Touched by FIRST  68% of Total E/F WRAs Covered  332 Peculiar Support Equipment Items  19,000 Non-Maintenance Significant Consumables  DLA Functions As ICP for A-F Common and Multi- platform Consumables (FIRST provides 2nd source support)  FIRST Provides non-RFI and Repair Parts to NADEPs for Organic Repair  85% availability vs 67% for F/A-18 C/D  BCA savings of $52.4M over 5 years  Growth Plans, including APG-65, 73 and 79 Radars

13  Predecessor ALR-67(v)2 MTBF 100 Hours, $200M+ in ECP Costs, Traditional 3 Level Maintenance  ALR-67(v)3 PBL Contract Awarded Sep 1999, 6 Year Base Period, 5 Year Ceiling Priced Option, funded by NWCF and APN (Reliability Growth)  State of the Art, More Complex, More Capable  Initial Plan for 125 Hours MTBF, 3 Level Maintenance Plan  Change MP to O-D With Reliability Commitment of 300 Hours, Growing to 600 Hours in 11 Years; Achieved 600+ Hours After 4 Years  Availability 90% in 5 Days; Achieving 100% in 3 Days  Obsolescence Management and Technology Insertion vs. High ECP $ i.e. Analog Encoder Replaced With Digital Encoder (Lowers Cost, Far More Reliable, Less Prone to Obsolescence, Reduces Heat Signature of WRA Contributing to Reduced Failure Mode for Other WRA Components  Allowances Being Reviewed for Reduction, No High ECP Costs Being Driven, Reduced Fleet Cannibalizations, Reduced Logistics Footprint ALR-67(v)3 Radar Warning Receiver (F/A-18E/F) Bottom Line: Better Product, Better Support, Lower Total Ownership Costs

14  Based on Commercial “Maintenance Service Agreement”  Provides Support for APUs Used on the C-2, F/A-18, S-3, C-130 and P-3 Aircraft  Navy’s First Public / Private Partnership NADEP Cherry Point... Touch Labor Honeywell... Program Management  10 Year Performance Based Contract, Firm Fixed Price (5 Year Base & 5 One-year Incentive Terms)  Availability, Reliability Increases Guaranteed  Delivery Guarantees... 2 Days (IPG 1)  Priced by the Flight Hour  TAV- Requisitions/Data Via EDI and Web  Obsolescence Management  Product Support Engineering  Surge Capability % of Annual Flight Hours  G Cond 232 to 0, BOs 125 to 0, SMA 65% to 97%  Tech Insertion- Over 30 Reliability Improvements  Over $50M in Cost Avoidances and Provides Relief to the CIP, PRL and APN-5 Accounts  Added P-3 EDC in FY03 and Adding F404 MFC in FY04 Auxiliary Power Unit Total Logistics Support All Inclusive “No Excuses” Performance