|#1307||2801||December 18, 2014||By Sanjay Sethi|
All modern defence forces seek logistic paradigm that reduces readiness to cost ratio in face of budgetary pressures. Performance Based Logistics (PBL) is one such paradigm which enhances readiness at reduced costs. It significantly differs from traditional logistics support models which are transaction based and focus on purchase of products and services. PBL is strikingly different, as it focuses on purchase of ‘performance’. An understanding of the differences between the two approaches is critical to the recommendations that follow in this article.
In the traditional logistics support models, the users or their representatives, purchase parts or maintenance services from providers in order to execute repairs, and the commercial organisation providing spares or services is not incentivised to reduce the need for repairs and repair parts. On the contrary, when the equipment fails or is overhauled, the provider (who in most cases is the Original Equipment Manufacturer (OEM)) stands to gain, as product failure results in bigger sale of spares and/or service. Increased failure rate generates more revenue for the product providers/OEMs, but on the other hand reduces product availability in the field army. Therefore, there exists a fundamental product support misalignment between the user and the provider. Furthermore, the traditional support system is considered efficient, if large numbers of stores are purchased in advance and stocked in anticipation of failures; and a large trained and committed repair echelon is raised to respond to predicted failures. Increased transactions, which imply greater expenditure, is interpreted as an indicator of efficiency; in spite of the reduced product availability and higher costs they eventually result into.
PBL contracts are designed to address this fundamental product support misalignment. If providers/OEMs are paid for equipment performance, and not as per volume of transactions, their costs increase whenever the equipment fails. In a PBL contract, a commercial provider/OEM is incentivised to reduce both the number of repairs and the cost of the parts and labour used in the repair process. Commercial providers are incentivised to reduce system downtime in PBL contracts, which is also the user’s prime requirement. Since the OEM is paid for performance/product availability, both the users and the provider’s interests are well aligned.
PBL is used by many organisations today. The World Bank expects organisations seeking financial support for provision of healthcare to use a performance based toolkit [i]. More than 35 countries are using performance based approaches for roads and highways [ii]. Nearly 70 percent of commercial maintenance, repair, and overhaul functions employ performance based strategies[iii]. US Department of Defence (DoD) uses the model since 1999. A DoD study has concluded that, when properly structured and executed, PBL arrangements reduce the cost per unit-of-performance while simultaneously driving up system, subsystem, or component readiness. As per DoD estimates an average annual cost savings of upto 20 percent is possible for programs with sound adherence to the PBL tenets [iv]. But, perhaps the biggest advantage for the defence forces lies in making the logistic chain leaner and in the consequential enhanced agility.
PBL offers a unique opportunity for the Indian army and many before have suggested their implementation. Ideally, PBL arrangements should be finalised at equipment induction stage so as to yield long term benefits for both the user and provider. However, current procedures do not facilitate or even allow such arrangements to be concluded. Therefore, while policy makers take time to formulate guidelines for implementing PBL, a beginning can be made by negotiating a PBL arrangement for an existing system. The Maruti Gypsy is probably an ideal choice to initiate PBL for the reasons appended below:
PBL is a game-changer. It is only a matter of time when all traditional logistics support models will be replaced by PBL. The corporates and armies abroad are already using it in a big way. The Indian corporates and to an extent the army’s sister services have also adopted the model. It is time the Army ventures into it and the Gypsy affords a unique opportunity. The army should not delay any further in forging a meaningful PBL partnership based on aligned interests that delivers higher readiness levels at reduced costs, and a smaller logistic footprint.
The author is Senior Fellow at CLAWS. Views expressed are personal.
[i] The World Bank. (2008). Performance-based contracting for health services in developing countries. Washington, DC: International Bank for Reconstruction and Development
[ii] Transportation Research Board. (2009). Performance-based contracting for maintenance (National Cooperative Highway Research Program Synthesis 389). In T. R. B. f. t. N. Academies (Ed.), p. 117. Washington, DC:Author.
[iii] Flint, P. (2007). Balancing act. Air Transport World, 44(11), 47–54.
[iv] PBL Guidebook : A Guide to Developing Performance-Based Arrangements, U.S. Department of Defense, 2014
[v] Retrieved Dec 11, 2014, from Business Standard http://www.business-standard.com/article/companies/maruti-bags-lucrative-army-deal-114120700351_1.html
[vi] Retrieved Dec 12, 2014, from Maruti Suzuki Way of Life: http://www.marutisuzuki.com/service-network.aspx