Supplier Management Module 5 ACQ-315

Jeran Binning

(Lesson 5) Given a company contract award scenario and corporate goals, students will identify and assess a company’s management challenges in optimizing prime contractor relationships and decisions in shaping and managing its supply chain.

Lesson 5: Supplier Management (Tuesday Afternoon 1500-1630)   Learning Outcomes: Given a company contract award scenario and

corporate goals, students will identify and assess a company’s management challenges in optimizing prime contractor relationships and decisions in shaping and managing its supply chain.

  Explain industry strategies to support system sustainability. Describe prime contractor methods used for task and risk flow down. Explain supplier management impact on company margins. Identify company resources needed for subcontractor management. Identify risks and financial considerations for various make-buy decisions to

include company motivation to outsource scope. Describe prime contractor financial gains and reduced risks from managing

“pass-through” to a subcontractor/supplier. Explain company management of critical supply chain priorities across the

several programs. Describe agreements on data rights and licensing in protecting a company’s

intellectual property

ACQ-315 Excercise The instructor briefs the Supplier Management concepts in the

Thursday morning session.

Use of segments of LOG 340 will be included but adjusted for an industry perspective.

Industry motivations to engage in product support activities will address impacts on market opportunity and company margins.

An overall supplier management process will emphasize issues related to supporting both a manufacturing production line as well as sustaining an aging, legacy system.

The legacy system may be experiencing rising sustainment costs, declining availability, obsolescence issues, and the need for modifications/upgrades/new capabilities.

Case Study Activities: The instructor will introduce a short

Case Study to demonstrate financial gains and risks for managing supply chain subcontractors on a program to include business acumen considerations through subcontractors.

Table teams will be split up representing a prime, sub (large company), and sub (small company). Instructor will note facilitated student offered business challenges and risks for their companies.

Content/References:

Content available is 20% principally using LOG-340 framework. References include LOG-340 Student Guide, commercial supply chain whitepapers provided on K:\LCIC\Business Acumen\ACQ 315\8 Supplier Management.

Learning Outcomes 8.1 Explain industry strategies to support system sustainability.

8.2 Describe prime contractor methods used for task and risk flow down.

8.3 Explain supplier management impact on company margins.

8.4 Identify company resources needed for subcontractor management.

8.5 Identify risks and financial considerations for various make-buy decisions to include company motivation to outsource scope.

8.6 Describe prime contractor financial gains and reduced risks from managing “pass-through” to a subcontractor/supplier.

8.7 Explain company management of critical supply chain priorities across the several programs.

8.8 Describe agreements on data rights and licensing in protecting a company’s intellectual property.

Skill Set is Complex! contact Nick Little at MSU.8

Conclusion International business supply chains provide the structure for the new

world of globalized business. Much of U.S. international trade is conducted by globalized supply chains.

For public policy, supply chains affect the magnitude of impact for fiscal stimulus packages and also the incidence of trade policy.

Supply chains also are affected by the range of policies that have an impact on the competitiveness of U.S. business.

Whether taxes, environmental regulations, labor policy, or shipping security, business supply chains are directly affected by changes in the business environment, whether in the domestic or foreign markets.

In the world of globalized supply chains, a policy aimed at imports, may actually hit U.S. parented supply chains as well as foreign companies and countries.

Public policy affects businesses in two distinct ways. The first is in the environment for business or the economic, political, and social crucible in which it operates.

This includes a wide range of factors including basic institutions of private property, commercial law and rights, market access, rights of establishment, national treatment, border barriers, exchange rate policy, protection of intellectual property, infrastructure, education and training of workers, energy policy, the climate for innovation, political governance, and the panoply of policies aimed at the general climate for business that all companies face.

The second way that public policy affects business is in actions that affect the internal operations of companies.

These are actions that directly affect costs of production and profitability, and may include tax policy, specific customs duties, wage and employment policies, accounting and reporting rules, health and safety requirements, specific environmental requirements, and product safety.

Some policies affecting the general business environment, such as energy costs and subsidies for research and development, also affect internal costs.

The development of global supply chains adds another dimension to the impact of public policy.

This appears in the incidence (who is affected) by policy. Since manufacturing processes now have become fractured, the incidence of policy likewise has become fractured.

A supply chain consists of a domestic parent, domestic suppliers, foreign suppliers, and a community of supporting functions that include logistics, supply chain management, and quality assurance.

Public policy may provide incentives or disincentives for supply chain parent companies to establish and retain their headquarters in the U.S. market. This applies both to historically American companies and to foreign companies that may locate regional headquarters in the United States.

Public policies favorable to business in the United States also may induce both American and foreign-owned supply chains to locate more segments of their supply chains in the United States (and vice versa).

Dow Chemical Model One example of how public policy may enter into business

decision making to determine where to manufacture product is an analytical tool reportedly used by Dow Chemical.

Dow has manufacturing capacity in several countries and can move production from location to location on short notice.

The company has used a linear programming model25 that takes account of international differences in exchange rates, tax rates, and transportation and labor costs to determine the best mix of production by location for each planning period.26

The company is able to respond quickly to government policies that may affect exchange rates, taxes, or other cost factors.

iPod Supply Chain

Major Policies Affecting Global Supply Chains Taxation

Trade and Investment Policy

Labor and Health Care Costs

Environmental Regulation

Currencies and Exchange Rates

Infrastructure and Transportation

Product and Food Safety

Education and Training

Protection of Intellectual Property

Risks

Fiscal, Monetary, and Industrial Policies

Taxation Numerous other tax provisions affect U.S.

businesses and their manufacturing decisions.

The taxation of income by Americans working abroad, the rate of taxation of corporations, various tax incentives or rebates aimed at promoting specific desired activities (such as technological change), the taxation of corporate dividends, and other tax-related issues are being debated widely.

These are beyond the purview of this report.

Trade and investment policy

Global supply trains could not exist without international trade.

Traditionally, trade and investment policy deals with border barriers.

These include customs duties, import quotas, the freedom to move capital across borders, and the right to establish businesses (including taking over an existing company) in a given country.

The development of globalized supply networks does not alter the role of traditional trade and investment policies.

Labor and Health Care Costs Labor Costs Labor costs are one of the most controversial aspects of

globalized manufacturing chains.43 The argument is that U.S. companies are “shipping jobs overseas” or “outsourcing jobs” in search of cheap labor to reduce costs of production.44

In 2007, for example, hourly compensation costs for production workers were

$37.66 in Germany $24.59 in the United States, $28.91 in Canada, $16.02 in Korea $2.92 in Mexico, $0.81 in China (2006 data)

Health Care In the United States, much of health care is provided

by employers, so health care costs have become an integral part of labor costs.

The costs for health care in the United States are the highest in the world.

The Congressional Budget Office (CBO) estimates that spending on health care and related activities will account for about 17% of gross domestic product in 2009 ($2.6 trillion or $8,300 per capita) and under current law CBO projected that share to reach nearly 20% ($13,000 per capita) by 2017.57

Environmental Regulation As with labor issues, environmental regulation both as

applied to businesses in the United States and as contained in various international trade and other agreements tends to be quite controversial.

The issue for governments is how to find a balance between three potentially conflicting objectives:

security of supply,

industrial competitiveness, and

environmental sustainability.

Currencies and Exchange Rates

Infrastructure and Transportation One part of infrastructure and transportation that is critical to

global supply chains seems to be oceanic shipping and air freight.

The oceans are no longer a barrier that isolates and protects countries.

Instead, modern communications and transportation have brought markets of the world onto each other’s doorsteps.

The oceans and skies have become avenues of interaction rather than barriers of separation.

Shipping, however, raises certain issues for public policy. These revolve around risks in the supply chain, particularly costs, security risks and delays in shipping.

Transportation In 2007, the Global Supply Chain Council in Shanghai conducted

a survey of international companies there dealing with secure logistics. The respondents indicated that security in logistics had become an important element in their strategy and operations. Many of the companies surveyed had reorganized their international supply chains to comply with new international regulations, such as the Container Security Initiative.

In addition, many technological initiatives had been launched that were aimed at improving the security of the supply chain. These included the use of radio frequency identification, E-seals (physical locking mechanisms with technology to detect and report tampering), satellite supported tracking of containers, electronic locks, image recognition devices, and biometric identification.

Intellectual Property Chinese counterfeits include many products, such as

pharmaceuticals, electronics, batteries, auto parts, industrial equipment, toys, and many other products, that may be exported and could pose a direct threat to the health and safety of consumers in the United States.

Inadequate IPR enforcement is a key factor contributing to these shortcomings. China has high criminal thresholds for prosecution of IPR violations as well as difficulties in initiating cases.

This arguably results in limited deterrence. Civil damages are also low.

Deutsche Bank

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010

A Wall St Perspective on the Defense Industry November 2010

Myles Walton, PhD, CFA Myles.Walton@db.com

617.217.6259

Incentives Give You A Clue to Actions

27

28

Dealing with the Downside of a Budget Cycle: Follow the Customer or the Technology?

• Strong Balance Sheets And Declining Addressable Markets Will Test Discipline

• Adjacencies Are Likely to Be Better Forged Through Customer Than Technology Know-How

• The Bad News: Sharp Drops Will Be Felt the Hardest Down the Chain• The Good News: Sellers and Buyers Will Be Motivated to Consolidate

“Their death rays, they say, will treat cancer. Their electric rail guns will loft commercial payloads into space and enrich earthling entrepreneurs. Their nuclear reactors, originally meant for war in space, will instead hurl astronauts toward the moon and Mars.”

NYT, April 8, 1990 on the Military Industrial Base Repositioning

29

Valuation

Post 9/11, the group began to

move in line with the market

Multiples very reasonable

reflecting budget uncertainty

Source: Capital IQ

Source: Capital IQ.

Defense multiples beginning to diverge again

P/ E TrendsS&P and Large-cap Defense

5

15

25

1997 1999 2001 2003 2005 2007 2009

Defense Average P/E

S&P 500 P/E

Defense Historical P/E Analysis Current 5 yr 10 yr CY12E Historical Historical

GAAP P/EGeneral Dynamics 8.8 13.3 10.6Lockheed Martin 8.6 15.0 13.0Northrop Grumman 8.4 13.4 10.0Raytheon 8.5 15.2 10.6

Average GAAP P/E 8.6 14.2 11.1

Outsourcing

Boeing Dreamliner

Boeing Dreamliner The head of Boeing’s commercial-airliner

division, Jim Albaugh, admits that with hindsight too much of the Dreamliner programme was contracted out to other firms.

Some work has been brought back in-house so that it can be more closely supervised.

The plane maker has also set up a “war room” that constantly monitors the world’s supply of aircraft parts and raw materials.

Boeing Dreamliner

It has signed a long-term deal with a Russian metals firm to ensure a steady supply of crucial components made from titanium.

Rand Titanium Study

Boeing Dreamliner

And it has hired hundreds of “examiners” to visit suppliers, to check that they are building up production to meet Boeing’s increasing needs and chivvy them along if not.

Boeing Dreamliner It has about 1,200 “tier-

one” suppliers, which provide parts directly to the plane maker from 5,400 factories in 40 countries. These in turn are fed by thousands more “tier-two” suppliers, which themselves receive parts from countless others.

Boeing Dreamliner

Beverly Wyse, who oversees production of the 737, admits that it has sometimes been a job to persuade all these suppliers to invest enough to meet future demand. To do so, Boeing has had to learn to be more open with them about its production plans, and a bit less paranoid about whether such information might reach the ears of its competitors.

Boeing Dreamliner

At Boeing’s Everett factory to the north of Seattle and another plant in South Carolina, plans are afoot to churn out more of the company’s bigger jets, including the 787. But the 40-odd unfinished Dreamliners scattered around the Everett campus and elsewhere are a reminder of how such attempts to ramp up production can go wrong.

Having first suffered from a worldwide shortage of the fasteners that hold bits of the plane together, the 787 was then held back further by other mishaps, including faulty horizontal stabilisers sent by an Italian supplier.

Boeing is struggling to correct the problems on the unfinished planes even as it strives to get its production lines turning out ten fault-free 787s a month by the end of next year.

Boeing Dreamliner REUTERS January

2011

More delays followed as production problems mounted. In 2008, the company blamed another delay on a 58-day strike by Boeing assembly workers over contract terms.

The next year, Boeing bought portions of business units of two of its suppliers to help regain control of its Dreamliner production.

It paid $580 million for the South Carolina operations of Vought Aircraft Industries, the company that worked on the 787 aft fuselage section.

Boeing later purchased Alenia North America’s half of Global Aeronautica LLC, the South Carolina fuselage subassembly facility for the 787. Boeing did not disclose financial terms of that deal. “By taking Alenia out of the ownership equation, this tidies up the situation in Charleston,” Boeing said in a statement at the time.

Aerospace Clusters: Local or Global Knowledge Spillovers?

JORGE NIOSI & MAJLINDA ZHEGU School of Management Science, Universite ́ du Que ́bec a` Montre ́al, Montreal, Canada

ABSTRACT: The literature about regional innovation systems, clusters and industrial districts insists on the importance of local knowledge spillovers.

Nevertheless, more recently a few authors have put in question the importance of local knowledge spillovers. This paper provides an analysis of some of the most dynamic aerospace clusters in the world, located in Montreal, Seattle, Toulouse and Toronto.

We start by discussing theories of clustering, then provide research questions as well as empirical evidence on the international nature of knowledge spillovers.

Local knowledge spillovers are less significant, of a different nature, and they may make a scanty contribution to explain the geographical agglomeration of firms.

Conversely, international spillovers help to explain the relative dispersion of industry across nations.

Resilient geographical clustering is related to the anchor tenant effects as creators of labour pools and owners of very large manufacturing plants creating regional inertia.

We thus reject the local knowledge spillover explanation of aerospace clusters in favour of another one based on anchor firms and their effects on the local labour pool.

Making aircraft

Making aircraftFull throttleBoeing and Airbus enjoy huge

demand for their planes. Can they keep up?

Nov 26th 2011 | from the print edition

Naval shipbuildingSmall is the new big in naval shipyards

May 12th 2011, 15:53 by J.F. | MOBILE, ALABAMA

5.1 Explain industry strategies to support system sustainability.

5.1 Explain industry strategies to support system sustainability

48

Redefining Supportability• New Design Related Metrics• Integrated with Producibility

49

Our Supportability Approach Emphasizes Support EventCharacterization Beyond Traditional Operational Availability (AO)

TRADITIONAL APPROACH

AO = SUPPORTABILITY (S)?

AOOT + ST

OT + ST + TCM + TPM + A/LDT=

WHERE: TOTAL OPERATING TIME DURINGA SPECIFIC INTERVAL

TOTAL STANDBY DURING ASPECIFIED INTERVAL

TOTAL CORRECTIVE MAINTENANCETIME DURING THE SAME SPECIFIEDINTERVAL

TOTAL PREVENTIVE MAINTENANCETIME DURING THE SAME SPECIFIEDINTERVAL

TOTAL ADMINISTRATIVE ANDLOGISTICS DOWNTIME DURING THESPECIFIED INTERVAL

• HENCE, AO ADDRESSES R&M ONLY • HENCE, SUPPORTABILITY REQUIREMENTS ADDRESS ALL EVENTS

• GIVEN: AO

OT

ST

TCM

TPM

A/LDT

=

=

=

=

=

OT + ST(?) + OT + ST + TCM + TPM + A/LDT

=

MISSING EVENTS

- SERVICING- RECONFIGURING-GROUND/CARRIER HANDLING-SET UP AND TEAR DOWN

- COMBAT OPERATIONS- LAUNCH ACTIVITIES- MISSION VARIATIONS- OTHER NON R&M ACTIONS

• THEREFORE: AO ≤ S

• AND: S = {OPERATIONAL SUITABILITY, READINESS,SUSTAINABILITY, SURVIVABILITY, MOBILITY, LIFE CYCLE COSTS, AO} Events

• BECAUSE: S IS NOT ADDITIVE BUT CONSISTS OF FINITE,SIMULTANEOUS SUPPORT EVENTS FROMALIGN TO WINTERIZE (500+ EVENTS DEFINED)

SUPPORT PLANNING BASELINE(PEACETIME OPERATIONS)

DESIGN FOR S BASELINE (WARTIME OPERATIONS)

• WHERE:

f = SUPPORT EVENT FREQUENCYd = SUPPORT EVENT DURATIONc = SUPPORT EVENT COST

S = F (f, d, c) IS A CHARACTERISTIC OF DESIGN

Answer: Ao = 1.0BUT NOT TO THE SQUADRON

COMMANDER!!BUT

NGC Approach

12/16/2009

Integrated Producibility and Supportability Requirements Development is Pivotal to Systems Engineering

Reliab

ility

Maintai

nabilit

y

Producibilit

y

Logistics

Other

DESIGNINTEGRATION DILEMA

DESIGNER

Design Integration Solution – Producibility and Supportability

DESIGNERS DESIGNERSSYSTEMENGINEERS

ProducibilityP Other Supportability

S

POWER SOURCESELECTRO-MECHANICAL& HARNESS

ASSEMBLYAND TEST

MACHINE SHOPAND PLATING

PRODUCIBILITYENGINEER

• PDTR* OPTIMIZATION• TECHNOLOGIES INSERTION• TRADE STUDIES• INDEPENDENT RESEARCH & DEVELOPMENT (IRAD)

HYBRIDMANUFACTURING

INTEGRATIONAND TEST

FABRICATION &PRECISIONMECHANICALASSEMBLY

PRODUCTIONPLANNING ANDCONTROL

• HUMAN FACTORS• SAFETY

RELIABILITY

MAINTAINABILITY

LOGISTICS SUPPORTANALYSIS

DESIGN• SUPPORT EQUIPMENT• TRAINING DEVICES

SUPPORTABILITYENGINEER

• SDTR INTEGRATION**• SUPPORTABILITY TECHNOLOGIES• TRADE STUDIES• INDEPENDENT RESEARCH & DEVELOPMENT (IRAD)

FIELDSUPPORT

ILS DISCIPLINES/ELEMENTS• MAINTENANCE PLANNING• MANPOWER AND PERSONNEL• SUPPLY SUPPORT• TRAINING• TECHNICAL DATA• COMPUTER RESOURCES SUPT• PKG, HANDLING AND STORAGE• TRANSPORTATION• FACILITIES• STANDARDIZATION AND INTEROPERABILITY

* Producibility Design-To-Requirements (PDTRs)

**Supportability Design-To-Requirements (SDTRs)

FORMALINFORMAL

Sustainment Logistics

Future Organizational Relationships

LOGISTICS ENGINEERING

INFRASTRUCTURE FOOTPRINT

• Supply Support• Provisioning• Spares

•Technical Data• Training and Training Support• Type Classification• Material Release• Demil

• Facilities• Fielding• Deployment

• Size• Weight• Personnel

• PHS&T

• Producibility Design-to Requirements (PDTR)•Spares Acquisition Integrated with Production•Ease of Equipment Installation• Design for ease of access

• Modularity• Fasteners• Tooling

• Reduction in TOC

SUSTAINMENT

ENGINEERING

Design for SUPPORTABILITY

Design for PRODUCIBILITY

• Supportability Design -To Requirements (SDTR)•Maintenance Planning

• Failure related• Non-failure related

• Support and Test Equipment• Manpower and Personnel• Design for Availability• Reduction in TOC

PRODUCT

SUPPORT

52

Comprehensive Supportability Design-To Requirements (SDTRs)Reduce Support Event Frequency, Duration and Cost for AM

• SUPPORTABILITY (S) ELEMENTS- OPERATIONAL SUITABILITY

- READINESS- INFLIGHT SUSTAINABILITY

- MOBILITY/TRANSPORTABILITY- LOGISTICS LIFE CYCLE COST

- AVAILABILITY (A0)- RELIABILITY

- MAINTAINABILITY

- OPERATIONAL SUSTAINABILITY

• SUPPORT ACTIO

NS

- GROUND HANDLIN

G

- SERVIC

ING (FUEL, O

IL...)

- ARMAMENT &

WEAPONS

• LOADIN

G

• UNLOADIN

G

- RADIO

/RADAR FREQ CHANGES

- HOT/COLD W

EATHER KITS

- BALLAST LOADIN

G/UNLOADING

- MISSIO

N RECONFIG

URATION

- TAPE IN

STALLATIO

N (PROMS)

- CHAFF LOADIN

G/UNLOADING

- PRESERVA

TION

- DEPRESERVA

TION

- ENGINE RUNUP IN

TEST CELL

- INSPECTIO

NS (MAJO

R, MIN

OR)

• OPE

RAT

ION

S- A

LER

T TI

ME

- REA

CTI

ON

TIM

E

- FLE

XIB

ILIT

Y

- CO

MB

AT M

ISSI

ON

S

- TR

AIN

ING

MIS

SIO

NS

- FER

RY M

ISSI

ON

S

- SPE

CIA

L O

PER

ATIO

NS

- AU

STER

E FI

ELD

(3rd

WO

RLD

)

- EQ

UIP

MEN

T EM

PLA

CEM

ENT

(SET

-UP)

- EQ

UIP

MEN

T D

ISPL

AC

EMEN

T (T

EAR

-DO

WN

)- N

AVY

OPE

RAT

ION

S (O

CEA

N, S

UB

-SEA

)

Operational Availability (Ao)

RELIABILITY & MAINTAINABILITY - MAINTENANCE • PREVENTIVE • CORRECTIVE - SUPPLY DELAY - ADMIN DELAY(128 PARAMETERS FROMMIL-STD-721C)

OPERATIONSGENERALSUPPORTACTIONS

SELECTED SET OFSDTRs

SUPPORT EVENTS• 500+ PARAMETERS• DESIGN TO ALGORITHMS

DESIGNER

TAILORED SDTRs

SYSTEM SPEC

Supportability Design-to Framework

Materiel Availability (AM) Design

S = F(f, d, c)

12/16/2009

12/16/2009 53

DS

f d r c f d r c AVDLR

NMC NMC PMC PMC C

f d r c f d r c AVDLR

A A mh A o A A mh A A iA

s m s m na

A A mh A o A A mh A A iA Eq

Eq

D D D D D D DD

I I I I I I II

SUPPORTABILITY DEGRADER ALGORITHM (DS) PURPOSE: The purpose of the Supportability Degrader Algorithm is to provide focused

characterization and assessment of cause and effect relationships within a selected range of supportability degraders. A secondary purpose is to enhance developing supportability design-to requirements (SDTRs) for inclusion in Technical Data Packages or LECPs.

SCOPE: Implementing the Supportability Degrader Algorithm will allow managers to

determine if the degrader is design, mission, or infrastructure driven as defined by the individual equations above. The algorithm will generate rankings across the entire range of NALDA reported systems with respect to Total Ownership Cost. TERMS AND DEFINITIONS ARE AVAILABLE.

The Supportability Degrader Algorithm differentiates between Mission, Design and Infrastructure Issues - NAVY or AIR FORCE Data Bases

Design

Mission

Infrastructure

Constructing Successful Business Relationships: Innovation in Contractual Incentives

Prepared by Science Applications International Corporation

Under Contract DASW01-95-D-0076, Delivery Order 45

For the Deputy Assistant Secretary of the Army (Procurement)

Program Stability

Susceptibility to disruptions in funding, schedule, requirements, and political and other support.

While the government and the contractor will view basic program stability more or less in the same light, the contractor may also view stability in additional ways, including:

• The ability to project forward with certainty

• The stability to develop an efficient supply chain

• The ability to recover front-loaded costs

Contractor Considerations

Requirement Acquisition Phase Primary Incentive Areas Size Contract Type Program Stability Program/Contract Flexibility Competitive Environment Entry Barriers Performance History Future Effort Corporate Strategy Inherent Risk Industry Dynamic

Constructing Successful Business Relationships: Innovation in Contractual Incentives

Several incentives viewed as having the highest impact were also voted the most difficult to implement.

However, there were also contractual incentives that were considered to have high impact and relative ease of implementation. These included:

• Award-term contracting—the idea that contract length can be shortened or extended, based on attaining or surpassing specified results metrics, and;

• Output Contracting—defining deliverables as outputs (for example, copies rather than copiers).

The cross section of contractual incentives from the Phase I study, the Phase II group efforts, and additional research are reflected in a Compendium of Contractual Incentives (Appendix B), intended as a baseline guide for the contracting and acquisition community in the development and crafting of more effective business relationships.

5.2 Describe prime contractor methods used for task and risk flow down.

5.2 Describe prime contractor methods used for task and risk flow down.

5.3 Explain supplier management impact on company margins.

5.3 Explain supplier management impact on company margins.

5.4 Identify company resources needed for subcontractor management.

5.4 Identify company resources needed for subcontractor management.

Page 6205/03/2023

RTN Supplier Diversity Websitehttp://www.Raytheon.com/connections/supplier/diversity

Raytheon Supplier Diversity - Connect With Us

The On-line

Supplier

Registration tool

will aid in matching

suppliers to

opportunity.

8.5 Identify risks and financial considerations for various make-buy decisions to include company motivation to outsource scope.

5.5 Identify risks and financial considerations for various make-buy decisions to include company motivation to outsource scope.

5.6 Describe prime contractor financial gains and reduced risks from managing “pass-through” to a subcontractor/supplier.

5.6 Describe prime contractor financial gains and reduced risks from managing “pass-through” to a subcontractor/supplier.

5.7 Explain company management of critical supply chain priorities across the several programs.

5.7 Explain company management of critical supply chain priorities across the several programs.

8.8 Describe agreements on data rights and licensing in protecting a company’s intellectual property.

5.8 Describe agreements on data rights and licensing in protecting a company’s intellectual property.

Make Vs BuyACQ-315

Intracompany Transdfers and Make vs Buy

“make-or-buy” Two costs typically drive an organization’s “make-or-buy” decisions:

production costs and transaction costs. Conventional economic analysis focuses on production costs (economies of scale and scope, learning curves, etc.).

The “buy” (or outsourcing) option is routinely prescribed whenever external production costs are substantially lower than internal production costs.

Although recognizing the importance of production cost savings in the decision to outsource, there is another key factor, transaction costs (e.g. search and information costs; bargaining, decision and contracting costs; and monitoring and enforcement costs).

As Oliver Williamson rhetorically queries:“What...does zero transaction costs mean? All of the relevant information is freely available and can be costlessly processed by the participants? Comprehensive contracting is feasible? Actions can be costlessly monitored? Decisions will always be made in a benign way?” [1999 p.316]

Make Buy TradeoffsWhat Drives Make vs Buy Decisions?

Rand 1992

Overhead Allocation and Incentives

Business Models Compared

Inventory Intensity

Low High

Capital Asset HighIntensity

LowCommercial Software

ShipbuildingLarge Vessels

Semiconductors

Large ScaleConsulting

Goal = Capacity Loading Goal Varies

Goal = More Sales Volume Goal = Faster Payment Cycles

Motivations Compared

Loading

Low High

Nominal High Capital Intensity

Low

Must PushCapacity Out

Few examples in This quadrant

Nominal condition For low intensity model

Must pull work back into the Prime

ICD’s Interface Control Documentation (ICD)

Interface Control Documentation includes Interface Control Drawings, Interface Requirements Specifications, and other documentation that depicts physical and functional interfaces of related or co-functioning systems or components.

ICD is the product of ICWGs or comparable integrated teams, and their purpose is to establish and maintain compatibility between interfacing systems or components.

4.4. Systems Engineering Design Considerations   Subordinate sections to 4.4 cover the following topics:    4.4.1. Accessibility    4.4.2. Commercial Off-the-Shelf (COTS)    4.4.3. Corrosion Prevention and Control    4.4.4. Critical Safety Items (CSIs)    4.4.5. Disposal and Demilitarization    4.4.6. Diminishing Manufacturing Sources and Material Shortages (DMSMS)    4.4.7. Environment, Safety, and Occupational Health (ESOH)    4.4.8. Human Systems Integration (HSI)    4.4.9. Insensitive Munitions (IM)    4.4.10. Interoperability    4.4.11. Open Systems Design    4.4.12. Parts Management    4.4.13. Program Protection &System Assurance    4.4.14. Quality and Producibility    4.4.15. Reliability, Availability, and Maintainability    4.4.16. Software    4.4.17. Spectrum Management    4.4.18. Standardization    4.4.19. Supportability    4.4.20. Survivability and Susceptibility    4.4.21. Unique Identification of Items

Aviation Week & Space TechnologyAugust 29, 2011 Pg. 38Starved For CashPentagon industrial policy chief defends aerospace as a safe investmentBy Amy Butler, Huntsville, Ala.

Pentagon’s industrial policy chief says he worries that the U.S. aerospace industry could follow in the footsteps of the domestic automobile industry by cutting corners in manufacturing, churning out inferior products and eventually losing market share to superior foreign competitors.“What happened to the auto industry could happen to aerospace,” Brett Lambert tells Aviation Week. Shortsighted financial decisions, such as using cheaper parts, drove customers to “stop having confidence in cars, companies to start losing profit, [and the large companies] put that burden onto the supplier,” he says. U.S. automakers “weren’t competitive with the market” as a result, he says.

As the defense budget declines and the Pentagon continues to demand management efficiencies, Lambert says this burden should not be disproportionately transferred from the prime contractors to the third- and fourth-tier suppliers.

Diminished access to capital for small suppliers is one of the preliminary findings of his sweeping Sector-by-Sector, Tier-by-Tier (S2T2) industrial base study under way now.

Outsourcing OUTSOURCE IN HASTE, REPENT AT LEISURE By Stefan Stern

So now we know. BP did not have “the tools you would want in your toolkit”, in the candid words of its chief executive, Tony Hayward. While the unexpected will, by definition, always happen, when disaster struck on April 20 in the Gulf of Mexico the company lacked the necessary expertise and capacity to deal with a deepwater oil leak. The PhD geologist boss did not have enough specialist engineers to turn to.

One unattractive aspect of the Deepwater Horizon catastrophe was the sight of executives from BP, rig operator Transocean and maintenance provider Halliburton, all seeking to play down their responsibility for the accident. “Mistakes were made, but not by us,” seemed to be the attitude. Responsibility for the accident was shared, but no one could agree by whom exactly, and in what proportion. In effect, the sort of discussions that should have taken place before contracts were signed ended up being played out on Capitol Hill, in front of the television cameras.

This article can be found at:http://www.ft.com/cms/s/0/15f7acf6-727e-11df-9f82-00144feabdc0,_i_email=y.html"FT" and "Financial Times" are trademarks of The Financial Times.Copyright The Financial Times Ltd 2011

Major Supply Chain Challenges

Today’s Supply Chains Are Multi-Dimensional and Complex

Today’s Supply Chains Are Multi-Dimensional and Complex(Cont)

12/16/2009 85

Recursive and Iterative Systems Engineering Vee Model

86

Stakeholder Requirements, CONOPS,

Validation Planning Definition

System Performance Specification and

Verification Planning

Configuration Item Performance

Specification and Verification Planning

Configuration Item Detail Specification and Verification Procedures

Fabricate, code, buy, or reuse

Inspect and test to Detail Specification

Assemble Configuration Items and Verify to CI

Performance Specification

Integrate System and Verify to System

Specification

Validate System to Stakeholder

Requirements and CONOPS

Validation

Verification

Verification

Verification

Stakeholders Requirements

Definition

Requirements Analysis

Architecture Design

Implementation Integration

Transition

Validation

Validation

Technical Planning

Requirements Management

Risk Management

Decision Analysis

Data Management

Technical Assessment

Configuration Management

Interface Management

These are critical in a

Buy situaton

MIL-HDBK-61A: Configuration Identification

Interface Management

5.8 Interface Management Another aspect of configuration

identification to be considered during development is interface management, also referred to as interface control.

5.8.1 Interface Management Concepts Interfaces are the functional and

physical characteristics which exist at a common boundary with co-functioning items and allow systems, equipment, software, and data to be compatible.

Design

During development, part of the contractor’s design effort is to arrive at and document external interface agreements, as well as to identify, define, control and integrate all lower-level (i.e., detailed design) interfaces.

Categorize the interface To understand how a particular interface

should be defined and managed, it is necessary to categorize the interface in a number of ways:

Contractual relationship Customer relationship (Acquisition

activity(ies) Hierarchical relationship Developmental status

Categorize the interface

Each interface must be defined and documented; the documentation varies from performance or detailed specifications to item, assembly, or installation drawings, to interface control documents/drawings.

Levels of Interface

Interface Management Whether formal or informal interface management is employed, it is

necessary that there be a legal responsibility on the part of the interfacing parties, since even the best intentioned technical agreements can break down in the face of fiscal pressure.

If there is a contractual relationship, including a teaming arrangement, between two or more parties to an interface, there is already a vehicle for definition and control.

However, where there is no contractual relationship, a separate interface agreement may be necessary to define the interface process and provide protection of proprietary information.

When the agreement involves two or more contractors, it is referred to as an associate contractor agreement; when two or more Government activities are the parties to the agreement, a Memorandum of Understanding (MOU) is generally used.

ICWG Within an organization, and often with

subcontractors, integrated product teams may be used to establish interfaces. Some interfaces must be defined through a formal interface management process involving interface control working groups (ICWGs). An ICWG is a specialized integrated product team comprised of appropriate technical representatives from the interfacing activities. Its sole purpose is to solve interface issues that surface and cannot be resolved through simple engineer-to-engineer interaction.

ICWG and IPT Once interfaces have been agreed-to by the parties

concerned, they must be detailed at the appropriate level to constrain the design of each item and baseline the configuration documentation so that the normal configuration control process will maintain the integrity of the interface. Then it may be necessary to convene an ICWG or other mechanism on rare occasions to resolve change issues in a satisfactory manner. The Government is the arbitrator of issues that cannot be resolved by an ICWG or IPT, such as those issues which involve contractual issues requiring contract changes and agreement between different acquisition activities.

Interface Flow

ICD’s Interface Control Documentation (ICD) Interface Control Documentation includes

Interface Control Drawings, Interface Requirements Specifications, and other documentation that depicts physical and functional interfaces of related or co-functioning systems or components. ICD is the product of ICWGs or comparable integrated teams, and their purpose is to establish and maintain compatibility between interfacing systems or components.

Government Infrastructure

“DoD operates 17 major depot activities, employing more than 77,000 personnel and expending more than 98 million direct labor hours (DLHs) annually… The property, plant, and equipment of DoD’s depots are valued at more than $48 billion.

That infrastructure comprises more than 5,600 buildings and structures, with 166 million square feet used for depot maintenance.”

- Logistics Management Institute Depot Maintenance Report, 2011

GAO on Subcontracting

117

Robert H. TriceSenior Vice PresidentCorporate Strategy andBusiness Development

The Business of Aerospace and Defense

September 2010

117

118

Foster Informed Discussionof the Business Aspects

of the Aerospace and Defense Industry

Goal

119

Agenda

• Business Principles • A&D Evolution• A&D Contributions• A&D Unique Characteristics• Defense Contracting Considerations• Summary

120

Business Principles

121

What All BusinessesHave in Common

• Capacity to Produce– Employees and Facilities

• Opportunity to Sell– Customers and Markets

• Access to Capital– Lending Institutions and Shareholders

Stakeholders’ Values Drive Business

122

What All Successful BusinessesHave in Common

• Effective Business Rhythms

– Strategy for Success and Determination to Execute It

• Strong Cash Flow

– Processes Enabling Financing, Sales, Execution, and Collection

• Prudent Risk Management

• Reasonable Shareholder Returns

Returns Enable Success

123

Financial Flow

Development, Production & Delivery

Earnings Per Share

Sales

Order

Backlog

Operating Profit

Net Earnings

Minus Cost of Sales

Minus Interest and Taxes

Divide by # of Shares

124

A&D Evolution

125

1910 1950 1970 19900

5%

10%

15%

20%

25%

30%

35%

40%

Defense Industry Evolution

Chart Source: Lexington Institute

1930

WWII

KoreaVietnam

Cold War

WWI9/11/01

Berlin Wall

12/07/41

CubanMissileCrisis

Desert Storm

Defense Industry was Formed from Threats to National Security and Needs for Technological Investments

Defense Spending as % of

GDP

GovernmentArsenal

IndustrialMobilization

SpecializedComponents

“Pure” A & DIndustry

2010

126

A&D Industry Consolidation

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2007 2008

LOCKHEED MARTINLockheedGD Ft. Worth

Martin MariettaGE Aerospace

GD SpaceLoral

LTV MissilesIBM Federal

Comsat

SAVIPAE

AcculightUnitech

ACS

NorthropGrumman

WestinghouseLogicon

LittonNewport News

TRWEssex

3001 Int’lRaytheon

BAe Corporate JetsE-Systems

GM-HughesGD Missiles

Texas InstrumentsBoeing Australia

Flight OptionsSarcos Research

SI GovtBoeing

RockwellMcDonnell Douglas

Hughes S&CAviallInsitu

General Dynamics

GulfStreamMotorola IISG

GM DefenseVeridian

United Defense

Anteon & FCBSSNC

Jet Aviation Group

NORTHROP GRUMMAN

RAYTHEON

BOEING

GENERAL DYNAMICS

Reduced Demand and Market Forces Reshaped the Primes126

127

7,581

Defense Systems Procured

Ship Procurement

1980 1985 1990

2000 2005

11

33 31

6

Missile Procurement

1980 1985 1990 2000 2005

18,466

87,11365,107

5,702

Aircraft Procurement

531497

337

138

1980 1985 1990 2000 2005

188

Source: DoD Procurement Programs P-1

81082009

14,661

2009

52009

Helicopter Procurement

124

353

243

1980 1985 1990 2000 2005

6628

248

2009

128

A&D Primes’ PortfoliosBoeing - $68B

General Dynamics - $32B

Northrop Grumman - $34BLockheed Martin - $45B

Raytheon - $25B

(2009 Sales)

AeronauticsSpace Systems

Electronic Systems

Information Systems & Global Services

Military Aircraft

Global Services & Support

Network & Space Systems

Integrated Defense Systems

Space & Airborne Systems

Missile Systems

Intel, Info, & Net Centric Systems & Technical Services

Aerospace Systems

Shipbuilding

Electronic Systems

Information Systems & Technical Services

AerospaceMarine Systems

Combat Systems

Information Systems & Technology

Commercial Aircraft

Primes are Adapting to Changing Market Demands

129

Major Combat

Irregular Conflict

Humanitarian Assistance

Providing for Society

Disaster Response

Nation Building

Conventional Regional Conflicts

Coping with a Faltering or Collapsed Government

Defense of Allied Nations

War on Terrorism

Counter Insurgency

Peace Keeping

Maintaining Social Order & Secure Commerce

Managing Resources & The Environment

Global Peer Warfare

Effective GovernmentSolutions for the Entire Spectrum of EngagementExploration of Space

A&D Industry Supports Global Security

130

Three-Tiered Global A&D Industry

• 30,000+ Subsystems and materials suppliers• Includes small, minority-owned and

disadvantaged businesses (20,000+)• Includes commercial companies• Network of use extends to additional suppliers

Lower-Tier Suppliers

Sub-Primes & Systems Partners

A&D Global Primes

60 to 75% of Work Subcontracted

131

A&D Contributions

132

A&D Workforce Contributions

0

200

400

600

800

1000

1200

91 94 97 00 03 06 09

Aer

ospa

ce W

orke

rs (t

hous

ands

)

Hundreds of Thousands of Jobs

Workforce Age Distribution

Under 3535-49Over 50

38%39%

23%

0%5%

10%15%20%25%30%

Engineering Research & Development

Manufacturing Labor

Program Management

Elig

ible

to R

etire Workforce Eligible to Retire by 2013

(Avi

atio

n W

eek

2009

W

orkf

orce

Stu

dy)

133

= 100 Jobs Cut

Over 40K A&D Jobs Lost Since 2009Notes: Since First Quarter 2009, Actual and Announced

Plus: Layoff of 560 A&D workers in San Diego who cannot find work in the region within one year could result in the loss of 760 supplier jobs and 400 jobs related to spending cutbacks by those laid off. This could mean a total nation-wide loss of ~120,000 A&D-connected jobs since 2009. (Source: Institute for Policy Research)

WA = 6578

CA = 4458

NY = 2682

FL = 10,108

LA = 6771

133

134

Competitive Compensation(2009)

Tech

A&D

Governmen

tAuto

Financia

l Serv

ices

Educatio

n and Hea

lth

Leisure

and Hosp

itality

$84,400 $78,904

$74,403 $73,000

$56,243

$47,174

$27,206

All Employee Annual Earning Comparisons

Leisure

Transp

ortatio

n

Manufac

turing

Educatio

n

Financia

l

Professio

nal

Constructi

on

Govern

ment

Autos

Aerosp

ace

$11

$16$18 $19 $20 $21 $22 $23

$31$33

Production Workers Hourly Wage

Sources: Bureau of Labor & Statistics, U.S. Census,Aerospace Industries Association, TechAmerica (Average U.S. Salary: $38,000 per year )

135

Aerospace: A Leader in Net Exports

-60,000-50,000-40,000-30,000-20,000-10,000

010,00020,00030,00040,00050,00060,000

$ Millions

Source: Bureau of the Census (seasonally adjusted), Foreign Trade Division

Aeros

pace

Semico

nduc

tors

Chemica

ls

Medica

l

Equipm

ent

Food

s, Fe

eds,

and

Bever

ages

Telec

om

Equipm

ent

House

hold

Applia

nces

Pharm

aceu

ticals

Compu

ters a

nd

Compu

ter

Acces

sorie

s

Newsp

rint

20072008

136

A&D Technology Contributions

(AIA, Bureau of Labor Statistics, National Science Foundation)

R&D Investment as a Proportion of Net Sales

AerospaceAll Industry

2.9% 13.3%

Non-Company Funded Company Funded

137

Jeep

Internet

Hydraulic Brakes Traffic Cameras

Pagers

Smoke Detectors

A&D Technology Contributions

Legacy of Innovation and Public Benefit

138

Superior Systems for Warfighters

139

A&D UniqueCharacteristics

140

4.2%3.8%

1.8%

0.9%

1.7%

2.4%

1960 1970 1980 1990 2000 2009*

A&D Industry Market Value

Aerospace & Defense Market Cap as % of S&P

Sources: Company Reports, Morgan Stanley, Yahoo! Finance (Includes Commercial Aircraft)

* A&D as sum of LMT, BA, NOC, RTN, GD

141

Industry Comparisons

Cigarette Industry

Beer Brewers Microsoft Apple IBM HP A&D

$221

$184

$219

$243

$164

$107

$180

$77 $71 $58

$43

$96

$115

$251

Market Cap / Sales ($B)Market Cap2009 SalesSources: CNN Money, Yahoo! Finance

Aerospace and Defense: Lockheed Martin, Boeing, Northrop Grumman, General Dynamics, Raytheon, L3, and Honeywell CorporationCigarette Industry: Lorillard, Reynolds American, Vector Group, Star Scientific, Altria Group, Philip Morris International, and British American Tobacco IndustriesBeer Brewers: Anheuser-Busch InBev, Fomento Economico Mexicano, Companhia de Bebidas das Americas, Molson Coors Brewing Co, Compania Cervecerias Unidas, Boston Beer, and China New Borun Corporation

Publicly Traded Companies on NYSE or AMEX

142

EBITDA Margin from 2007 – 20091

Gross Earnings Sector Comparisons

Aerospace and Defense Margins Lag Other Industries

A&D

Industrials

Consumer Discretionary

Consumer Staples

Materials

Utilities

Healthcare

IT

Energy

Telecommunications

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%2007 2008 2009

Source: CapitalIQ Note: (1) Analysis includes publicly-traded, US-based companies with revenues >$1B in CY2008

143

Net Earnings as % of RevenueCompany Comparisons from Various Industries

Sources: Company Reports, Fortune, Yahoo Finance (Includes Commercial Aircraft) Note: Recent S&P Average is 7-8%

Other IndustriesYr 2009 Yr 2009

A&D Sector

RTN GD LMT NOC BA

7.8 7.5 6.7 5.01.9

Merck G'Sachs M'Soft Cisco IBM Intel HP

47

3028

1714

12

7

144

Aerospace & Defense Elements

Commercial Defense

Commercial and Defense Sectors Share Technical Skills,But Require Segmented Business Systems

Military Aircraft

Military Space & Missiles

Military Ships

Sustainment, IT & ServicesGround Systems

Commercial Aircraft

Commercial Space

145

Commercial vs. Gov’t ContractorsGovernment Business

• Monopsony• Single Customer Comprised

of Multiple Constituencies • Industrial Base Policy Limits

• Cost-based Business Model• Truth In Negotiations Act

(TINA)• Maximize Sales• Upside/Downside Capped• R&D Investments Funded or

Reimbursed by Government

• Open Markets• Multiple Customers With

Individual Transactions• Anti-trust Limits

• Price-based Business Model• Closed Books• Maximize Sales• Upside/Downside Unlimited• R&D Investments Recouped

in Production Price

Commercial Business

146

Commercial vs. Gov’t ContractorsCommercial Business Government Business

• Significant Government Oversight

• Subject To Federal Acquisition Regs

• Export Licenses Required to Sell Overseas

• Annual Funding; Government Policy Driven

• Limited Government Oversight

• Not Subject To Federal Acquisition Regs

• Limited Export Control• Multi Year Projections;

Consumer Driven

147

Defense Program Reductions

B-2 Bomber Programmed: 132 Built: 21

V-22 Tiltrotor Programmed: 913 Being Built: 458

F-22 Fighter Programmed: 750 Being Built: 187

DDG-1000 Programmed: 32 Being Built: 3

Expeditionary Fighting Vehicle Programmed: 1025 Being Built: 593

148

Terminations for ConvenienceRAH-66 Comanche

$9 Billion Spent

XM2001 Crusader $2 Billion Spent

Future Combat System $24 Billion Spent

TSAT/TMOS$10 Billion Spent

Airborne Laser $7 Billion Spent

VH-71 Presidential Helicopter$5 Billion Spent

149

Why Invest in the A&D Industry

• Reasonable Returns on Investment

• Strong Cash Flows

• Consistent Dividend Returns

• Longer Term Business Outlook

• Sustainable Revenue Streams

• Government Indemnification from Catastrophic Risk

• Counter Cyclic to the Market

150

Five Year Stock Performance (through December 31, 2009)

General Dynamics 30%Raytheon 33%

S&P 500 -8%

Boeing 5%

Lockheed Martin 36%

Dow Jones -3%

S&P A&D 24%

Northrop Grumman 3%NASDAQ 4%

12/31

/2004

3/31/2

005

6/30/2

005

9/30/2

005

12/31

/2005

3/31/2

006

6/30/2

006

9/30/2

006

12/31

/2006

3/31/2

007

6/30/2

007

9/30/2

007

12/31

/2007

3/31/2

008

6/30/2

008

9/30/2

008

12/31

/2008

3/31/2

009

6/30/2

009

9/30/2

009

12/31

/2009

-50%

-35%

-20%

-5%

10%

25%

40%

55%

70%

85%

100%

115%

151

Defense Contracting Considerations

152

153

Government vs. Industry View of Profit

Government Perspective Industry Perspective

Total Allowable Cost $9,000,000

Profit/Fee @ 12% $1,080,000

Price $10,080,000 Sales $10,080,000

Total Allowable Cost ($9,000,000)

Unallowable Cost @ 3% of Sales ($310,500)

Earnings Before Taxes 769,500

Income Taxes @ 35% ($269,325)

Net Income $500,175

Net Income as % of Sales 4.96%

How 12% Yields 4.96%

Return on Sales 10.7%

154

Revenue DistributionNet Lockheed Martin 2009 Sales $45.2B

Cost of Sales

Interest and Taxes

Net Earnings

$41B

$1.2B$3B

Cost of Sales Includes:• Subcontracts• Direct Labor and Travel• Materials and Distribution• Amortized Property, Plant & Equipment• IRAD• Bid and Proposal• Unallowable Compensation• Charitable Contributions

155

Cash Deployment

Internal Investment

Debt Retirement

Acquisitions/ VenturesShare

Repurchase

Dividends

Internal Investment: Capital Expenditures (Property, Plant & Equipment)

Working Capital (Inventory, Accounts Receivable / Payable)Pensions

Debt Retirement: Return to Creditors

Dividends: Return to Shareholders

Share Repurchase: Return to Shareholders

Acquisitions: Increase Capabilities

and Capacities

Supports All Stakeholders

156

Summary

157

A&D Industry’s Unique Role

REVENUES

SOLUTIONS

CAPITAL &

TALE

NTRETURNS

SECURITY & SERVICES

TAXESGOVERNMENT

AEROSPACE AND DEFENSE

INDUSTRY

PRIVATE SECTOR

Translating Private Sector Resources into Public Sector Solutions

158

• Supports Investment– Research and Development– Facilities and Infrastructure

• Creates and Protects American Jobs• Is a Major Exporter• Attracts and Retains Top-Tier Talent• Promotes American Technology Preeminence• Enables a Stable Partner for a Long Cycle of

Business• Enhances Allied Political, Military and Industrial

Partnerships

A Healthy Defense Industrial Base

Stability Supports an Industrial Base that Can Respond toTomorrow’s Challenges

Canadian Response to Downsizing in Defense

Tiers

UNCLASSIFIED

Supply Chain Complexity in a Changing Environment

Michael Forbes, CPSMCorporate Director, Supply Chain

Northrop Grumman Corporation

November 17, 2011

163

Supply Chain Complexity: Today’s Topics

• Northrop Grumman Introduction

• Do You Have the Right Talent?

• Responding to Customer, Legislative & Regulatory Changes

• Material Authenticity

• Risk Management

164

Northrop Grumman Today

• $34.8 billion sales in 2010*

• $64 billion total backlog (as of December 31, 2010)

• 75,000 people, 50 states, 25 countries

• Leading capabilities in:– C4ISR and battle management– Cybersecurity– Defense electronics– Homeland Security– Information technology and networks– Logistics – Space and missile defense– Systems integration– Unmanned Systems

Focus on Performance*2010 sales included sales from Northrop Grumman Shipbuilding, a business that was spun-off in the first quarter of 2011.

165

Four Operating Sectors at a Glance

Defense and Government Services

Ground Vehicle Reconstitution

Nuclear Security Services

Training Solutions

Technical andOperational Training Support

Live, Virtual and Constructive Domains

Integrated Logistics and Modernization

Irregular Warfare/Quick Reaction Capability

Aircraft System/Platform Sustainment & Modernization

Aircraft Subsystem/Component

Sustainment & Modernization

Technical Services

Radar Sensors & Systems

RF/IR Countermeasures

EO/IR Targeting & Surveillance

Navigation & Positioning Systems

Space Sensors

C4ISR Networked Systems

Marine & Undersea Systems

Propulsion & Power Generation

Air Defense Systems

Electronic Systems

Large Scale Systems Integration

C4ISR

Unmanned Systems

Airborne Ground Surveillance / C2

Naval BMC2

Global / Theater Strike Systems

Electronic Combat Operations

ISR Satellite Systems

Missile Defense Satellite Systems

MILSATCOM Systems

Environmental & Space Science Satellite Systems

Directed Energy Systems

Strategic Space Systems

Aerospace Systems

Command & Control Systems

Communications

Intelligence, Surveillance & Reconnaissance Systems

Enterprise Systemsand Security

IT/Network Outsourcing

Intelligence

Federal, State/Local & Commercial

Homeland Security

Health IT

Cybersecurity

Information Systems

166

Last Decade’s Environment

I’ll take 300 widgets for delivery next Friday…

Payment terms are net 30… Thank you for being a

preferred supplier.

167

Today’s Environment

Key Questions To Determine Approach

External assessment

Evaluation and prioritization of strategic options

Implementationplan & approach

• What criteria should be used to prioritize strategic options?

• How can we build, buy, or ally to obtain critical capabilities?

• What key investments are required and what are the expected savings/returns?

• What governance/structural issues need to be addressed to ensure success?

Key questions

Internal assessment

• What are the relevant best practices and trends in Supply Chain?

• What are the most likely future scenarios?

• What are the best opportunities for us to differentiate itself?

• What are our relative strengths and weaknesses in supply chain management?

• How significant are the capability gaps/shortfalls?

168

Aligning Structure allows Supply Management to Excel

• Industry dynamic has shifted and requires new skill sets and functional integration

• Organizations may be out of sync with Business Shift• Understanding Supply Management Maturity Phase Drives

Improvement

Subcontracts is Management of Systems Integrators

100-75-50- * * * * *(50%)

(60%) (65%)(70%) (80%)

* Percent Outsourced

Prime/OEMLarge & Small

Systems Integration, Manufacturing

1970’s - 1990’s

SubcontractorsSystems,

Manufacturing,Components

Suppliers SubcomponentsParts

Large Systems Integrations

Small Systems IntegrationManufacturing

Systems

Components, Manufacturing

Subcomponents, Parts

1990’s - 2010’s

Suppliers

Move up

Supply

Chain

Suppliers Need

• Add capability• Be acquired• Go out of business1970s 1980s 1990s 2000s 2010s

Graphic Source: Aerospace Industries Association169

Dev

elop

men

t

Integration / Complexity

Development

High

Cross Functional

Team

Team Mix Variance*

G

D

E

F

Cost Type ContractsFixed Price

Type ContractsLow

Production Buyer

C

B

A

Cost Type Contracts

Supply Chain Management Complexity

Percent of Supplier Management personnel

with management responsibility

Align Skills With Business Needs - One Size Does Not Fit All170

Participate in Supply Chain AssociationsFunctions Associations

Subcontracts

National Contract Management Association (NCMA)

Institute of Supply Management (ISM)

Project Management Institute (PMI)

Aerospace Industries Association (AIA)

Business Management

AAQG Registration Management Committee (RMC)

Supplier Assurance

Nadcap Management Council (NMC)

American Society for Quality (ASQ)

Society of Manufacturing Engineers

Logistics

International Compliance Professional Association (ICPA)

Council of Supply Chain Management Professionals American Society of Transportation and Logistics

(AST&L)National Institute of Packaging, Handling & Logistics

Engineers (NIPHLE)National Association of Fleet Administrators (NAFA)

American Association of Exporters and Importers (AAEI)

Goods Movement

Association for Operations Management (APICS)

Socio-Economic Business Prog.

8 = Local Associations6 = National

171

172

Heightened Activity in 2010 & 2011

• DFAR 252.222-706, Restrictions on the Use of Mandatory Arbitration Agreements (MAY 2010)

– Defense Appropriation Act for Fiscal Year 2010– Requires Contractors to Certify that Covered Subcontractors Agree Not to Make a Condition of

Employment Arbitration of Certain Employment Claims

• FAR 52.222-99, Notification of Employee Rights Under the National Labor Relations Act (JUN 2010)

• Executive Order 13496. Requires Contr’s to Post Notice, Mandatory Flow-Down to Subs >$10,000, unless performing exclusively outside US

• Dr. Carter (USD(AT&L)) Mandate (JUN 2010)– Deliver warfighting capability for the dollars we have while maintaining healthy defense industry

• FAR 52.204-10, Reporting Executive Compensation and First-Tier Subcontract Awards (JUL 2010)

– July 2010 >$20 M, Oct. 2010 >$550,000, Mar. 2011 >$25,000; Report to FSRS

• Dodd-Frank Wall Street Reform Law, SEC Rule on use of “conflict minerals” (JULY 2010)• Minerals from sources contributing to the conflict in the Congo (DRC or an adjoining country)• Due diligence of ores from which tin, tantalum, tungsten and gold are derived

• Secretary Gates’ Initiative announced (AUG 2010)– Reduce DoD’s overhead, Find and redirect $100B within the Defense Budget

• Dr. Carter Affordability Initiatives released (SEP 2010)– Guidance on 23 initiatives in 5 focus areas, DoD directed to implement immediately

Significant Additional Requirements Levied on Supply Chain 2010-2011

Conflict MineralsOverview

“Conflict Material” reporting rules will severely impact component Manufacturers

173

• Minerals mined in conditions of armed conflict and human rights abuses– The U.S. Secretary of State is required to create a map showing

which areas are under the control of the warlords in the Eastern Congo area.

• Democratic Republic of the Congo and adjoining countries– Cassiterite chief ore from which Tin is processed– Wolframite most important Tungsten ore– Coltan ore from which Tantalum is processed– Gold

• Related to government & commercial products– Tin is the majority element in solder; also a very common lead/termination

plating on electronic components– Tungsten is commonly used in microcircuits in a sputtered titanium

tungsten layer; it is used in high strength steels– Tantalum is used in electrolytic capacitors– Gold is used in terminations and wire for bonding applications as well as in

external platings; The vast majority of electrical contacts are gold plated

174

Enterprise Material Authenticity Capability

Leadership &

Engagement

Policy & Processes

Training & Awareness

Tools & Infrastructure

• Enterprise Network• Multi-Discipline

Team• Improvement Plan• Rapid Response

• Corporate Policy• Sector Procedures• Guidance &

Manuals• Terms &

Conditions

• Enterprise Module• Corporate Comms• Annual Training• Industry

Association

• Alert Management• Recording &

Reporting• Counterfeit

Verification• Industry Standards

Material Authenticity

Reduce our risk through strict procurement practices, supplier management, and material authenticity verifications

Additional Risks in the Electronic Supply Chain

• Continued foreign growth in development and design of semiconductors (approx 1500 total with several hundred in China alone)

• Government attention– Trusted computing platform– Build in security bus for validation checking of

data calls– Change in culture to compartmentalize chip

activities vs. assumed trust model

• ~ 9,400 reported DoD incidents of counterfeit electronics according to ‘09 Dept. Commerce Survey

• Society of Automotive Engineers (SAE) reports a 140% increase in counterfeit electronics in last 3 yrs

Total Counterfeit IncidentsDoD Electronics Survey - Nov 2009

Increased Demand for Awareness and Effective Countermeasures175

176

Tool Solutions

Credit Risk Monitor offers 100% of US Public Corporations - FRISK Scores and News/Financial Information Push. Ability to enter private company financials into secure portal to utilize proprietary FRISK score ratings for small business.

Sector Analysis Detailed Analysis of Supplier(s) based on a variety of public and private information; to include private supplier financial statements, FRISK (where available), Altman Z-score, and other financial assessment criteria.

Tiered approach includes contractual protection to Boots on the Ground

Private Large

Private Small

Public Large

Public Small

Risk Profile

177

Credit Risk MonitorFRISK scores on Watch list Portfolio

The FRISK Score is reported on a scale from1 (worst) to 10 (best)

The FRISK Score, calculated daily, indicates the probability of a company default over a 12 month horizon

Inputs include:– most recent financial statements– Altman Z scores – the most recent ratings from S&P or Moody's– daily stock price volatility over the preceding 6-month period

Stack International – Electronics Group ISM Supply Chain Alerts

Risk Realized: Japanese Tsunami Response

Link to Industry Associations, Working Groups and Consortiums to understand

and react to supply chain impact

Plexus Commodity Impact ReportSource: EE Times March 14

178

Integrated Supply Chain Strategy

179

180

How May I Prepare Today?

Determine where you stand in these key areas:

• Talent – Right Time & Place– How many CPSMs are in your Supply Chain Organization?

• Industry Associations– Functional (Institute for Supply Chain Management, APICS)– Cross Industry (National Association for Manufacturers, TechAmerica)– Industry Specific (Aerospace Industries Association)

• Academic Institutions– University of San Diego, Michigan State University, Arizona State University

• Understand your Supply Chain Business Model– Where do you fall on the complexity scale?

The Global Supply Chain IS Complex – But you are not Alone

Supplier Diversity

Doing Business With Raytheon

Page 18305/03/2023

Taxpayer Small, Minority, Women

Business Owners

Congress Approve Budget

ProgramsJobsVotes

DoD and Other Gov Agencies Budget

Program FundingBest Value Solutions

Prime ContractorsWin ProgramsCompetitive SolutionsBest ValueCustomer Requirements

Supplier Diversity = Business Strategy

Support the Customer - Support Growth

Taxpayer dollars

a

a

a

Congress

Source Selection Decisions

DoD

Prim

e C

ontra

ctor

s

Page 18405/03/2023

Supplier Diversity FocusRaytheon’s “Supplier Diversity” Program is designed to drive supplier source selection strategy and ensure compliance with:

Public Law Federal Acquisition Regulations Customer Requirements Company Policy

concerning the utilization of businesses that are:

Small Small Disadvantaged Woman Owned – Small Businesses Veteran Owned – Small Businesses (including Service Disabled) Small Businesses meeting Hub Zone Criteria (historically under-utilized) Historically Black Colleges, Universities and Minority Institutions Minority and Women-Owned Businesses

Page 18505/03/2023

Supplier Diversity Built in the Organization

Benita FortnerSupplier Diversity Director

William SwansonChairman and CEORaytheon Company

David WilkinsVice President

Contracts & Supply Chain

Mike JarrettMissile Systems

Janet DuffeySpace & Airborne Systems

Dan RyanIntegrated Defense Systems

Vince HrenakNetwork Centric Systems

Paul LoveladyIntelligence &

Information Systems

Stephanie FosterRaytheon TechnicalServices Company

Vivek KamathSupply Chain Operations

Organized to support supplier diversity objectives

Supply Chain Leadership team serves as RTN Supplier Diversity Council

Page 186

…and Staffed to develop and executeSupplier diversity strategy, Initiatives and outreach

It’s all about collaboration

…Key players in local customer interface and developing goals

Benita FortnerRaytheon

Supplier Diversity Director

JoAnne ArvizuMissile Systems

Mike MurnaneIntegrated Defense Systems

Lee WesnerIntelligence &

Information Systems

Shirley PattersonSpace & Airborne Systems

Don BrechtelNetwork Centric Systems

Crystal KingTechnical

Services Company

Carol PhillipsSupply Chain Operations

Supplier Diversity Leadership Team

Replace - this

Page 18705/03/2023

Supplier Diversity - Responsibilities Provide assistance to “focus businesses” who are interested in doing

business with Raytheon

Assist in identifying potential sources for procurement opportunities and sourcing strategies.

Ensure supplier diversity is addressed in all procurements and sourcing strategy activities including proposal support

Track supplier diversity performance and provide customer and industry reports.

Conduct training to ensure that Raytheon personnel are aware of Raytheon Supplier Diversity objectives

Conduct outreach as a means of developing and counseling “focus businesses”

Page 18805/03/2023

Supplier Diversity Business Leader

Complete Supply Chain Support

Supply Chain Expertise

Page 18905/03/2023

Traditional Supplier Requirements Performance Performance Performance Cost Quality Schedule / Delivery

Contemporary Supplier Requirements Customer considerations Competitive market enablers Supplier life cycle in the value chain

Supply Chain Strategies In Global Competition

Supplier Diversity Integral to Supply Chain Strategy

Supply Chain Process Enablers E-Enabled business transactions

Internet-based transactions Inventory Management Processes

Barcode technology Just-in-time deliveries from suppliers Supplier managed inventory Warehouse management

outsourcing Supplier performance management

Supplier scorecards Web based supplier communications Supplier consolidation and

rationalization

Page 19005/03/2023

Sourcing Opportunities and the Global Supply Base

Indirect Commodities

Direct Commodities

Travel IT

Contract Labor

Connectors

Semiconductors

Capacitors

Other Categories:SubcontractsCCA’sPower SuppliesDirect Computersetc.

Remarkable Variation in Supply Chain

Page 19105/03/2023

National, Regional and Local events

Focused outreach and networking within strategic business areas

Raytheon business specific events

Emphasis on Veteran, Hub Zone and Women businesses

Performance - Relationships - Solutions

Outreach drives supplier diversity performance

Raytheon’s performance is driven by a competitive supply baseRaytheon’s performance is driven by a competitive supply base

Page 19205/03/2023

Performance - Relationships - Solutions

Outreach to meet potential suppliers

Share Raytheon strategy and objectives

Respond to customer requests– Significant number of requests

to support customer, industry and advocacy organization initiatives and events

Build Relationships

Committed to strong relationships with customers and suppliers

Page 19305/03/2023

Performance - Relationships - Solutions

CastingsCastings

Chemicals & GasesChemicals & Gases

ConnectorsConnectors

Electrical ProductsElectrical Products

Guidance and ControlsGuidance and Controls

Hardware and Bearings Hardware and Bearings

MachiningMachining

Major AssembliesMajor Assemblies

Manufacturing Lab SuppliesManufacturing Lab Supplies

Packaging SuppliersPackaging Suppliers

Wire & CableWire & Cable

Microwave DevicesMicrowave Devices

OpticsOptics

Outside ServicesOutside Services

Passive DevicesPassive Devices

Power SuppliesPower Supplies

Propulsion Warheads & Propulsion Warheads &

PyrotechnicsPyrotechnics

PWBs / CCAsPWBs / CCAs

SemiconductorsSemiconductors

Test EquipmentTest Equipment

Art/ Computer Graphics/ Text ProcessingChemical & Gas ManagementColor Film ProcessingComputer Hardware/ SoftwareConsultantsContract LaborCopier Paper/ Fine PaperCopiers & Print ServicesEnergy BrokeringExpress Air - DomesticExpress Mail - InternationalFacilities ServicesFaxesFlight Operations ServicesFood and Vending ServicesFormsFreight Payment - 3rd PartyFuels & OilsFurnitureGeneral ConstructionGraphic SuppliesHazardous Waste & Environmental

Household Goods TransportationInternational Freight Forwarding & Brokerage ServicesJanitorial SuppliesLease/ Purchase VehiclesLithographyManufacturing/ Laboratory SuppliesOffice and Computer SuppliesPackaging SuppliesProfessional Services-Health & WelfarePurchasing CardReprographicsSecuritySoftware DevelopmentSolid Waste Management and RecyclingSupplies & Services/ Video ServicesTelecommunications - Cell PhonesTelecommunications - PagersTelecommunications Long Distance VoiceTest EquipmentTest Equipment CalibrationTest Equipment RentalTransportation Logistics

Direct Commodity Agreements

Indirect Commodity Agreements

Suppliers are a significant component of customer solutions

Page 19405/03/2023

Work with Small Business advocate to clarify requirements.

SmallBusiness Advocate

Are you in the position to bid for prime contracts with the right Teaming Agreement?

TeamingAgreements

Joint Ventures

Diversity Supplier

s

DetermineStrategy

Determine significant supply strategies (agreements/programs).

Area ofExpertise

Identify/highlight your areas of expertise and map to target company

IndustryLeader/

Competition

Research industry competition. Am I a leader in this field? Who held the last contract?

RiskAssessment

Can you afford (time, money, technology) to pursue this business?

NationalRegionalSupport

Utilize existing or develop strategic alliances/national and regional support requirements.

Supplier Diversity Planning Process

Page 19505/03/2023

RTN Supplier Diversity Websitehttp://www.Raytheon.com/connections/supplier/diversity

Raytheon Supplier Diversity - Connect With Us

The On-line

Supplier

Registration tool

will aid in

matching

suppliers to

opportunity.

DoD Sustainment Infrastructure

“DoD operates 17 major depot activities, employing more than 77,000 personnel and expending more than 98 million direct labor hours (DLHs) annually... The property, plant, and equipment of DoD’s depots are valued at more than $48 billion.

That infrastructure comprises more than 5,600 buildings and structures, with 166 million square feet used for depot maintenance.”

- Logistics Management Institute Depot Maintenance Report, 2011

USAF Sustainment Infrastructure

Air Force Global Logistics Support Center

Air Force Nuclear Weapons Center

Ogden Air Logistics Center

Oklahoma City Air Logistics Center

Warner Robins Air Logistics Center

Global Logistics Support Center, Scott AFB, Ill Serves as the Air Force supply chain manager,

providing enterprise planning, global and control, and a single focal point, all in support of the full range warfighter operations.

Overall, GLSC is a geographically dispersed organization with six operating locations.

In addition to Scott AFB, these include Hill AFB, Utah; Langley AFB, Va.; Robins AFB, Ga.; Tinker AFB, Okla., and Wright-Patterson AFB. 

USAF Global Logistics Support Center TheAir Force plans to build on a 34 percent improvement in supply rates through the

eLog21 campaign and other recent improvements in logistics support.

GLSC is considered to be one of the key elements in the Air Force logistics transformation.

The main objectives of eLog21 are to increase the equipment availability rate by 20 percent and decrease operations and support costs by 10 percent by fiscal 2011.

The GLSC has three primary functions: 1) The enterprise-wide planning of the Air Force supply chain including planning for

material, maintenance and distribution. 2) The GLSC will exercise command and control as a single point of contact for customers

to resolve immediate logistics issues at the point of execution. 3) The GLSC will be the single point of entry and authority for enterprise supply chain

information management. This will include the management of business rules, policies and procedures, providing functional requirements for supply chain systems and measuring, assessing and taking action to improve supply chain performance through enterprise metrics and analysis capability.

According to Trixie Brewer, the provisional organization's deputy director, between 4,000 and 5,000 people will be assigned to the GLSC when it is fully operational.

Oklahoma City Air Logistics Center, Tinker AFB, Okla., Repairs and maintains bomber, refueling and

reconnaissance aircraft, among others. Many crucial airborne accessories also are maintained at the center, including life-support systems. The center provides cradle-to-grave support for a variety of aircraft, including the E-3 AWACS, C/KC-135, B-52 and B-1. It is responsible for depot-level repair, modifications, overhaul and functional check flight of the B-1, B-52, C/KC-135, E-3 and the Navy's E-6 aircraft. Engines managed include a substantial inventory, from the older Pratt & Whitney TF33 to the state-of-the-art F119. Units: 72nd Air Base Wing, 76th Maintenance Wing and Aerospace Sustainment Directorate.

Ogden Air Logistics Center, Hill AFB, Utah Provides logistics, support, maintenance,

distribution and engineering management for the F-16, C-130, A-10, B-2, KC-135, T-38, T-37 and 22 other actively flying, mature and proven weapon systems, including the Minuteman III ICBM. The center is the leading provider of rocket motors, small missiles, air munitions and guided bombs, and serves as the ammunition control point for the Air Force. Units: 75th Air Base Wing, 508th Aircraft Sustainment Wing, 84th Combat Sustainment Wing, 309th Maintenance Wing, 526th Intercontinental Ballistic Missile Systems Wing.

Warner Robins Air Logistics Center, Robins AFB, Ga., provides product support, purchasing and supply-chain

management, and depot maintenance. It has management and engineering responsibility for repairing, modifying and overhauling the F-15, C-130 and all Air Force helicopters. It also provides logistical support for all Air Force air-to-air missiles, vehicles, general-purpose computers, and avionics and electronic systems on most aircraft. In addition, the center has management and engineering responsibility for the U-2 and performs Global Reach Improvement Program aircraft modifications and systems sustainment support on the C-17. Units: 78th Air Base Wing, 330th Aircraft Sustainment Wing, 542nd Combat Sustainment Wing, 402nd Maintenance Wing.

Nuclear Weapons Center, Kirtland AFB, N.M., Is the command's center of expertise

for nuclear weapon systems, ensuring safe, secure and reliable nuclear weapons are available to support the National Command Structure and Air Force.

Center responsibilities include acquisition, modernization and sustainment of nuclear system programs.

Naval Sea Systems Command

Naval Air Systems Command

Naval Supply Systems Command Mechanicsburg and Philadelphia

Naval Material Supply Chain Management (SCM) is NAVSUP’s largest Product & Service in terms of resources invested with over 3,000 civilian, military and contractor personnel involved, $21 billion of inventory on hand and an annual material budget of over $3.5 billion.

It covers the over 430,000 class IX repair part line items of supply for which the NAVSUP Weapon Systems Support (NAVSUP WSS) is responsible.

NAVSUP WSS uses funds from the NWCF (Navy Working Capital Fund) to buy and repair the parts and in turn sells them to Fleet customers.

Why Have Navy Ship Costs Risen?

What Do Shipbuilders Say About Cost Escalation?

Fluctuating ship orders, with initially forecast orders typically exceeding what is ultimately purchased, discourage shipyards from making investments that could ultimately reduce the cost of ships.

An unstable business base also causes fluctuations in the demand for skilled labor that are expensive and difficult to manage and prevents contractors from leveraging through long-term contracts purchases from subcontracting suppliers.

Decreasing production rates tend to increase overhead rates and make the shipbuilders and their suppliers produce at lower efficiency.

Harvard Business Review

Align or redesign

Once companies have identified the root causes of incentive problems, they can use one of three types of solutions—

contract based, information based, or trust based—to bring incentives back into line.

Most organizations don’t have the influence to redesign an entire chain’s incentives—they can change only the incentives of their immediate partners. While it is often the biggest company in the supply chain that aligns incentives, size is neither necessary nor sufficient for the purpose.

http://www.hbs.edu/

Harvard Business Review

One way companies can align incentives in supply chains is by altering contracts with partner firms.

When misalignment stems from hidden actions, executives can bring those actions to the surface—unhide them, as it were—by creating a contract that rewards or penalizes partners based on outcomes.

http://www.hbs.edu/

HBR Incentives in Supply Chains

It’s necessary to alter contracts when badly designed incentives are the problem. Let us think back to the Canadian bread manufacturer whose deliverymen overstocked stores when they were paid sales-based commissions.

The company changed the deliverymen’s behavior by altering their contracts to include penalties for stale loaves in stores, which could be tracked. While the penalties reduced the incentive to overstock stores, the commissions ensured that the deliverymen still kept shelves well stocked.

Small changes in incentives can transform supply chains, and they can do so quickly. Take the case of Tweeter, a consumer-electronics retail chain that in May 1996 acquired the loss-making retailer Bryn Mawr Stereo and Video. For years, Bryn Mawr’s stores had reported lower sales than rivals had. Tweeter’s executives realized early that the incentives that Bryn Mawr offered its store managers would not lead to higher sales. For instance, while Tweeter penalized managers for a small part of the cost of products pilfered from their stores, Bryn Mawr deducted the full value of stolen goods from their pay. Since store managers faced more pressure to prevent shoplifting than to push sales, they behaved accordingly.

They placed impulse-purchase products like audiotapes and batteries behind locked cases, which reduced theft but killed sales. They spent more time tracking merchandise receipts than they did showing products to consumers.

HBR Incentives in Supply Chains

“The Economics of Incentive Alignment.”

In the 1990s, Hollywood movie studios, such as Universal Studios and Sony Pictures, found that frequent stockouts at video retailers, like Blockbuster and Movie Gallery, posed a major problem. A lack of inventory on store shelves meant that everyone suffered:

The studios lost potential sales, video rental companies lost income, and consumers went home disgusted. Inventory levels were low because the incentives of the studio and the retailers weren’t in line. The studios sold retailers copies of movies at $60 a videotape.

At an average rental of $3, the retailers had to ensure that each tape went out at least 20 times to break even. The studios wanted to sell more tapes, but the retailers wished to buy fewer tapes and rent them out more often.

velocity

In the late 1990s, when video rental companies proposed revenue-sharing contracts, the studios raised no objections.

They agreed to sell tapes to the retailers for around $3 per tape. And receive 50% of the revenues from each rental.

“The Economics of Incentive Alignment.”

“The Economics of Incentive Alignment.”

However, the studios needed to track the retailers’ revenues and inventories for the revenue-sharing system to work.

The studios and the video rental companies relied on an intermediary, Rentrak, which obtained data from the retailers’ computerized records and conducted store audits to ensure that all tapes were accounted for. In fact, the contract-based solution wouldn’t have worked if Rentrak hadn’t revealed previously hidden information in the supply chain.

Video RetailerRevenue Sharing “The Economics of Incentive Alignment, Harvard Business School, 2004.)

In fact, both the publisher and the consumers would be happier if there were more copies of the newspaper on the stands, but the vendor would not be. The vendor stocks less than everyone else would like him to because it is in his best interest to do so. The publisher therefore needs to change the incentives of the news vendor so that when the vendor chooses an inventory level that is in his best interest, it increases the publisher’s profits.

One way the publisher could do that is by using a revenue-sharing contract and lowering the price the vendor pays for each copy from 80 cents to 45 cents.

In return, the vendor could retain, say,

Video RetailerRevenue Sharing 65% of the sale price and pass on 35% to the publisher. The retailer’s

understocking costs would remain 20 cents, but his overstocking costs would fall because he’d pay less for each copy.

The retailer would now be inclined to stock 131 copies instead of 120. The profits of both the retailer and the publisher would rise (see the table below).

Alternately, the publisher could pay the retailer markdown money of, let’s suppose, 60 cents for every unsold copy. That would lower the overstocking cost of the retailer and encourage him to stock more copies. The publisher would more than make up for bearing some of that cost because of profits he’d gain in higher sales. In this case, the retailer would stock 150 copies.

As the exhibit shows, both the publisher and the retailer would earn more profits under the revenue sharing and markdown-money contracts considered here than under the traditional system.

The increase in profits would not come at the expense of consumers, who’d pay the same retail price. Inventory levels would also go up, which would result in greater consumer satisfaction.

Economics of Incentive Alignment

When Western companies link up with Asian manufacturers or component suppliers, each party has misgivings about the other’s interests.

The importers are convinced that the vendors won’t deliver on time, can’t produce consistent quality, and will give greater priority to companies that will pay higher prices. They also fear that the contractors will reduce their costs by bribing government officials or using child labor. As Nike found, those dubious practices give importers, rather than their suppliers, bad reputations. For their part, suppliers fear that importers might reject products.

Since importers enter into contracts six to nine months in advance of delivery, vendors doubt companies’ ability to predict consumer demand accurately.

They worry that demand for products will be lower than anticipated and that importers will reject consignments, pretending that the quality wasn’t up to snuff.

Cost Composition

ISSR Cost Driver Framework

ISSR

ISSR

DoD Industrial Base Study 2010 • Supply Chain Risk Management is related to cyber-security.

The Department is preparing another Report to Congress on this issue entitled “Trusted Defense Systems” in response to the 2009 National Defense Authorization Act, Section 254.

With thousands of tier III suppliers and a large proportion of tier III and tier IV work moving offshore, this is a serious area of concern.

For example, a survey of OEMs, subcontractors and distributors by the Department of Commerce documented nearly 10,000 cases of counterfeit parts in 2008.

These components not only have increased likelihood of failure but also the potential to house malware.

DLA IBEX Industrial Base Extension DLA’s Industrial Base Extension (IBex) Program is a government/industry

partnership with multiple global logistics providers that develops an overlapping global network of information on inventory, manufacturing, logistics, storage, transportation, humanitarian support, and base camp construction and maintenance.

The IBex program provides OCONUS and CONUS asset visibility of inventory and global logistics capability available to support U.S. military operations and relief efforts following natural disasters with possible access to these capabilities if required.

Strategic partnerships formed with industry experts allow supplier relationships to transcend purchasing transactions and enhance DLA’s ability to develop improvement opportunities that facilitate the sharing of information.

For the expenditure of $200K per year, the government gains access and a better understanding of the global logistics networks and issues related to cultures, customs requirements/documentation, host nation knowledge, global constraints, and logistical nuances unique to any country or culture in areas of the world with limited U.S. resources.

DoD Supply Chain Materiel Management Policy “Potential disruptions within and outside the DoD

supply chain shall be identified, monitored, and assessed in order to mitigate risk to supply chain operations.

Life-cycle management controls shall be applied to guard against counterfeit materiel in the DoD supply chain” and “additionally, life-cycle management controls shall be developed, applied, and maintained to guard against counterfeit materiel in the DoD supply chain.”  

CLL 032 Preventing Counterfeit Parts from Entering the DoD Supply Chain)

DoD Supply Chain Materiel Management Policy Energy efficient products or services

shall have preference in all procurements, except those products or services procured for combat or combat-related missions.”

CLL 043 Green Logistics: Planning for Sustainability

DoD Supply Chain Materiel Management Policy “The supply chain operational reference

processes of plan, source, make and maintain, deliver, and return shall be used as a framework for developing, improving, and conducting materiel management activities throughout the DoD supply chain to satisfy customer support requirements developed collaboratively with the support providers.”

LOG 102 System Sustainment Management Fundamentals)

DoD Supply Chain Materiel Management Policy “Resourcing for all elements of the DoD

supply chain shall be optimized through collaboration between support providers and customers. DoD investment shall be sufficient throughout the life cycle of new or existing weapons systems, equipment, and major end items to respond to warfighter needs.”

LOG 102 System Sustainment Management Fundamentals and LOG 235 Performance Based Logistics)

DoD Supply Chain Materiel Management Policy “Best-value materiel and services

shall be provided to support rapid power projection and operational sustainment of U.S. forces as required by the National Military Strategy.”

CLL 001 Life Cycle Management & Sustainment Metrics)

DoD Supply Chain Materiel Management Policy A decision to use organic versus commercial

sources should be part of developing an acquisition or sourcing strategy. This decision must be supported by a management analysis. The use of existing Government-owned inventory shall be maximized before seeking new commercial support on all performance-based logistics (PBL) arrangements and collaborating agreements.

CLL 015 Product Support Business Case Analysis and CLL 005 Developing a Life Cycle Sustainment Plan)

DoD Supply Chain Materiel Management Policy “All costs associated with materiel

management, including acquiring, distributing, transporting, storing, maintaining, and disposing, shall be considered in making best value decisions throughout the DoD supply chain.

” (CLL 015 Product Support Business Case Analysis)

DoD Supply Chain Materiel Management Policy “Supply chain risk management strategies

shall be employed to identify, monitor, assess, and mitigate (reduce or eliminate) potential disruptions within the DoD supply chain (e.g., insufficient quality, unreliable suppliers, machine break-down, uncertain demand) and outside the supply chain (e.g., flooding, terrorism, labor strikes, natural disasters, large variability in demand).”  

LOG 206 Intermediate Systems Sustainment Management and CLM 017 Risk Management)

DoD Supply Chain Materiel Management Policy DoD Components’ materiel management

systems shall be designed to facilitate DoD-wide asset visibility of materiel throughout the DoD supply chain. Materiel managers shall use automatic identification technology to maintain accountability and control, effectively manage costs, and implement the DoD policies cited in this Instruction.”

CLM 044 Radio Frequency Identification)

DoD Supply Chain Materiel Management Policy Unique item level traceability is required for all DoD

serially managed items that are also sensitive or pilferable, all DoD serially managed Critical Safety Items (CSI), and all NWRM using a unique item identifier (UII) assigned to each individual item, e.g. a single instance of a stock-numbered item or a single assembly or subassembly. Unique item level traceability is also required for depot level reparables as well as any item that the DoD materiel manager decides requires unique item level traceability.

(CLE 040 IUID Markings)

DoD Supply Chain Materiel Management Policy “Provide for an integrated,

synchronized, end-to-end materiel distribution system to meet customer requirements for authorized information and materiel”

CLL 017 Introduction to Defense Distribution and CLL 055 Joint Deployment & Distribution Metrics Framework)

DoD Supply Chain Materiel Management Policy Modern materiel preservation,

packaging, and marking techniques shall be used to provide all materiel within the DoD supply chain with the required level of protection and identification at the lowest possible cost. (CLL 013 DoD Packaging)

Deloitte Analysis PBL Margins

Deloitte

Model Based Approach to PBL Pricing

24212/16/2009

PBL Maturity ModelCo

ntra

ct S

cope

Wea

pons

Sys

tem

s Sc

ope

Component

Platform

Performance Outcomes…

Stage 1 Stage 2 Stage 3 Stage 4

Delivery Speed

Operational

AvailabilityMaterial

Availability

MissionAssuranc

e

MissionPerforman

ceWeapon System

PerformanceLogistics

Performance

Distribution

Performance

Logistics Chain Services

SupplyChain Services

Whole SystemAvailability

Mission Success

Scope of PBL Strategies

PBL Implementation

12/16/2009 243

12-StepFramework

244

PBL Foundation1) Integrate Requirements and Support

Translate warfighter’s top-level mission requirements into key system support performance objectives

2) Form Team

• Include key stakeholders & disciplines• Build trust and focus through open communication across boundaries

3) Baseline System

• Fielded system: Use actual data• Replacing legacy: Parametric estimate• New system: Life-cycle estimate

12/16/2009

245

PBL Planning4) Identify Performance Outcomes

Translate top warfighter requirements (i.e. availability, cost) into lower measures (i.e. reliability, supply time)

5) Select Product Support Integrator

Identify single point accountable for delivering performance outcomes• Knowledgeable about the system• Accountable for system performance • Responsible for integrating support • Incentivized to continuously improve • Involved early in the system's life

6) Workload Allocation Strategy

Apply statue (US Code Title 10 i.e. “Core” and “50/50”), service policy/guidance, public-private partnering, existing support & infrastructure … & then select best value

12/16/2009

246

PBL Execution7) Supply Chain Management Strategy

Tailor solutions for; • Unique repairables• Common repairables• Unique consumables• Common consumables

8) Performance Based Agreements

Embed warfighter system support performance objectives into measures and incentives with support integrators and providers

9) Business Case Analysis

Determine “best value” solution by analyzing alternative performance benefits, costs and risks

12/16/2009

247

PBL Control10) Award Contracts

Select contract type based on system maturity and risks • Fixed-price when support costs stable• Include performance incentives, reward improvement, and maintain flexibility

11) Financial Enablers

Facilitate “buying performance” • Single line of accounting for support • Non-expiring, revolving fund enables long-term contracts and investments

12) Implement & Oversight

Performance assessment plan includes; • Who & when will access performance • Performance measures & data sources • Schedule for performance incentives

12/16/2009

CONFIG. MGR: JP, 7.1.1, (301) 757-7699FILE NAME: 00_Aviation_Week_16May11.pptx 248

• TOC COST DRIVERS AND TEMPLATES – DEVELOPMENT– PROCUREMENT– SUSTAINMENT

• PORTFOLIO VIEWS• SUPPORT EXTERNAL

TOC INITIATIVES

• BILL OF MATERIAL ANALYSIS

• CONTRACT REQUIREMENTS

• SUPPLIER– PERFORMANCE– DEPENDENCIES– SUSTAINMENT– CAPACITY

• NAVAIR / INDUSTRY COLLABORATION ON FOCUS INITIATIVES– TOC TRANSPARENCY– PRODUCTION METRICS– SUPPLIER NETWORK– CONTRACTOR COST

STRUCTURE & RATES

BUSINESSCOLLABORATION

SUPPLIERNETWORK

TOCTRANSPARENCY

• RATES TRAINING• CONTRACTOR RATE

REVIEWS – ROTARY WING

• RATE COST DRIVERS & TEMPLATES

• PILOT RATES COCKPIT CHARTS

• UPDATE PENSION PROTECTION ACT ESTIMATES

CONTRACTORCOST STRUCTURE

& RATES• DEVELOP DATA

ACQUISITION PLAN• METRICS PACKAGE• SUPPLIER NETWORK

AND RATES INTEGRATION

• SHOULD COST INTERSECTION

PRODUCTIONMETRICS

• PROGRAM TRAINING• BOOK OF TRUTHS• ACADEMIA

INVOLVEMENT• PROGRAM START-UP

SUPPORT• PUBLISH BEST

PRACTICE• RAPID ANALYSIS• METRICS DICTIONARY

ENCULTURATION“Changing the Culture”

2011 OBJECTIVES SUPPORT REDUCING ACQUISITION CYCLE TIME& TOTAL OWNERSHIP COST, AND SHOULD COST MANAGEMENT

DECREASE ACQUISITION PROCESS CYCLE TIMEAND TOTAL OWNERSHIP COST ACROSS ALL NAVAL

AVIATION PROGRAMS WHILE CONSISTENTLY DELIVERING EXPECTED CAPABILITY

REDUCE ACQUISITION CYCLE TIME &TOTAL OWNERSHIP COST (TOC)

ALIGN THE REQUIREMENTS, RESOURCES, AND ACQUISITION PROCESSES TO ACHIEVE ACCOUNTABILITY AND DELIVER

THE RIGHT CAPABILITY AND CAPACITY ON TIME AND AT THE OPTIMUM COST THROUGHOUT THE LIFECYCLE

CNO GUIDANCE2010

NAVAIR COMMANDER’S INTENT 2010

FOCUS AREA 2

EXPECTED OUTCOME

DIRECT ENABLERS OFSHOULD COST MANAGEMENT

1) Target Affordability and Control Cost Growth

2) Incentivize Productivity and Innovation in Industry

3) Promote Real Competition4) Improve Tradecraft in Services

Acquisition5) Reduce Non-Productive Processes and

Bureaucracy

Under Secretary of Defensefor Acquisition, Technology,

and Logistics“Better Buying Power”

Memo

FOCUS INITIATIVES FOR 2011

M & A Activity Finmeccanica’s other big foreign acquisition, of

DRS Technologies, an American defence-electronics firm, for $5.2 billion (then €3.4 billion) in 2008, now looks too expensive. “It was bought at the top of the market when the US had a huge presence in Iraq and Afghanistan,” says Zafar Khan, an analyst at Société Générale, a bank. He adds that the business is now slowing. Buying DRS loaded Finmeccanica with debt. That frightens investors, especially when defence budgets are shrinking.

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PBL Power by the Hour (PBH) contract with Rolls Royce.

• The T-45’s F405-RR-401 engine is supported through a PBL Power by the Hour (PBH) contract with Rolls Royce. Performance is based on aircraft flying time and paid per flight hour. The engine contractor provides a minimum number of RFI engines to the aircraft PBL contractor. The ACO will be responsible to make any adjustments to the actual engine inventory. Performance Based Logistics (PBL) is the preferred Department of Defense (DoD) product support strategy to improve weapons system readiness by procuring performance, which capitalizes on integrated logistics chains and public/private partnerships. The cornerstone of PBL is the purchase of weapons system sustainment as an affordable, integrated package based on output measures such as weapons system availability, rather than input measures, such as parts and technical services.

• http://www.globalsecurity.org/military/systems/aircraft/systems/f405.htm

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Power-By-the-Hour (PBTH®)

• Rolls-Royce Defense Services Inc., Indianapolis, Ind., was awarded on 02 September 2003 a requirements contract with a not-to-exceed value of $51,197,805 to provide power-by-the-hour (PBTH) logistics support for approximately 175 T-45 F405-RR-401 engines. PBTH support to be provided includes maintaining and controlling the current inventory of F405-RR-401 engines, modules, spare and repair parts, as well as additional engines added to the fleet, including engines delivered with new production aircraft. Work will be performed in Meridian, Miss. (50.41%); Kingsville, Texas (49.04%); and Patuxent River, Md. (.55%), and is expected to be completed in September 2004. This contract was not competitively procured. The Naval Air Systems Command, Patuxent River, Md., is the contracting activity (N00019-03-D-0012).

• Rolls-Royce Defense Services Inc., Indianapolis, Ind., was awarded on September 27, 2005 a $63,260,398 fixed-price modification to a previously awarded requirements contract (N00019-03-D-0012) to exercise an option for Power-By-the-Hour (PBTH®) logistics support for approximately 188 T-45 F405-RR-401 engines. Work will be performed at the Naval Air Station (NAS) Meridian, Miss. (50 percent); NAS Kingsville, Texas (48.94 percent); and NAS Patuxent River, Md. (1.06 percent), and is expected to be completed in September 2006. Contract funds will not expire at the end of the current fiscal year. The Naval Air Systems Command, Patuxent River, Md., is the contracting activity.

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Power-By-the-Hour (PBTH®)

• Rolls-Royce is optimistic about getting new contracts, as the Navy says the PBTH work has led to a dramatic improvement in maintenance quality and performance reliability in the more than 190 F405 engines used in T-45s at the Navy's major combat pilot lead-in training sites, Naval Air Station Meridian, Miss., and NAS Kingsville, Texas, and for two test aircraft at Patuxent River, Md.

• Ready-for-issue engine availability, which had declined at one point to 70%, exceeded the 80% requirement in the initial year of the Rolls-Royce contract, October 2003-2004. Since then, the RFI metric has been increased to 85% and has been exceeded, said Capt. Win Everett, program manager for naval undergraduate flight training systems. Additionally, the average mean time between removal (MTBR) of engines from T-45s rose from 700 to more than 900 hours.

• Expected engine removals fell by 15% and average engine release life rose from a low of 500 hours to more than 1,000 hours, meeting the expected norm of between 1,000 and 2,000 hours. Those improvements took place as more aircraft and engines were entering the inventory.

• "The Navy and Rolls-Royce worked very hard to bring our commercially successful PBTH concept into the world of DOD to produce a contracting vehicle that would work for both of us," Wilson said.

• Under PBTH, Rolls-Royce gets paid a flat fee for each hour the engines are in the air - 75,000 to 80,000 hours a year. The company is responsible for all repairs and replacement parts. It handles all intermediate and depot-level maintenance and supplies line replaceable units and technical support for flight-line operational level maintenance , which is performed by L-3 Communications Vertex Aerospace.

• "When there is a problem with an engine, we do more than fix the problem. Rather than concentrate on a fixed work package, we look over the whole engine. If there are modules that will need replacement or overhaul in the imminent future, we do that work," Wilson said. "That saves having to pull the engine off the aircraft again a few days or a week later, which saves us money and gives the Navy an engine that will fly more hours before it has to return to the shop."

• The $51 million PBHT contract, which has four option years, initially was awarded to Rolls-Royce in September 2003. It was followed by a one-year option beginning in October 2004 for up to $60 million, depending on the total hours flown.

• "The Navy said it intends to exercise the second year option, also worth up to $60 million, which will begin this October," Wilson said. • Aviation Week Jun 13, 2005 By John Terino

12/16/2009

Lexington Institute 1 Randy T. Fowler, “Misunderstood Superheroes: Batman and Performance-Based Logistics,” Defense

AT&L, January-February 2009. 2 Randy T. Fowler, op. cit.

3 Office of the Secretary of Defense, Public-Private Partnerships for Depot-level Maintenance through the end of Fiscal Year 2006,

Department of Defense, July 2007, pp. II-23 to II-28.

4 Aerospace Industries Association, “U.S. Defense Modernization: Today’s Choices for Tomorrow’s Readiness,” August 2008, p. 45.

5 U.S. Department of Defense, DOD Weapons Systems Acquisition Reform: Product Support Assessment, November 2009, p. 11.

6 Ibid, p. 32.

7 The United States Air Force Depot Maintenance Strategic Master Plan, April 2008, p. 7.

8 Paul Klevan, “Navy Success with PBL,” Briefing to DoD Maintenance Symposium, October 27, 2008.

9 Rebecca L. Kirk and Thomas J. DePalma, Performance Based Logistics Contracts: A Basic Overview, CRM D0012881A2,

Center for Naval Analyses, November 2005, p. 44 . 10 PEO TACAIR, Briefing on F/A 18 E/F FIRST Program, 2006.

11 Vice Admiral W.B. Massenburg, Performance Based Logistics (PBL) Guidance and Best Practices, Naval Air Systems

Command, Department of the Navy, February 2007.

12 Ronnie Chronister, AMCOM: Performance Based Logistics, Briefing to SOLE Conference, 2007.

13 Peter Buxbaum, “Performance Made to Order,” Military Logistics Forum, November/December, 2009.

14 Aerospace Industries Association, Modernizing Defense Logistics, June 25, 2009, p. 6.

15 Peter Buxbaum, op, cit.

Lexington Institute 16 Quoted in Amy Butler, “USAF Spending Too Much On Support Contracts, Donley Says,”

Aerospace Daily & Defense Report, Nov. 3, 2009.

17 Stan Soloway, “Insourcing Benefits are Smoke and Mirrors,” Washington Technology, October 29, 2009.

18 Analysis based on data extracted from the Working Capital Fund Attachment to the Air Force and Navy submissions to the

Presidents Budget.

19 Michael Boito, Cynthia R. Cook, and John C. Graser, Contractor Logistics Support in the U.S. Air Force, MG779, RAND

Corporation, 2009, p. xv.

20 Analysis based on data extracted from the Working Capital Fund Attachment to the Air Force and Navy submissions to the

President’s Budget.

21 Government Accountability Office, Air Force Depot Maintenance: Improved Pricing and Cost Reduction Practices Needed, GAO

04-498, June 2004.

22 Bradley W. Bergmann II and Robert L. Buckley, Assessment of Successful Performance-Based Logistics Efforts, Logistics

Management Institute, DAC90T1, September 2009. 23 The Honorable Jacques Gansler, “Global War on Contractors Must Stop,” ExecutiveBiz Blog,

January 15, 2010, at http://www.blog.executivebiz.com/jacques-gansler-global-war-on-contractors-must-stop/7105. 24 “From PBL to U.S. Government Directed Logistics,” Second Line of Defense, February 2010, at

http://www.sldinfo.com. 25 Government Accountability Office, Depot Maintenance: Actions Needed to Identify and Establish

Core Capability at Military Depots, GAO 09-83, May 2009. 26 U.S. Department of Defense, Creating an Effective National Security Industrial Base for the 21st

Century; An Action Plan to Address the Coming Crisis, Report of the Defense Science Board Task Force on Defense Industrial

Structure for Transformation, Office of the Under Secretary of Defense for Acquisition, Technology and Logistics, July 2008, pp.

9-10. 27 DOD Weapons System Acquisition Reform: Product Support Assessment, op. cit., pp. 43-47. 28 Aerospace Industries Association, op. cit., p. 6.

Business Case Analysis

From Flight Global April 2o1o

The US Air Force is taking back control of maintenance functions for the C-17 and F-22 previously outsourced t0 Boeing and Lockheed Martin.

The USAF confirmed to Flight International in early April that Lockheed's performance-based logistics contract for the F-22 will cease, ending months of speculation about the potential re-insourcing move.

That confirmation came only three months after the USAF announced that Boeing's performance-based logistics deal for the C-17 also would be stripped away.

In those two strokes, the USAF reversed more than a decade of policy momentum building in favor of such long-term outsourcing deals, and threw into doubt a pillar of projected profit growth across the defense industry.

S- Curve

Bundling

The appeal of bundling is partly that it reduces transaction costs: instead of having to figure out how much each part of a package is worth to you, you can make a blanket judgment.

Bundling eliminates the problem of fretting about small expenditures, which may be one reason that flat-rate pricing is very common in the vacation industry (cruise ships, all-inclusive travel packages, and so on).

It also offers what economists call option value: you may never watch those sixty other channels, but the fact that you could if you wanted to is worth something. Many consumers also perceive bundles as bargains; getting a bunch of things for one price feels like a deal, even when it’s not.

http://www.newyorker.com/talk/financial/2010/01/25/100125ta_talk_surowiecki#ixzz0eFitIO1r

Final 259

Is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model.

It includes all of the logistics management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance, and information technology. Supply Chain

Management:

Encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Logistics

Management: Supplier Relationship Management (SRM):

TIMELINES PHOTOS 3 STEPSSupply Chain Management:

Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfillment, logistics network design, inventory management, supply/demand planning, and management of third party logistics services providers.

To varying degrees, the logistics function also includes sourcing and procurement, production planning and scheduling, packaging and assembly, and customer service. Supply Chain

Management:

Encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Logistics

Management: Supplier Relationship Management (SRM):

Logistics Management:

The goal of supplier relationship management (SRM) is to streamline and make more effective the processes between an enterprise and its suppliers just as customer relationship management (CRM) is intended to streamline and make more effective the processes between an enterprise and its customers.SRM includes both business practices and software and is part of the information flow component of Supply Chain Management (SCM).

SRM practices create a common frame of reference to enable effective communication between an enterprise and suppliers who may use quite different business practices and terminology.

As a result, SRM increases the efficiency of processes associated with acquiring goods and services, managing inventory, and processing materials.

Supply Chain Management:

Is a comprehensive approach to managing an enterprise's interactions with the organizations that supply the goods and services it uses.

Logistics Management: Supplier Relationship Management (SRM):

Supplier Relationship Management (SRM):

Subcontract Management:

The discipline of establishing service, quality, cost, and satisfaction goals and selecting and managing third party companies to consistently meet these goals.

Subcontract Management :

Establishing Goals –When selecting or managing subcontractors , subcontractor managers must optimize their opportunity to achieve these goals by using third parties companies.

Selecting Subcontractors – The fine art of matching the right company with the desired performance characteristics. Failure to consider this comprehensively could lead to complete failure.

Managing Subcontractors – On a daily basis, vendor managers must monitor performance, provide feedback, champion new projects, define or approve/disapprove change control processes, and develop vendors.

Consistently Meet Goals – Operations must perform within statistically acceptable upper and lower control bounds. The vendor manager focuses on meeting goals, from providing forecasts to defining requirements, from ensuring vendors have adequate staff to ensuring the staff have completed all required training.

Clustering It also should be noted that firms tend to cluster to take advantage of

concentrations of skills, similar production processes, and specialized suppliers.

Within the United States, there is Silicon Valley in California, the Research Triangle, in North Carolina, the High-Tech Community along Route 128 in Boston, financial services and transportation in Atlanta, and plastics and aerospace in Wichita, Kansas.

The same is true for clusters of industries abroad, including financial services in London, medical research and development in Singapore, and fashion design in Paris.

These centers seem to attract industries regardless of their relatively high cost of labor. Studies of such clusters indicate that the most important sources of prosperity can be created and are not dependent on “inherited” advantages, such as relative wage costs.46

Clustering Working groups are focused on broad areas

Technology Demonstration and Development Procurement

Goal: Helping to position industry to take greater advantage of “emerging opportunities” in the US and elsewhere.

Focus: Developing a mechanism for helping companies to identify those opportunities

Clustering. Aviation Week and Space Technology. 19/26 December 2011. pp 59-60

Montreal and the surrounding province of Quebec are using a top-to-bottom approach of government and industry support to help their small and medium-size aerospace manufacturers be more competitive by innovating within the supply chain.

Working with industry and provincial officials, Canada is building a policy framework designed to assist companies, particularly in doing business internationally, since there is little domestic market for their products and services.

The effort includes a review of all federal policies that might have significant impact on the industry; including restrictions on technology sharing.

Mecham, M and Velocci Jnr, A.L. 2011. Clustering. Aviation Week and Space Technology. 19/26 December 2011. pp 59-60

Clustering Economists from Adam Smith to Paul Krugman have noted

that similar businesses tend to congregate geographically ("agglomerate"); opening near similar companies attracts workers with skills in that business, which draws in more businesses seeking experienced employees.

There may have been no reason to prefer one place to another before the industry developed, but as it concentrates geographically participants elsewhere are at a disadvantage, and will tend to move into the hub, further increasing its relative efficiency.

This network effect follows a statistical power law in the idealized case,[12] though negative feedback can occur (through rising local costs).[13]

Aviation Clusters There are five aviation clusters in the world: Dallas-Fort

Worth, Montreal, Puget Sound/Seattle, Toulouse, and Wichita.

These zones either have one huge, dominant player (Seattle and Toulouse) or enough players to reach a similar level of critical mass (Fort Worth, Montreal, Wichita).

There are many other important aviation sites – from Savannah to São Jose Dos Campos to Shenyang – but these five clusters are responsible for about 65% of the world’s aircraft production – roughly $80 billion in new deliveries.

They also perform huge volumes of MRO, spares, development, and aero-engine work.

B-29 Superfortress

B-29 Production Four main-assembly factories:

Two Boeing operated plants at: Renton, Washington, and Wichita, Kansas,

The Bell plant at Marietta, Georgia ("Bell-Atlanta"), and

The Martin plant at Omaha, Nebraska ("Martin-Omaha").

Aerospace and Defense in Texas

Aerospace and Defense in Texas

Wichita has the highest concentration of aerospace manufacturing employment and skills in the nation.

About 55% of Wichita metro area manufacturing employment (52,900) – or some 29,300 persons – is in aerospace products and parts.

Wichita Cluster The Wichita area hosts four OEMs (Boeing Defense, Space & Security;

Bombardier Learjet; Cessna Aircraft; and Hawker Beechcraft.)

Wichita is also home to an Airbus Engineering Design Center.

During 2010, Wichita companies delivered 58% of all general aviation aircraft built in the United States, and accounted for 39% of global general aviation deliveries.

Located in Wichita is some of the most specialized equipment in the world for metal and composite material fabrication. Decades of aircraft production has built a comprehensive network of over 200 precision machine shops, tool & die shops and other aerospace subcontract manufacturers.

There are more than 40 Boeing-certified gold and silver suppliers within a 200-mile radius. Those leading edge suppliers include Spirit AeroSystems, the world’s largest independent producer of commercial aircraft structures.

Wichita firms either directly manufacture, or provide critical components for, over half of all general aviation, commercial and military aircraft.

Montreal Cluster