Bob Trebilcock

Coming soon to a DC near you: Performance-based logistics

They call it PBL. The new supply chain acronym stands for performance-based logistics, and it is an emerging trend in outsourcing that may be coming to your distribution center. The concept shifts greater responsibility, demands and rewards down to the supplier community who then perform added value services and operations rather than simply providing an inventory item.

I first heard about performance-based logistics in the maintenance and repair side of the aerospace and defense industries. For instance, the military may contract with a defense supplier to maintain its aircraft. As part of the contract, the supplier agrees to insure a certain level of fleet readiness– the contract may specify that a component, like a jet engine, is available for service 98% of the time.

That same concept is now being applied to automated materials handling systems, according to Eric Thatcher, an account executive with HK Systems.

“When you’re talking about a materials handling system, performance based logistics means that you, as a systems supplier, will be held accountable in some way for the performance of the system,” says Thatcher. “Instead of just giving a price, you’re going to be in a long-term partnership with your customer.”

Given the investment and life expectancy of a sophisticated system, that partnership might last for ten or fifteen years, Thatcher adds. Companies adding performance-based logistics clauses to their contracts operate in environments where downtime resulting from a warehouse operations failure is extremely costly, like a warehouse feeding parts and components to a 24/7 manufacturing operation.

Some of the elements that go into performance-based logistics may include:

The design of the system: “The customer wants to make sure that you’ve evaluated the solution and that you’re using solid technology,” says Thatcher. “They may also want a balance between technology and conventional systems since you need some labor for workarounds.”

A transition plan: Customers that are already operating a warehouse or manufacturing facility want to see a plan for a seamless transition from their existing processes to the new system so that operations aren’t impacted by the upgrade. Or, in the alternative, that any impact is planned and mitigated.

Shared responsibility: In a traditional engagement, a system integrator’s job may have been done once the new system was up and running. In a PBL engagement, responsibility for the operation of the system is shared. At the least, a systems integrator may be responsible for the maintenance. At the other extreme, the systems integrator may actually operate the system. In between those extremes, it’s likely that metrics will be established and reviewed on a weekly or monthly basis. “If you say up front that you’re going to provide 99.9% inventory accuracy, you’re going to be held to that,” says Thatcher. “If you’re not meeting your metrics, there may be penalties.”

It’s a partnership: Much like a 3PL relationship, for a PBL relationship to work, customer and supplier need to work as partners. Yes, metrics will be reviewed on a regular basis and penalties may be assessed. More importantly, both organizations have to work together to determine how to improve processes and operations. That may require updating systems and processes. It may lead to more training of personnel.

“Given that a system may be in operation for years, a PBL contract requires a much longer time horizon,” Thatcher says. “And both the vendor and the customer have to be ready for that kind of relationship.”

Click here to learn more about performance-based logistics.

Posted by Bob Trebilcock on December 16, 2008 | Comments (3)