The Changing World of Supplier Management

Eileen Lang and Reginald Goodman

Over the last two decades, outsourcing more and more has become a foundational strategic component of business models used by the prime contractors supporting naval aviation.

Twenty years ago, Naval Air Systems Command (NAVAIR) prime contractors were airframe/platform centric providers making on average about 60 percent of their product in-house and buying (subcontracting) about 40 percent. Today, primes are more of a “system solution” provider making approximately 20 percent and buying approximately 80 percent (Figure 1). Due to this significant change, NAVAIR made it an imperative to understand the impacts of prime contractors shifting their efforts, knowledge, data, labor, costs, risks and opportunities to their subcontractors. Active insight into supplier performance can be key to the ability of a program manager (PM) to successfully plan and execute his or her program. Therefore, it is important for the government to understand and mitigate the inherent risks posed by a prime contractor’s outsourcing strategies.

When NAVAIR followed the money in this rapidly changing landscape of supplier management, it quickly became clear why outsourcing has become more prevalent. A prime contractor’s outsourcing decisions largely are based on its overall business strategy and the industry’s technical capabilities. Primes have widely adopted outsourcing as a method to reduce investment costs, distribute associated risks, increase return on invested capital, and leverage sub-tier supplier capabilities that, in turn, have expanded to accommodate the increased demand.

However, from the government’s perspective, understanding a prime contractor’s supply management strategy and the impact of their strategies on a program’s cost, schedule and technical performance must be considered when assessing a program’s plan and the associated execution risks. While prime contractors are responsible for overseeing and managing the supplier network that provides a product and/or service, government program officials provide oversight and contract surveillance duties on Department of Defense (DoD) prime contracts to ensure that the prime contractor performs adequate subcontractor management.

A clear contribution to this shift was the substantial consolidation of defense contractors occurring during the 1990s. Examples include Northrop Aircraft acquiring Grumman Aerospace in 1994, creating Northrop Grumman; Martin Marietta merging with Lockheed Corporation to form Lockheed Martin in 1995; and McDonnell Douglas merging with Boeing in 1997. This heavy consolidation coincided with a period in which prime contractors strategically increased the degree and complexity of effort that was outsourced—effectively transitioning the contractors from airframe and platform-centric providers to the system solution providers of today. Ongoing budget reductions, perceptions of declining defense procurement demand, and uncertain prospects for new major programs re-enforce the contractors’ strategy of improving efficiency and reducing investment risk exposure through such changes as:

• Moving product or process from make to buy
• Changing, consolidating, or acquiring suppliers
• Adjusting the products or processes a supplier provides
• Expanding the scope of what is outsourced to include sourcing technical design, buying systems, etc.
• Changing the processes and equipment suppliers use on programs
• Moving supplier product or processes from one location to another

These changes have significantly impacted program cost, schedule and technical performance, requiring additional consideration when assessing the program plan and associated program execution risks. Multiple opportunities exist to improve performance on programs through risk identification and mitigation. Government PMs must leverage available tools to meet program cost, schedule and technical goals and objectives.

Leveraging Earned Value Management to Assess Risks

Weapons systems acquisition is a complex business complicated by the motivations of the customer (government) and the market (contractor). Government PMs are obligated to the warfighter and must deliver the right capability on time while meeting their fiduciary responsibility to the taxpayer to control cost growth.

On the other hand, contractors are obligated to their shareholders and must enhance wealth by meeting financial performance objectives (i.e., sales, profits, revenue growth, cash flow, etc.). To illustrate this point, compensation data for the top five executives (publicly available in 2013 company filings with the Security Exchange Commission filings) reveal that Customer Satisfaction is 2 percent of Executive Incentive Award Criteria while Financial Metrics and Stock Price are 61 percent and 27 percent, respectively. Clearly, this reveals divergent priorities that do not align in a number of areas (such as cost/schedule control, shareholder return, rewards, risk management, etc.), and makes it extremely challenging to find common goals.

Fortunately, many tools are available to DoD PMs to help them proactively manage programs. Since the early 1960s, Earned Value Management (EVM) is one of those tools used for program management by the DoD, the rest of the federal government and the commercial sector. It is a program management technique for objectively measuring program performance and progress. Because PMs ultimately are responsible for the cost, schedule and technical performance of their programs, an EVM System (EVMS) integrates these parameters for optimum program planning and control. For DoD programs, use of EVM is required on all cost or incentive contracts of $20 million and more. As a widely accepted industry best practice prescribed in the Electronic Industries Alliance Standard-748 EVMS (EIA-748), EVM provides a number of tools that help government and industry PMs assess cost, schedule and technical progress. Two of the EVM tools assess program risk, specifically the Integrated Baseline Review (IBR) and the Schedule Risk Assessment (SRA). When planning and performing these reviews or assessments, it is important that IBR and SRA assessment criteria, process steps and questionnaires include specific measures to access the impact of company supplier sourcing and management strategies.

Required by DoD policy when EVM is determined to be applicable on a contract, IBRs are reviews of contractors’ Performance Measurement Baselines (PMBs). It is crucial that the PMB captures all contracted work scope and the IBR is the primary tool for helping the government PM make that determination. The objectives of the IBR are to gain insight into the cost, schedule, technical, management processes and resource risks associated with a project. PMs are required to conduct an IBR within 6 months of contract award, or exercise of options, and major modifications. These timeframes are essential in identifying program execution risk early in order to minimize cost, schedule and technical risk. Also, this timing allows the IBR to provide management and staff personnel a continuous method to develop and maintain an understanding of the project objectives, the PMB, the management processes, and the project risks and opportunities. At NAVAIR, IBRs are conducted using a five-step process:

• Joint Government/Prime Management Systems Training
• Prime Management Systems Assessment
• Subcontractor IBRs
• Schedule Risk Assessment
• Total Contract IBR

The Total Contract IBR (the fifth step above) typically is conducted onsite at the contractor’s facility and is focused on discussions or interviews with contractor Control Account Managers (CAMs) who are responsible for all work required to meeting contractual requirements. These discussions are not unlike a grade school “show and tell” where the CAMs demonstrate through explanation and documentation that they have captured the contract scope of work and are executing appropriate project management controls within the budget and resources they have been allocated. The government officials lead the discussions using questionnaires developed prior to the IBR that include questions associated with risks in five areas (cost, schedule, technical, management processes and resources). Based upon the outcome of the discussions, the government program officials make an assessment of risk in the five areas using a set of risk criteria presented in Table 1.

It is very important that both the questionnaires and risk criteria consider the contractor supplier management strategy. For example, at NAVAIR we included the following selected questions:

• Are subtier suppliers on contract?
• How is supply chain managed?
• Have critical suppliers been identified and evaluated?

It should be apparent that negative responses on any of these three questions could result in potential significant risk to program cost, schedule and technical objectives—a risk that would need to be mitigated. Analysis of the NAVAIR IBR Findings Database reveals that 29 percent of IBR findings/risks are associated with supplier management issues.

The foundation for an effective EVMS is the Integrated Master Schedule (IMS). A program’s IMS is a powerful planning, control and communications tool that, when properly executed, supports time and cost estimates, opens communication among personnel involved in project activities, and establishes a commitment to project activities. The IMS is required when EVM is placed on DoD contracts and typically also is required on most other contracts when EVM is inapplicable. The IMS’ purpose is to provide a communication tool to improve the execution of a project, coordinate work efforts, assist in identifying and mitigating risks, and capture opportunities for decision makers.

The IMS should represent the discrete effort for entire project and be the focal point in the program management’s business rhythm. Program teams use the schedule as a tool to communicate and coordinate their tasking identifying what, when, and how things might occur and who will perform them.

The SRA helps PMs effectively use the IMS and understand prime contractor outsourcing strategies. The SRA is a tool and process that identifies technical and programmatic opportunity and/or risk in a program. It uses statistical techniques to identify and quantify technical, programmatic and schedule risks in a program and quantify the impact of those risks on the program’s IMS.

When conducting SRAs, government program officials must ensure that SRA criteria, process steps and questionnaires include specific measures to assess the impact and risks of company supplier sourcing and management strategies. For example, the SRA Risk Analysis Discussion Form used at NAVAIR includes 145 discussion questions, 73 of which focus on the prime contractor’s management of its suppliers.

Note that as with the previously discussed IBR questionnaire, negative responses to these selected questions could pose significant risk to meeting program cost, schedule and technical objectives.

Table 2 shows areas of interest that were very useful in planning for NAVAIR IBRs and SRAs and provides examples of areas to focus attention to properly determine the impact and risks along with ensuring the prime contractors manage programs effectively. We encourage all government program teams to use it when conducting IBRs, SRAs, as well as during periodic program reviews with the prime contractor.

Outsourcing management cannot be considered effectively unless one correctly establishes acquisition reporting requirements in order to receive the information needed to effectively manage EVM work flow (such as Integrated Program Management Reports (IMPRs) and IMS. The requirements may be tailored based on program risk and the PM’s specific needs. Incorporating requirements and changes after contract award is typically more challenging and expensive as contractors resist scope growth and typically advocate scaling back requirements as much as possible.

DoD budget cuts (e.g., the Budget Control Act of 2011, etc.), and inaction by Congress in the form of routine Continuing Resolutions in the place of comprehensive fiscal year spending bills, have resulted in inefficiencies and added risk to weapon system acquisition programs. Now more than ever, government PMs need to take advantage of any opportunity available to avoid program cost and schedule growth. Understanding and addressing contractor supplier management strategies is one of the opportunities that PMs should maximize.

Contractor supplier management strategies vary from one company to another because of various factors that ultimately promote and benefit their financial success. A host of tools and support personnel are available to government PMs to help them manage their programs within the framework of the principles of project control and have an absolute responsibility to do so on behalf of the warfighter and taxpayer. 

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Lang leads the NAVAIR Supplier Analysis and Management Support effort. She has 26 years of experience providing Earned Value Management support to acquisition programs. Goodman is assigned to the NAVAIR Cost Estimating and Analysis Department. He has 41 years of Department of Defense experience in audit and acquisition functions.

The authors can be contacted at [email protected] and [email protected].