15.5 Transforming the Defense Supply Chains

The complexity of the DOD supply chain in total or for any one weapon system is staggering with a supply chain that often encompasses hundreds of vendors and subcontractors, from many states and countries, all having a need to maximize profit, while minimizing cost and uncertainty.  Adding to the complexity is the fact that on many of our large weapon system programs the prime contractor is often the integrator, with up to 80 percent of the value of the program coming from subcontractor, and other vendors or suppliers.  Thus managing the supply chain becomes a key and critical management function. 

Transforming the supply chain from a loosely managed function to one that is well integrated, and focusing on the capabilities of upstream partners is a new challenge.  The entire procurement team (prime, subcontractors and vendors) need to work together to add value while driving out cost and risks.

Uncertainty in the commercial sector sometimes comes many sources.  One of the largest sources of uncertainty comes when senior management attempts to estimate the success of a new product and provides a production estimate to supply chain members down the line.  If they estimate too low, then they run the risk of running out of product and angering their customers.  If they estimate too high, then they are left with excess inventory and must sell the remaining stock at a loss. 

Uncertainty in the DOD sector sometimes comes from failure of the contractor and SPO to manage cost, schedule and performance.  When the cost becomes too excessive, Congress or others within the administration may elect to reduce the final production quantity.  This in turn drives unit cost up, which in turn tends to force another round of rate and quantity reconciliations.  This can become a death spiral as once the factory has been set for one rate and quantity curve, any adjustments, up or down, will have an effect on unit costs.

Each of these uncertainties can lead to what is called the "bullwhip effect."  The bullwhip effect refers to swings in inventory that are caused by changes in demand.  This can cause manufacturing cost, inventories, lead times, and transportation cost to rise and customer satisfaction and profits to fall.  Moving upstream from the customer, the effect or impact becomes greater and greater as companies upstream build inventory to mitigate risks to the changes in demand.  While inaccurate demand forecasting is often a source of variability that can contribute to the bullwhip effect.  Other sources of variation can include:

• Changes to lead times (especially if on the critical path);
• Problems at a key or critical vendor (strikes, poor quality, plant shutdown, etc.); and
• Price fluctuations in critical materials to name a few. 

Let's look at two very real scenarios that can drive demand forecasting.

Scenario 1:  A rise in the use of improvised explosive devices (IEDs) in Iraq resulted in almost 3,000 U.S. troops being killed.  As a result the military had an urgent need for a Mine Resistant Ambush Protected (MRAP) vehicle.  Development and rampup of the program had to happen quickly.  This required the use of an existing supply chain, using fairly mature materials and proven manufacturing techniques.  From the program office, to the prime contractor(s) and their supply chain the message was clear, "work together, work fast, and get results." 

Scenario 2:  The President calls for the end of NASA's space shuttle program resulting in the cancellation of the Constellation program.  One of the major components used in space launches is the shuttle boosters, a solid rocket engine built by ATK in Utah.  The shuttle's solid rocket motors are ten times larger than the next biggest solid rocket motor, the Navy's Trident D-4.  In fact, the shuttle motors are so large that they constituted 70 percent (by weight) of the demand base for solid rocket motor propellants.  Upstream in ATK's supply chain is a company called American Pacific, and they make ammonium perchlorate (AP), a critical propellant ingredient.  And that is all they make at their Utah facility.  Since their factory has been set up to produce "X" amount of AP at known cost, the cancellation of the Constellation program resulted in a 70 percent cut in production, but their fixed costs remained the same.  The cancellation of the Constellation program sent such a sever ripple through the supply chain that Congress called for the Secretary of Defense to review and establish a plan to sustain the Solid Rocket Motor (SRM) Industrial Base (IB).   

Some of the ways to cope with the bullwhip effect include:

• Developing strategic partnerships with vendors and suppliers;
• Stronger collaboration of information (especially forecasting data);
• Reducing lead times on the critical path; and
• Reducing variability.

There are numerous supply chain management software (SCMS) tools that can aid in the planning, forecasting and integration of procurement, production, and distribution information between suppliers and customers.  These software tools are aimed at the strategic, tactical and operational level and are often used to manage the following applications:

• Supply Chain Planning,
• Demand Planning,
• Vendor Managed Inventory,
• Supplier Management,
• Procurement,
• Strategic Sourcing,
• Warehouse Management,
• Transportation Management,
• Order Fulfillment, and
• Contract Management.

Key capabilities of software tools include the following:

• Demand Planning made up of forecasting tools, web-based collaboration interface, and sales and operations reporting and metrics that help companies predict and shape customer demand with greater accuracy.
• Distribution Planning made up of inventory analysis and time-variable stock target calculations for ensuring the optimal balance between service levels and inventory investment; synchronized replenishment plans points right back to manufacturing and supplier sources for better visibility.
• Manufacturing Planning made up of advanced planning system for engineering, assembly, and repetitive manufacturing environments; similar tools for process manufacturers.
• Production Scheduling made up of finite capacity scheduling for engineering, assembly, and repetitive environments, as well as batch-process production facilities.
• Transportation and Logistics Planning made up of transportation planning, transportation procurement, route planning, transportation management, small parcel shipping, and international trade logistics for global, multi-modal operations.
• Warehouse Management System made up of end-to-end fulfillment and distribution including inventory, labor, and work and task management, as well as cross-docking, value-added services, yard management, multiple inventory ownership and billing/invoicing, and voice-directed distribution.

Supply chain metrics are used to track supply chain performance and cover many areas or functions to include procurement, production, warehousing/distribution center, distribution of materiel, and customer response. Tracking metrics will allow for benchmarking, viewing performance over time, identifying problem areas and optimizing the supply chain. Supply chain metrics can be broken down into two types of metrics: supply chain performance and logistics performance.

• Supply chain metrics are tools used to measure and analyze the entire supply chain by integrating the various independent processes. The process must begin with planning the acquisition of customer driven requirements for materiel, including the returns segment of the process, and the flow of required information in both directions among suppliers, logistics managers, and customers. Supply chain metrics must have the capability to "peel back" the data to facilitate review by managers at all levels. Supply chain metrics often employ the balanced scorecard technique to measure the criteria of time, quality, cost, and variability across the entire supply chain. The aim is to purge the logistics process of unnecessary elements — those that do not add value — and to find and act upon opportunities for improvement. Logistics performance metrics are tools used to measure a particular process within the supply chain.
• Logistics includes seven interdependent processes: customer response, inventory planning and management, supply (manufacturing/procurement), maintenance, warehousing/distribution center, distribution of materiel, and reverse logistics. Logistics performance metrics are diagnostic in nature. They also must have the capability to "peel back" the data to facilitate review by managers at all levels.

Measuring the performance of a supply chain has always been difficult to answer in a single slide or metric. There are over a hundred metrics identified by the Supply Chain Operational Reference (SCOR) model. Some metrics that look good one month may not the next.  The metrics below are a few that are often used by SC managers and are applicable to logistics and acquisition professionals:

Table 15-1 Potential Supply Chain Metrics

Many of these measures or metrics focus on the "3-Vs:"

• Visibility:  Knowing what you have and where it is located;
• Velocity:  Getting inventory moving through the system efficiently; and
• Variability:  Involves identifying and reducing variability so that the supply chain becomes more predictable.

These metrics are somewhat complicated to calculate and the above descriptions do not adequately describe the full extent of the metric.  In addition, given the focus on just-in-time (JIT) inventory management, supply chain managers need to ensure that sources of material to not suddenly dry up.  JIT can leave companies and organizations vulnerable to interruptions in the supply chain. Finally, it is important to recognize that there are some cases where JIT should not be applied such as for medical supplies, and for ammunition, water, and rations for the warfighter in a forward area.  This is where a good SC manager can assist the program in establishing and understanding the full impact of the metrics chosen, and in developing contingencies to ensure the supply chain remains unbroken.