A Systematic Use of Performance Based Logistics Will Save DoD Money

On Tuesday October 14, the national security industrial base working group at Brookings held an event on the arcane-sounding topic of performance-based logistics or PBL.  This idea is a way of making the Department of Defense more efficient and more economical in how it maintains equipment.  The results of the discussion were encouraging, because while they promised no easy relief from the pain associated with sequestration—due to return in just a year if no way can be found around it—they did suggest that at least several billion dollars a year can ultimately be saved in Pentagon maintenance accounts, perhaps within half a decade or so, through this innovative concept. 

I organized and moderated the panel, which included Jay DeFrank of Pratt and Whitney, George Mitchell of Sikorsky Aircraft, and Alan Banghart of Deloitte.  All three are heavily involved in PBL programs.  DeFrank and Mitchell work for companies that already perform these services for DoD; Banghard studies the programs and advises DoD on how to make optimal use of them. 

The basic logic of PBL is fairly simple, and rather elegant from the point of view of theoretical economics—and it has also now been proven in the real world, as it is already employed in 5 to 10 percent of all Pentagon maintenance contracts. Traditionally, the Department of Defense has paid contractors to repair equipment on a transactional basis—that is, fee for service. When something breaks, it is fixed.  Contractors make more money the more work they do to maintain and repair equipment.  This system gives contractors no direct financial incentive to make repairs more efficient, and also often reduces the availability of key equipment since much of it is frequently in the shop. 

By contrast, a PBL contract pays a contractor per successful flight-hour, steaming day, or mile driven of a plane, ship, or vehicle.  It leaves it to the contractor to figure out the optimal schedule for doing not only repairs but preventive maintenance. It also therefore encourages the contractor to bundle maintenance activities into a single visit to the shop, so that many things can be done efficiently and economically at the same time.  As Mitchell, Banghart, and DeFrank explained, this system also leads contractors to do more detailed studies on which parts tend to break most often, so that they can perhaps be reengineered or otherwise made more durable. 

Savings from this approach typically range in the vicinity of 5 percent to 20 percent though, as Banghart noted, they can be even greater.  Mitchell cited a University of Maryland independent study making  the same basic point.  There can also be second-order savings from other effects of successful PBLs.  For example, if aircraft are available a higher percentage of the time, the Department of Defense will not need to buy as many to ensure that a given number are ready to go on any given day. As such, not only maintenance costs (funded in the Department of Defense’s Operations and Maintenance or O&M budget) but also equipment purchase costs (funded in Procurement) can be reduced. 

There are some cases where PBL may not be applicable—for brand new systems using new technology (since no dependable baseline exists for knowing likely maintenance costs, making a PBL a gamble for all parties), or for systems about to be retired (since it takes time to set up a PBL and make it efficient).  But on balance, the panel tended to agree that, over time, up to $70 billion or $80 billion of annual O&M costs could be addressed through the PBL approach, meaning that by 2020 or so, a systematic use of this approach might yield the Department of Defense annual recurring savings in excess of $5 billion.