Wesley S. Randall

1. Sustainment Dominated System (SDS)
Life Cycle Affordability
Wesley S. Randall Ph.D.
Associate Professor of Logistics
Logistics PhD Program Coordinator
Department of Marketing and Logistics
College of Business
University of North Texas
Denton, Texas
Wesley.randall@unt.edu
+1 940.735.0287

2. • What is a sustainment dominated system?
• Why study them?
• What is the opportunity?
• How does this work?
Agenda
2

3. • Sustainment dominated systems
– System whose post-production spending is greater than production
– Defense, healthcare, power, infrastructure, utilities, child and family
services
• Limitations in existing theory and practice
– Constrained post production investment (e.g., bad actors and safety)
– Constrained design focus (producibility, reliability, maintainability, and
sustainability)
– Return to specification post production
– Return on sales business model
– Lack of anticipatory innovation
– Lack of learning
• Poor incentives: the more the system breaks, the higher the profit
• Creat R,M, S & Innovatability
Motivation for research and application
3

4. 4
Defining Total Ownership Cost
30%
60%
Research &
Development
Production Costs Operation & Support Costs Retirement & Disposal
$ Includes Aging and DMSS
considerations
10%
The DoD estimates that over 60% of its support costs fall into the
“operation and support costs” category.
Thinking about the life cycle is good business.
Source: UT Executive Education

5. Suppliers
OEMs
engine
airframe
MRO
Provider
Post-Production Support
Infrastructure
warehouses
people
inventory
equipment
Operators
Expertise
spare parts
repair
design
production
modification
SCM
logistics
is developed
is developed
provides MRO
runs
End Customer Value
routes
price
schedule
provides
Purchasing
Traditional post-production support systemigram representation

6. • Key premises
– Governance not contracts
• Monetize cost avoidance
– Focus on the value created by an integrated supply chain
– New materials, processes, and technology shift from repair to redesign
– Buy outcomes
– Redesign increases the affordability of the system
– Return on investment is superior to return on sales
– Prognostics instead of diagnostics
• Create life cycle innovatable systems and philosophies that promote
continuous learning and investment
The Logic Behind SDS Performance Based
Strategy

7. • Supplier incentives
– Profit
– Return on investment is superior to return on sales
– Life cycle innovation structures protect competitive position
– Smart life cycle investments
• unbend the bathtub curve
• Operator incentives
– Simultaneously improve performance and affordability
– Spend on knowledge, skill, and ability conversion, not resource
conversion
– Give greatest reward when cost is least and performance is highest
SDS Opportunity: Performance based strategy

8. Suppliers
OEMs
engine
airframe
MRO
Provider
Post-Production Support
Infrastructure
warehouses
people
inventory
equipment
Operators
Expertise
spare parts
repair
design
production
modification
SCM
logistics
is developed
is developed
provides MRO
runs
integrated by
Customer
routes
price
schedule
value
provides to
Performance Based Post Production Support Systemigram representation
Systems Integrator
life cycle
cost
system
level design
redesign
cost benefit analysis
manage
supplier network
logistics
is developed
provides
post-production support to

9. • Return on sales
– Incentive structure is broken—
suppliers make more when the
system fails
– Profits are constrained
– Customer costs goes up
– Core competencies are not aligned
– The principle-agent model reflect
classic information asymmetry and
present moral hazards
– Sell more parts make more money
How does this apply to sustainment dominated systems?
Transaction of Knowledge not Product
9
• Return on investment
– Suppliers make the most when the
system breaks least
– Profits are good
– Customer costs go down
– Core competencies are aligned
– The principle-agent model reflects
mutual self interest – win-win
– Monitize cost avoidance to drive
investment, innovation and
learning
Knowledge, investment and innovation provide superior competitive position

10. Architecting for Life Cycle Affordability
UnBending the SDS Bath Tub Curve
10
Non-Investment Life Cycle Reactive Investment Life Cycle Proactive Investment Life Cycle
Time Time Time
Cost
Capability Cost
Capability
Cost
Capability

11. Return on Investment Competition
Cost Traditional vs. Performance-Based Contract
Providers’ profits are
higher (Area between the
lines is bigger with PBL)
Total Cost for company is
lowerInvestment to
improve
reliability or
service
Term
Traditional Industry Price PBL Industry Price
PBL Industry CostTraditional Industry Cost
Industry Profit
PBL Investment
Start to Pay Back
Contract Duration Incentivizes Investment

12. How do we convert knowledge into value:
notional case example
Table 1: Cases demonstrating impact of contract length and discount rate
Per year savings
$300M
Case 1: 15% reduction in cost, 5 year price
based contract
Case 2: 15% reduction in cost, 3 year
price based contract
Discount; contract Discounted reward
base year $
Discount;
contract
Discounted reward
base year $
Year 1 0%discount; on
contract $300,000,000
0%discount; on
contract $300,000,000
Year 2 5%; on contract
$270,750,000
5%; on contract
$270,750,000
Year 3 5%; on contract
$257,212,500
5%; on contract
$257,212,500
Year 4 5%; on contract
$244,351,875
100%; no
contract $0
Year 5 5%; on contract
$232,134,281
100%; no
contract $0
Total Incentive
Available
$1,304,448,656 $827,962,500
Increased incentive /
investment gain by
year 4 & 5, = 55%
increase
$476,486,156

13. Buy (Redesign)
FinancialcaseforMake(Repair)
Strong Strong
Weak
Make (Repair)
Weak
Make (Repair) or Buy (Redesign) Efficient Frontier
FinancialcaseforBuy(Redisgn)
Make or buy: Implication for new technology,
material, process, or scale

14. – Fence to fence highway construction and management
– Moscow St Petersburg high speed rail
– Child and Family Services
– Eastern European utilities
– Alstrom LocLife Services
– Siemens Rail
– Boeing Goldcare
– World bank healthcare
– Over 70% of airline MRO
What evidence is there that Performance
Based Strategy can do all this?

15. • Provider gets paid for up-systems
– Monetizes cost avoidance through multiyear governance
– Links performance metrics (service desired by customer), profit, and learning
– Return on investment business model
– Negative incentive for opportunism of the return on sales business model
(e.g., selling more parts)
• Performance based strategy is attractive customer, operators and CEOs
– Focuses on ROI, and application of knowledge
– Creates superior profitability
– Unbends the complex system bathtub curve
– Profits are highest when costs are least
– Is adaptable, nimble, resilient, if something goes wrong plug in an alternative
– The power of integration and a open “lego” architecture
– Develops integration as a core capability
How does this work?

16. Questions?
Thank you for your time and attention
16

17. • Neo classic economic is about optimizing land, labor, and capital
through factory production to achieve efficiency
– Land, labor and capital is a poor predictor of sustained competitive
value in the long run.
– In this view the customer is the target of exchange
– Value is embedded in products
– The customer integrates disparate products to create value
• Emerging post neo classic model suggests that economic success
is better understood as the conversion of knowledge, skill and
ability into value.
– Share holder value and competitive position is based upon the ability
of the network of firms to provide attractive value propositions.
– The supply chain enterprise only offers value propositions
– The customer is a co-creator of value, value is contextual
– Integration is the highest core capability
Theoretical background

18. Life Cycle Affordable Based Competition
Primary Flows
Knowledge, Financial, & Information
Products
VPC2
VPD2
S12
S22
S32
ST42
ST52
Supplier11
Supplier21
Organic
Supplier 31
Supplier41
Supplier51
Value
Proposition
Created1
Value
Proposition
Desired1
ExtranetworkKnowledge
NetWorkIntegrator(whatandthehow) Time
Co-creation

19. What does SDS LCA look like organizationally?
Sound Systems
Engineering Design
and Architecting
Sharp
Business
Acumen
Effective
Analytical Models