Better PBL Contracts – An Analytical Approach

10 November 2014

Successful Performance Based Logistics (PBL) can reduce total ownership costs for government while maintaining or increasing capability. The chance of success depends heavily on the terms in the PBL contract. Performance targets, incentive models and measurement approach must be carefully selected in order to give the supplier both motivation and freedom to provide logistics functions that will enable high system performance.

When designing and negotiating such a contract it is imperative for all involved parties to have proper decision support. The consequences of different alternatives must be thoroughly analyzed in advance. A Monte Carlo simulation model of the logistics scenario can offer valuable insight to the how the outcome may change as different variables are altered and what results to expect with a statistical confidence level. Such information can be of great use when formulating PBL contract terms.

In this paper, some key success factors and a step wise approach for setting the terms of a PBL contract is presented. It is shown how a penalty function y(x) can be defined, where x can be any measurable logistics parameter(s) that can measure the degree of contract fulfillment. An example is used where backorders, B, plays the role of the logistics parameter x, but the ideas presented can be applied to any other type of measurable parameter(s). It is furthermore shown that the design of y(B) is dependent upon the time period used for monitoring the backorders.

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By Patric Andersson MSc, Robert Hell MSc, Oskar Tengö MSc, Olle Wijk PhD