PROCUREMENT LEAD TIME

Procurement lead time, which is defined as the time required to acquire supplies and services and then place them in the hands of the user, has two separate components: administrative lead time and development or production lead time. The administrative segment begins with identifying a material requirement and ends with awarding a contract for the needed item or service. Production lead time begins at contract award and concludes when the item or service is delivered to the ultimate user. For such non-development items as replenishment of material inventories, procurement lead time represents the span of time required to replenish the inventory, including the time needed to accomplish such administrative tasks as inventory management, solicitation, negotiation, and contract award, as well as production and distribution of the item.

Acquisition doctrine states “timeliness of delivery” as one of the primary objectives of the Federal Acquisition System. In the area of replenishment of inventory items, where demand is usually random, it is a tradeoff between the risk of not having the item immediately available and the cost of acquiring and maintaining an inventory at a supply point or points. A fundamental rule in the requirements determination process is that procurement lead times must be compensated for by the size of the inventory. Longer procurement lead times result in a larger investment in inventory to meet any demand that could occur during the time items are being ordered, produced, and delivered. In investment dollars this represents the one-time cost of the initial purchase of the item plus the continued cost of holding and managing the inventory.

As a general rule, procurement lead times for maintenance, repair, and operating (MRO) items in DoD are substantially longer than lead times in private industry, regardless of the type of commodity being purchased. A study completed before acquisition reform, which compared procurement lead time profiles on 400 aircraft engine parts purchased by DoD and major U.S. airlines, concluded that: (1) procurement lead times for DoD were 4.6 times longer, and (2) the average DoD inventory investment was 2.1 times greater than that of the airlines. In the period between FY 1984 and FY 1988, administrative lead times in DoD increased 104 percent, while production lead times grew 23 percent. Much of this increase in administrative lead time is related to the increased processing requirements of the Competition in Contracting Act of 1984. To illustrate how a change in policy often can have an indirect and unplanned effect, between FY 1984 and FY 1988, DoD’s budgetary requirement for inventory increased from $8 billion to $24 billion to compensate for the increased procurement lead times.

The time it takes to replenish stocks directly determines the size of the inventory the using organization must retain. The use of e-commerce has shown that it improves coordination among firms and lowers the cost of searching for qualified goods and services. A study called “Restructuring Supply Chain Through Information Channel Innovation” refers to a cost analysis of the procurement process of a large European pharmaceutical firm that demonstrated that the administrative cost of electronic procurement processes was one-third the cost of the manual process. The author states that some initial providers have used electronic markets to concentrate on systems biased to a particular supplier. (See Figure 3-1, Supply Chain Information Model.) However, he projects that in the long term buyers will realize that significant benefits from the electronic brokerage effect will drive almost all electronic markets toward being unbiased channels for purchasing products from many suppliers.

In the early 1980s, Norman Augustine, a long-time participant in the acquisition process on both the commercial and government sides, developed a set of laws for major systems development programs. One of his conclusions was that most new systems become obsolete only slightly before they are born. This is because the time it takes to develop a new system, including decision time and approval time, has consistently increased over the previous 15 years, while the life of technology has been decreasing. This problem became more acute in the 1990s because the halflife of technology continued to decrease at an increasing rate. Consequently, in the post Cold War–era, acquisition doctrine is challenging the acquisition community to reduce procurement lead times.

Figure 3-1 Supply Chain Information Model

In obtaining products on the higher end of the technology spectrum, government also experiences longer procurement lead times than does the private sector. In an article in the Acquisition Quarterly, A. Lee Battershell compares the differences between DoD and Boeing in developing aircraft with comparable technologies, i.e., the Air Force’s C-17 and Boeing’s 777. The C-17 was selected because it does not have the complex subsystems that are characteristic of fighters and bombers. It took well over 10 years to develop and deliver the C-17, compared to the Boeing 777, which took a little over four years to develop and deliver. The author concludes that where Boeing’s focus is on cost, schedule, performance, and market competition, DOD’s focus is mainly on performance. It would be appropriate to add that the manufacturers of commercial airlines usually base their designs on previous models, whereas DoD contractors are more often required to make quantum leaps between models. The goal of a major system acquisition by the Defense Department is to provide the technology to support the strategy. Dr. Jacques S. Gansler, currently the Under Secretary of Defense (Acquisition and Technology), points out that the world and the strategy will undoubtedly change during the long period of time between the initial decision to develop a weapon system and actually fielding the system, which is often 10 to 15 years.

Nevertheless, the importance to the national defense of having the technological advantage cannot be discounted. Military historians quickly point out that technology often provides the advantage in time of war. Former Secretary of Defense William Perry has cited people, readiness, and technology as the advantages the U.S. had during Desert Storm. Other examples include the evolution of fighter aircraft by both sides during World War I that turned the tide of the air-to-air combat two or three times; the invention of radar by the British, which prevented Germany from attaining air superiority because the British could concentrate their limited fighter forces against the German bomber raids, thus precluding an invasion of England; and the development and use of the V-2 buzz bombs late in World War II, which could have drastically changed the complexion of the war in Europe had they been introduced a year earlier.

In the post–Cold War era, where the threat now comes from multiple sources, an evolutionary acquisition approach is required. Today’s acquisition strategy is driven by rapidly changing operational requirements. This means that new capabilities must be selected, developed, and integrated into current forces using a block upgrade approach. Under this acquisition strategy the government will also be able to benefit from the changes to technology available in the commercial sector. For an evolutionary acquisition strategy to be effective, the acquisition community must look for ways to cut time out of the process by modifying the current sequential approach to acquiring goods and services.

Traditionally, the acquisition planning process has followed a gradual building up of the bodies of knowledge to be used to define the performance requirements as well as the contract and source selection information needed to award a contract. Developing an acquisition plan has traditionally been a push process—large batches of paper-based data are collected until they are complete and then assessed, placed in the proper format, and approved before being pushed to the next checkpoint, the solicitation. During this phase data are refined and information holes filled. When this process is complete, data are again placed in the proper format and, when approved, are pushed to another checkpoint on the path to evaluating sources. The difficulty with this approach is that it treats the information required as though it were a monolith, either entirely ready or entirely not ready for the next phase.

Following the traditional method has created queues of work in process everywhere, so that personnel have not always been productively engaged. Time is money, and backlogs of information waste time, cost money, and represent lost opportunities to reduce the cost of procurement. As noted above, past practices meant that information about the subject was held until it was virtually complete, and then was transferred to the next activity, where it was used by the next body of information to complete its part of the task. In reality, the data needed by another member of the team may be available and could be used concurrently. Overlapping of work will reduce the process time. By using modern electronic data interchange technology, which includes document imaging and workflow process technology, the phases leading to the development of a solicitation can overlap rather than follow a sequential approach. Overlapping relies heavily on the use of partial information and affects how the information is accumulated and how the user can pull it when it is needed.

Traditionally, most accounting and control systems have measured only cost. This has led management to measure performance on the degree of cost-effectiveness rather than on time. Only recently has procurement lead time been analyzed and monitored with the same fervor as cost. “It is essential that nonfinancial people also understand and be able to deal quantitatively with the financial value of time. Only when they are fluent in this language will they be able to challenge cost systems that delay development constructively.” Previously, when schedules were not met, attempts were rarely made to determine the impact on the cost of the operation. Improving the time taken to develop a product can be turned into an advantage for the ultimate user.

The just-in-time (JIT) movement has forced a reevaluation of our thinking. In manufacturing, JIT places emphasis on shortening the acquisition cycle, which results in reduced inventory requirements, especially the work-in-process (WIP) inventory. Benefits of just-in-time manufacturing are not limited to the reduction in the size of inventories; more important, JIT has forced the manufacturing sector to be more responsive to what the customer wants, when, and where. JIT reduces factory lead time so that orders are filled faster, mistakes corrected sooner, and forecasting becomes less critical. EDI is allowing the factory to be more responsive to the marketplace.

Sharing data systems means that JIT techniques can also be applied to transferring information between bodies of knowledge during the acquisition planning process. The pull concept of JIT can be employed to obtain partial information. In the traditional procurement process, information was pushed downstream whether or not the recipient was ready to use it. It also meant that the recipient could not use the data until it was pushed to him or her. On the other hand, under a pull concept every person on the acquisition team can quickly exchange information regardless of where he or she is in the organization or is located geographically.

Using partial information requires the members of the acquisition team to be connected to each other electronically. Real-time communication is essential. “The effective use of partial information requires and supports the concept of close-knit teams.”Figure 3-2, Overlapping and Non-overlapping Functional Tasks, illustrates how overlapping affects the point in time when information is available to another function. In the example at the top of the figure, the next activity cannot start until complete information is pushed to the next function. The 50-percent overlap example shows the pulling of information from the other function prior to completion of the task. Because the information is incomplete, communication must go both ways for clarification and to provide feedback on how well it serves its intended purpose. The last example shows a close working relationship, with the two tasks starting at the same time and being performed concurrently.

Useful multimedia tools include audio and video teleconferencing and electronic white boards, along with the Internet and an extranet. There are both formal and informal opportunities for overlapping. Formal, as the name implies, means that procedures or tasks are part of an established communications network. Informal opportunities for overlapping arise every day as circumstances demand. A member of an acquisition team can meet his or her needs for data by using an electronic interface linked with other team members. Partial information may either be pushed to other members of the team or pulled from a common database. The pull approach can be ingrained in the development team’s normal operating procedures by making it clear that it is the responsibility of the downstream function to ask for whatever information is needed. By making this method the standard way of doing business, tasks will get started sooner, and the time required to issue the solicitation will be compressed.

Figure 3-2 Overlapping and Non-Overlapping Functional Tasks

The acquisition team members must be the ones to initiate the transfer of data. They should look for opportunities where they can compress the process by asking such questions as:

• What is the bare minimum of information needed to start the next task?

• What is the earliest date this information can be made available?

• Are there assumptions that are accurate enough to begin work?

• Will the likely consequences of a particular mistake be large or small?

• Can one save enough time by starting early to allow for making a mistake?

• Who could use the information I have to enable them to initiate another one of their tasks?

Acquisition team members must also consider the risk associated with the possibility that the partial information is incorrect and should develop contingency plans for this eventuality.

The difference between the traditional push method of information management and an accelerated pull approach, which is designed to cut administrative lead times, is a matter of leadership within the acquisition team. In DoD such initiatives as Alpha contracting and the Air Force’s One-Pass Contracting Process have been implemented to cut administrative lead times. Both concepts stress early and continuous parallel involvement by the buyer and contractor in the acquisition process, including jointly defining and refining requirements.

An initiative by the Air Force’s Launch Systems Program Office presents an example of how the administrative lead time can be reduced through overlapping and transferring partial information. Motivated to meet the goals of the National Performance Review, the Delta II Integrated Product Team (IPT) set out to reengineer the traditional Engineering Change Proposal (ECP) process. Using Program Evaluation Review Technique (PERT) and Acquisition Management Information System (AMIS), they analyzed the cycle time of six ECPs, averaging over $700,000, that had followed the traditional ECP process (see Figure 3-3). The Delta II IPT discovered that it took an average of 46.5 weeks for these ECPs to navigate the standard administrative maze between the validation of need and contract award.

Figure 3-4, Overlapping the ECP Process, illustrates how the ECP process was reduced to 18.21 weeks based on changes initiated by the Delta II IPT. The initial goal of the Delta II IPT’s reengineering initiative was to reduce the ECP process cycle time by at least 50 percent. To achieve this objective, they implemented a comprehensive training program that emphasized teamwork, accountability, project management, and empowerment. Overlapping in the revised process forces the government to work directly with the contractor early in the cycle, beginning with joint participation in defining the requirement. Under the new procedure the contractor works closely with the government during each step in the contract change process rather than waiting until information is pushed back and forth, as in the traditional ECP process. The IPT communicates continuously to develop jointly the request for proposal and then reach a consensus on the hours and materials required to complete the project before the proposal is actually submitted to the government. The result is that after the proposal is received, the government knows what it contains, which makes negotiating and writing the contract change document much easier. The six ECPs that followed this new process were then examined and found to have taken an average cycle time of 18.21 weeks. The net result of overlapping and using partial information was a 60-percent reduction in the administrative lead time.