Original Post Date: Tuesday, March 29, 2011

“I think we have an obligation to work with industry to ensure that our suppliers do not just remain world class in defence, but aspire to be world-class manufactures that can withstand comparison to other industries.”

Chief of Defence Procurement, Sir Robert Walmsley

Is this a practical proposition or is it a pipe dream?  The following excerpt from Dale Shermon’s Systems Cost Engineering attempts to make the case that this type of comparison is possible.

Many of the statements in proposals and marketing literature stating the superiority of a company are anecdotal or at best qualitative evidence. It has not been possible to quantify the productivity of industry to demonstrate that one manufacturer is more efficient than another.

In the ship building industry it is possible to benchmark commercial ship yards using a metric called Compensated Gross Tonnage (CGT). CGT measures the complexity of building a ship. It is calculated by multiplying the gross tonnage by the relevant CGT coefficient (calculated by the Organisation for Economic and Commercial Development [OECD]).  However, this is only applicable to this one industry. Other metrics exist in other industries, but what is really required is a single benchmarking technique and measure.

Benchmarking with Cost Normalization.  Forty years ago, PRICE Systems developed a metric that can be used to normalize cost and support the benchmarking practices needed to reach Sir Walmsley vision.  Manufacturing Complexity represents the normalized cost density of an item that has been manufactured. It has two dimensions: technology and productivity. Hence, more than one Manufacturing Complexity can exist. As aircraft are made using different technologies and by different companies, these have various complexity figures. However, if the technology is constant, the only dimension that changes is productivity. As a result, it is possible to compare the efficiency of companies that produce similar technologies.

Supplier Assessment.  One obvious and practical application of this technique is Supplier Assessment. This technique exploits the capability of parametric models to compare organization’s normalized cost density or Manufacturing Complexity. If, on paper, you have very similar proposals, how can you judge which organization will provide the best value for money? Heritage data will determine the level of development that is required and Operating and Support Cost will establish the Through Life Cost, but if these cannot differentiate the proposals perhaps the productivity of the companies should be considered. This is not a simple comparison, but with manufacturing complexity this can be achieved easily.

This process will lead to your suppliers knowing that you are able to control them; they will need more control on themselves. It will enable you to perfect your negotiation skill, leading to more success, as better negotiation material is utilised based on technology cost drivers. A parametric questionnaire is a possible tool to enable proposal validation in minutes.  All this information can be garnered at a very early stage in a project if required, providing better estimating accuracy for the purchased items. Normalization enables a bigger data sample as previous proposals received from the same companies can be compared. This in turn enables the establishing of trends. Are the suppliers becoming more or less efficient? Ultimately, these comparisons can be used to determine preferred suppliers.

Conclusion.  This method of benchmarking a project or company can be used for all environments. With the ability to move across environments it is possible to compare commercial and military organisations equally. Decisions and judgments can be made between Commercial and Military suppliers where no military competition exists.  It is possible to assess the productivity of an organisation or country at System, sub-system and equipment levels. The technique can be used to compare the whole cost or just the labour cost if that is the focus of your efficiency drive.

It is possible to determine preferred suppliers on a justified basis, or alternatively it is possible to demonstrate the efficiency of your organisation when the customer is skeptical about your productivity or your drive to improve productivity.

Finally, many organisations already have a license to use the PRICE models and over 8,000 people worldwide have been trained and are familiar with the PRICE methodology. This is not a new idea, PRICE has been established since 1975, but this new application of an established technique can help decision maker take the right decision regarding source selection cross industry and national companies. Alternatively, it can enable industry to demonstrate, with proof, that they are more effective than other solutions.