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Making Smart Procurement Decision

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Writer: Dr. Vivek Lall

Life Cycle Costing (LCC) is a tool which empowers the acquisition / procurement managers to make more informed decisions by enabling them to incorporate costs and benefits that occur over the lifetime of a product into their procurement decisions. To mitigate LCC evaluation challenges, the next step would be to move towards a Performance-Based Logistics (PBL) approach. The significance of PBL is that the OEM / supplier is compensated not on promise of performance nor on its cost: compensation is based on the actual performance of the product. PBL was introduced by the US Department of Defence (DoD) in 2001 for weapon system acquisition and logistics management. PBL was made mandatory the same year - its initial guidance was promulgated by the office of Secretary of Defence. The potential annual savings to the US DoD just from reduced inventory holding and transportation is estimated to range from US$ 2.8 - 3.7 billion annually.

Capital acquisition programmes of advanced aircraft / weapons platforms run into billions of dollars. It is well understood that in the case of major platforms, sustenance costs work out much higher than acquisition costs. Equipment purchased on the basis of initial cost, often, eventually turn out to be more expensive.

Life cycle costing


Costs such as fuel / energy consumption, maintenance and replacement of equipment or parts, consumables and disposal, all affect the ultimate price, yet have traditionally not been considered when selecting a product. Operations and support cost added to acquisition cost is the true measure of the cost of a platform.


Life Cycle Costing (LCC) is a tool which empowers the acquisition / procurement managers to make more informed decisions by enabling them to incorporate costs and benefits that occur over the lifetime of a product into their procurement decisions - rather than considering the initial capital cost of a product only. LCC is a comprehensive assessment of the total financial commitment associated with the platform, is an international best practice and is increasingly being used by governments (acquisition managers) across the world to make more informed procurement decisions.

In order to reduce its overall cost of ownership while increasing serviceability of equipment, PBL is an important tool with the Ministry of Defence, which must be made an established practice. In conjunction with the Defence Offset Policy, the OEM / supplier may be required to invest in setting up of facilities in India, thereby increasing both the service level assurance as also a developing a trained indigenous workforce. This tool incentivises the OEM to improve equipment uptime while lowering the logistic costs and results in savings to the purchaser. It is a win-win scenario for both the supplier and the purchaser.

While the upfront acquisition costs are relatively easier to estimate, getting a reliable and accurate estimate on how much the user shall have to spend in operating, maintaining and upgrading the equipment till its final disposal, involve complicated projections and calculations. Further, determining the useful life of a platform is generally difficult. If wear out is the determinant of life-length, then making estimates for a new, untried platform is a formidable challenge.

Accurate and dependable data essential for this purpose is difficult to come by for new equipment and technologies. However a combination of data from manufacturers, data from other operators and extrapolation from experience from other similar equipment can help in reasonable assessment. Since India has a major acquisition programme, it would be prudent to develop databases and analytical models to ensure cost effective long term ownership. This would also ensure economic asset management during the life cycle of the equipment.

A recent UK government report also cautions of the risk of obsolescence and says that the buyer should consider how to “oblige contractors to manage the risk of obsolescence throughout the life of a project, which might include in-built flexibility for aircraft and other equipment to accommodate upgrades”.

Capital acquisition programmes of advanced aircraft / weapons platforms run into billions of dollars. It is well understood that in the case of major platforms, sustenance costs work out much higher than acquisition costs. Equipment purchased on the basis of initial cost, often, eventually turn out to be more expensive

Performance-based logistics


To mitigate LCC evaluation challenges, the next step would be to move towards a Performance-Based Logistics (PBL) approach. As an alternative to the traditional system of owning both the equipment and the logistic chain, PBL brings in a new dimension to asset management and operations. The significance of PBL is that the OEM / supplier is compensated not on promise of performance nor on its cost: compensation is based on the actual performance of the product.

To draw a simple analogy, the concept would be similar to a comprehensive service contract for an automobile, where the car is operated by the owner, while the complete maintenance is taken over by the car manufacturer.

PBL was introduced by the US Department of Defence (DoD) in 2001 for weapon system acquisition and logistics management. The potential annual savings to the US DoD just from reduced inventory holding and transportation is estimated to range from US$ 2.8 - 3.7 billion annually.

Modern day platforms require a large inventory of sophisticated spares and commodities that are used to perform maintenance and upgrades to weapons and equipment. PBL improves the efficiency of the supply network by insuring the rapid delivery of the needed commodities and reducing storage and inventory costs.

PBL was introduced by the US Department of Defence (DoD) in 2001 for weapon system acquisition and logistics management. PBL was made mandatory the same year - its initial guidance was promulgated by the office of Secretary of Defence. The potential annual savings to the US DoD just from reduced inventory holding and transportation is estimated to range from US$ 2.8 - 3.7 billion annually.

While the upfront acquisition costs are relatively easier to estimate, getting a reliable and accurate estimate on how much the user shall have to spend in operating, maintaining and upgrading the equipment till its final disposal, involve complicated projections and calculations

It is estimated that savings to the US DoD in 18 programmes would range between US$ 16 billion and US$ 21 billion annually if performance-based logistics was applied across all applicable DoD weapons and equipment in the support area.

In order to reduce its overall cost of ownership while increasing serviceability of equipment, PBL is an important tool with the Ministry of Defence, which must be made an established practice. In conjunction with the Defence Offset Policy, the OEM / supplier may be required to invest in setting up of facilities in India, thereby increasing both the service level assurance as also developing a trained indigenous workforce.

Costs such as fuel / energy consumption, maintenance and replacement of equipment or parts, consumables and disposal, all affect the ultimate price, yet have traditionally not been considered when selecting a product. Operations and support cost added to acquisition cost is the true measure of the cost of a platform

PBL is designed to capture the platform’s efficiency and effectiveness through its lifetime. This tool incentivises the OEM to improve equipment uptime while lowering the logistic costs and results in savings to the purchaser. It is a win-win scenario for both the supplier and the purchaser.


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