Peter Griffiths, KPMG - Independent View on the whole of defence logistics

ADM Supply Chain Summit Opportunities for the Next Generation of Logistics Evolution in the Australian Defence Peter Griffiths December 2013

1 © 2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Overview

• KPMG’s Global Defence Network • Defence Logistics Baseline Observations

• Focus on Global Defence Transformation/Reform programs:

o Canadian Defence Renewal Program 2012 o UK’s reform of Defence Equipment & Support (DE&S) o US Defence Logistic Agency (DLA) – Business

Transformation o Royal Netherlands Air Force – LEAN

• Opportunities for the ADF

• Lessons and insights from major Transformation and Reform

Program Experience

Presenter

Presentation Notes

Pilots of a CH146 Griffon, Canada


Steve Clark Australia

Peter Chew New Zealand

Bill Phillips & Miles McNamee

USA

Satya Ramamurthy Singapore

Ken Cochrane Canada Bernard Brown

United Kingdom

Chrystelle Roger France

Heinrich Rentmeister Germany

Amber Dubey India

Tore Eriksen Norway

Lars Gonnsen Denmark

Luuk Aarts Netherlands

Mauricio Endo Brazil

Makgotso Letsitsi South Africa

700 + Professionals 100 + Former Military

20 Countries

Bart Walterus Belgium

Asa Hannson Sweden

David Scott Czech Republic

Alejandro Villarreal Mexico

Yoshihide Takehisa Japan

Pierluigi Lonero Italy

KPMG’s Defence Network

Mercedes Sanches Varela European Union

David Bluck NATO


Baseline Defence Logistic Transformation Program

The program • 2009 White Paper (“Force 2030”) to be delivered in 2019 • Consolidation: 24 wholesale sites to 7 primary sites • Enhanced warehouse management technology (AIT and WMS) • Adoption of new logistics service delivery contracts ,

succeeding the DIDS contracts • Improved inventory accuracy and visibility • Reform of Land Materiel Maintenance • Organisation-wide process and operating model reform


KPMG has provided support

to Defence in 4 of the 9 countries

who are jointly funding the program. SUPPLIERS &

MANUFACTURERS

FOREIGN MILITARY SALES

REGIONAL VENDORS

PRIMARY TRANSPORT

WHOLESALE LEVEL

WAREHOUSES

CUSTOMERS

ARMY UNITS

NAVAL UNITS & SHIPS

AIR FORCE SQUADRONS

RETAIL LEVEL

WAREHOUSES

SECONDARY TRANSPORT

TERTIARY/ LOCAL

TRANSPORT

DISPOSAL DISPOSAL DISPOSAL

SUPPLY WHOLESALE RETAIL CUSTOMERS

ADF Defence Logistic

Transformation Program

(Storage & Distribution)

Network consolidation

Facilities rationalisation

Service delivery model

Channel strategies

Modernisation of the network:

• New facilities

and equipment • Consolidated

footprint enables improved facility performance

Use of technology:

• Warehouse

management systems

• Distribution systems

• Integration with suppliers

User outcomes: • Projected savings of A$350m over 10 years • Improved services delivery from new, purpose built

facilities • Improved visibility over demands and demand

satisfaction • Optimal inventory holdings • Facilitates better collaboration with suppliers, and

increase understanding of end-user requirements • Lower total logistic costs (including supply chain and

inventory holding costs)



In fact the Defence Supply Chain is complex and multi faceted operating across different lines to reach end customers who may be static or dispersed


Managing Across this Supply Chain Provides Multiple Opportunities for Optimisation

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Tier 1 Customers Navy Army Air Force JOC

Tier 2 Customers Ships Units Aircraft

Tier 2 Suppliers

Tier 1 Suppliers OEMs MCs FMS

Tier 3 to Initial suppliers

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JLC

DMO

DSRG

Managed Process Links

Not-Managed Process Links

Non-Member Process Links

Monitored Process Links At each level of the network there are synergies and opportunities to consolidate buying and logistics from common suppliers

Source: Douglas M. Lambert, Editor, Supply Chain Management:



• Acquisition of a proven, scalable Warehouse Management System (WMS) - integrated to MILIS which drives significant productivity improvements in the wholesale warehouses, supported by effective bar coding of inventory, capture of volumetric information.

• Adoption of Automated Identification Technology (AIT) – this investment is well under way has been employed to:

– Barcoding - Retrospectively bar code the wholesale inventory to enable scanners to read individual and packaged inventory.

– Improved Stock Management (ISM) – Improved and method of reading, tracking and assuring slow moving inventory using AIT.

– Consolidation of Stock - in primary locations (ie one location only within the wholesale site versus multiple in many cases today).

• Automated Data Capture (ADC) to Units – this investment extends

either wireless mobile data readers or “tethered” data readers which upload through a docking station to major units to enable efficiencies in workforce. This investment are is planned for roll out in 2012/13 and 2013/14 and largely involves the provision of hardware and mobility capability, coupled with retrospective barcoding at the unit level.

aRFID security

tags

aRFID asset tags


Defence Support & Reform Group (DSRG) – Procurement Reform • Strategic Review recommended creation of Shared Services Functions for Finance, HR and

Non-Equipment Procurement (NEP) • Creation of procurement functions with a AU$9B p/a spend within DSRG • Non-Equipment procurement includes all non-operational expenditure including corporate

support, estate management, IT, travel and 18 other national categories of spend. • DSRG have undertaken the design, consultation, development and implementation of;

o Wholly new Operating Model, (incl. Strategy, governance, policy and procedures) o Organisation design, (incl. Roles, responsibilities, performance management) o New Procurement methodology, tools, processes and analytic capability

• Fundamental change of the services provided:

Baseline Non-Materiel Procurement Reform Program

Small team of “internal procurement process advisors”

Centralised and “customer” service led procurement and contracting organisation

Provider of advice and guidance to procurement activities led by individual

Defence Groups and Services

+200 strong central capability leading and accountable for delivering procurement and

contracting benefit programs

Inconsistent interfaces and process duplication across Defence procurement activities

Consistent application of leading processes and market approach delivering leverage and

economies of scale

Presenter

Presentation Notes

From Andy Brightmore: They did not choose to implement 2 key areas we thought would have added significantly to the implementation process: Adopt a “lean procurement “ cell to work on each of the transitions from Defence branch to central organisation in mapping out the current processes and transitioning all activities as newly defined and more efficient processes. We conducted this activity on two occasions to great success, especially in forming the new service led relationship back to the Defence customers, but the central team did not have a great appreciation for Lean to make this standard practice We also suggested using KPMG as a small procurement capability cell along the way to champion and deliver a number of quick win projects. Partly to show the new customers the immediate value being realised through this new methodology, partly to deliver new savings to offset our costs at lot earlier in the program but mainly to provide an on-the-job mentor and training program to their newly transitioned (and very inexperienced) resources. This was not taken up due to the client believing they could not handle this additional complexity whilst the main changes were being designed and implemented


DMO SMART Sustainment Program seeking to deliver: • Transformational Change – focused on either the demand side (capability manager)

or supply side (DMO and industry) of the way sustainment work, or ithe capability itself, is managed.

• LEAN Deeper Level Maintenance - applying proven process improvement techniques to identify the critical needs of the customer, improve processes by eliminating waste from maintenance processes and supply chains.

• Planning - better forecasting of availability requirements to allow for appropriate maintenance intervals, smarter purchasing decisions and fewer ‘reactive’ and typically more expensive support demands. Supports Lean maintenance improvements.

• Asset Withdrawal - linked to demand and inventory management. Identification of areas where too many serviceable items are being held and maintained in stock, or where fleet elements could be retired and the existing workload transferred to other ADF assets that operate more cost-effectively.

• Contract Renegotiation and/or Retendering - establishing savings through competition, renegotiating contracts to include incentives for suppliers to make efficiency improvements.

• Inventory Management - better modelling and forecasting of inventory requirements to optimise inventory holdings and encourage smarter purchasing decisions.

Baseline Inventory and Maintenance Reform in DMO

Presenter

Presentation Notes

From Andy Brightmore: They did not choose to implement 2 key areas we thought would have added significantly to the implementation process: Adopt a “lean procurement “ cell to work on each of the transitions from Defence branch to central organisation in mapping out the current processes and transitioning all activities as newly defined and more efficient processes. We conducted this activity on two occasions to great success, especially in forming the new service led relationship back to the Defence customers, but the central team did not have a great appreciation for Lean to make this standard practice We also suggested using KPMG as a small procurement capability cell along the way to champion and deliver a number of quick win projects. Partly to show the new customers the immediate value being realised through this new methodology, partly to deliver new savings to offset our costs at lot earlier in the program but mainly to provide an on-the-job mentor and training program to their newly transitioned (and very inexperienced) resources. This was not taken up due to the client believing they could not handle this additional complexity whilst the main changes were being designed and implemented

10 © 2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

KPMG and the KPMG logo are registered trademarks of KPMG International.

Baseline Status as at 2013

Status Summary • The reform initiatives have created an

environment of improved visibility and understanding of Defence’s supply chain, which has driven and will continue to deliver efficiencies and service level improvement.

• Creates a platform for further reform and development, to meet likely Government direction from both the Commission of Audit and subsequent Defence White Paper.

• Acknowledging its flaws, the success of SRP from a supply chain perspective was the ability to argue whole of logistics reform elements supported by rigorous analysis. This yielded significant reform investments enabling once in a generation improvement.

What Has Not Been Achieved • Silos. Reform has been furthered in the

traditional Defence siloes – DMO have sought to address inventory and maintenance reform (SMART programs), DSG have led non equipment procurement, JLC have addressed wholesale logistics, the Services are each seeking efficiencies in delivery of support functions to sailors, soldiers and air crew.

• Governance. Fragmented accountability arrangements mean that no one has responsibility for whole of supply chain performance and outcomes.

• Logistics IT Systems. It remains the case that Defence has major proliferation of Logistics systems, which are not all integrated, operating from common data sources and are expensive to run and maintain.



Defence Reform Canadian Defence Renewal Program

Canada’s Defence Renewal Program is about operational refocus, innovation and cost efficiency: sustained improvement is underwritten by a regime for deep cultural change

• Defence Renewal Team established, 2012 • Projected reinvestment opportunity: $750M-1.2B annually, by 2017/18 • 9 renewal actions around Performance and

Organisational Practices • Staged implementation of changes, with the following key

outcomes desired by 2018: o Focus on front-line capabilities & readiness: reduced overheads and

process inefficiencies o Regime for performance metrics and targets in place o Technology and innovation to enable process improvements o Culture of continuous improvement

• Projected Performance reinvestments (P/A by 2017/18):

Operations & Training

Maintenance & Materiel

Information Management &

Technology Infrastructure Personnel Management

Systems

$100-190M $280-450M $35-70M $110-185M $50-85M $175-220M



Reform to materiel management in the UK: • DE&S strength 17,000 people, 173 sites, annual budget of £40B • Outcome of the 2009 Gray Report. Key recommendations:

o Relationship between HO and DE&S o Commercialisation of the operating model

• Reform within CAAS, and GOCO: o Strong interdependency o CAAS’ role effected by developments within CAAS

• CAAS. Addressed primary reform of project assurance within DE&S, by:

o Improvement of cost accuracy o Rejuvenation of the assurance organisation o Skilling of the workforce

• GOCO. Financial and commercial advisory (‘Procurement’ and ‘Materiel Strategy’)

o Fundamentally challenges delivery of procurement & support for Defence Materiel: “privatisation”

Defence Reform UK - Defence Equipment and Support (DE&S)

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The DLA’s financial accounts could not be relied upon • Manages approximately US$45B, p/a • Supplies (consumables, non-equipment) and services to US forces,

worldwide • 26,000 employees, in 48 US States and 28 countries • 8 supply chain operations: Aviation, Maritime, Land, Subsistence, Medical,

Clothing/Textile, Construction and Energy • 5 year transformation program:

•Achieved Federal Financial Management Compliance (FFMIA) •Accomplished successful rollout to more than 4,400 users •Achieved 99.7 percent system availability •Achieved $72 million in cost savings over legacy systems •Provided 100 percent supply chain interoperability with services •Reduced Logistics Response Time (21 days to 15 days) •Reduced order status notification (over 24 hours to 4 hours) •Achieved $180 million in cost avoidance by reductions in forecasts •Delivered Sales & Operations Planning to optimize service and cost.

Defence Reform Defence Logistic Agency (DLA)



Key challenges facing the Royal Netherlands Air Force • Budget cuts, rising costs, improving safety and operational

capability • Sustain positive changes for the long term • Required a platform for continuous improvement Approach • Empowerment of the workforce to make changes • Delivery of internal LEAN proficiency through ‘train the trainer’

approach • Establishment of a LEAN Centre of Excellence

Benefits • Over 250 people (from Chief of Air Force to Mechanics)

trained in LEAN • More than 60 process improvements which reduced cost

and increased efficiency delivered in the first 9 months (maintenance lead time: 19 weeks to 11)

• Other benefits (i.e. Military Air Traffic processes) • LEAN adopted across RNLAF

Almost on a daily basis, the LEAN program helps us make decisions and reform processes in our organisation.

“ “

Generaal-majoor Hans Wehren Deputy Commander, Royal Netherlands Airforce

Defence Reform Royal Netherlands Air Force


The Defence Logistics Companion Review to the White Paper in 2009 identified significant opportunities to deliver efficiencies, effectiveness and maturity in the Retail network and improve further Defence’s operating costs. Specifically: • synchronise delivery of Retail logistics services with Wholesale services in JLC and DMO presence

in the retail network across services. The prize here is significant further rationalisation of Defence Inventory holdings building upon the achievements of the DMO Inventory Reform Program;

• improve the planning and execution of the tasks from fleet managers and SPO’s to JLC whole sale logistics finishing in retail holdings supporting war fighters, and use common operating pictures to drive decision making; and

• optimise the DSRG components of the Retail network in accordance with their reform objectives savings targets, and enhance end-user Retail and Wholesale support requirements including migrating former RAAF and Navy warehouses to Wholesale.

Opportunity – Managing the Retail Network as an integrated component of the Defence Network

Unit Stores OEM/FMS Plants Defence Industry Supplier networks 2nd Line DC Wholesale DC JLC


It remains true that 60 to 80% of whole of life costs are incurred in the sustainment of a capability, including mid life upgrades, yet most active management effort is spent during the acquisition phase, and too little consistent attention is put upon managing the through life cost profile of capability. • This was one of the driving forces behind the creation of the DMO bringing together the DAO and

sustainment elements from the Services to drive whole of life awareness, data capture and management. This was to be achieved through the establishment of SPO’s who would drive this view of capability management.

• Much has been done to improve this planning in differing divisions within DMO and yet there remains significant variability in the maturity of these management approaches, including involvement of industry partners, OEMs and other contractors to deliver this support.

• Sustainment is also particularly susceptible to Government funding pressures, including quite arbitrary cuts in some celebrated cases and is afforded less attention than more high profile acquisition programs.

• SPO’s and Fleet managers are not always well supported by the Services ability to describe demand in any phase of the force generation cycle and therefore commit to baseline activity programs, which can be built upon over time.

• Lastly there are systems constraints to achieving the information all parties require to make more informed and cost aware decisions.

Opportunity – Improved Cradle to Grave Planning and Management


Opportunity – Improved Cradle to Grave Planning and Management

Such as approach need to be supported by: reliable information on forecasting, new capability introductions, contracts and financial performance. It supports all areas of the operations including finance, merchandising, and supply chain.


Central Opportunity. Establishing logistics nodes at, or near, the major training areas such as Cultana, Shoalwater Bay and Bradshaw would achieve the purpose of bringing the Brigade to the equipment, not with the equipment (the ‘Hertz’ concept). Development at a major regional centre nearby (Port Augusta, Rockhampton, Katherine) should have additional benefits over locating the node on the training area with respect to land use, services costs and workforce availability. Key elements: • Logistics nodes would provide a vehicle for combined arms formations or elements to mount to and

from an exercise, return loan equipment and acquire required support functions. • This is similar to the mounting base concept implemented at JLU(SQ), JLU(NQ) and JLU(N) under

DLTP. • Nodes could also provide the opportunity to incorporate warehousing and maintenance facilities,

possibly along with EO storage and fuel storage. • Implementation of this concept would afford Defence the opportunity to take a portfolio view of

potential savings to fund establishment investments. • Doctrine, policy and process to adapt to the new operating model, including alternate employment

concepts to maintain technical mastery for ADF logistics personnel.

Opportunity – Enhanced Use of Pools to Support the Raise, Train and Sustain Functions


Central Opportunity. Establish Managing Contractors to take accountability for the delivery of DMO Programs with the specific objectives to accelerating the effective acquisition or upgrade of new and existing capabilities. Such a model would need to comply with Defence Governance and approval requirements but would be specifically incented to reduce total acquisition costs and to propose methods of streamlining unnecessary bureaucracy. Key benefits of such an approach: • This is different to the GOCO model under review in the UK and proposes more contained application

of industry parties to deliver measurable results within clear areas of expertise. • Takes maximum advantage of industry strengths currently underutilised in Defence in complex

program management, cost containment linked to schedule incentives, the need for demonstrable quality standards and breaking down bureaucratic constraints to achieving the desired outcomes.

• Allows for clearly defined KPI’s supporting a DMO which is managing a series of MC’s and other contracts to deliver new capability and sustainment.

• Leverages a proven model within DSRG where Defence has been engaging MC’s on infrastructure projects for many years to great effect.

• It is step beyond appointing commercial, legal and technical advisers under the current model which produces variable results to truly embrace outsourced service provision models.

Opportunity – Adopt and Proliferate the Managing Contractor Model on a Program Basis


Large-scale transformation must be supported with the appropriate program infrastructure to support sustainable change and measured benefits realisation

Key observations from major reform programs

BASELINE FIRST “The devil’s in the detail.”

PROGRAM MANAGEMENT

“Plan well, centrally coordinate and implement aggressively!” “Interdependency management between programs is essential.”

FUNDING ARRANGEMENTS

“Seed funding must be supported by a business case, every time.”

BENEFITS “We took the benefits from the hollow logs rather than implementing real reform.”

THE RIGHT PEOPLE

“We know that the program will take hits and shocks: this will detract from the program unless there’s strong and positive leadership at all levels.”

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“The devil’s in the detail.” 1

BASELINE FIRST • Lack of detail → unachievable targets • Baseline provides understanding of what’s potentially achievable • Integral requirement for the benefits realisation • Baseline must include the detail:

o Costs o Number of staff o Extant contract/supplier arrangements

(committed funds & delivery mechanisms) • Sufficient detail to be a good management tool • Apply consistent approach • Centrally consolidate, understand and own

IMPACT: • “Potential v Feasible”

• Intended benefits only partially realised


Presenter

Presentation Notes

CH-146 Griffon, Royal Canadian Air Force


“ Plan well, centrally coordinate and implement aggressively!” “Interdependency management between programs is essential.”

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PROGRAM MANAGEMENT • Central Program Management Office (PMO) • Governance: structured and transparent • Reporting:

o Decentralised reporting leads to leakage (benefits, milestones and budget) o Centralised, standardised reporting mechanisms → accurate and timely

benefit realisation and control of program costs • Planning:

o Thorough and detailed planning required: everything takes longer (IT enablement, unions, political environment, operational tempo)

• Maintenance of momentum: o Challenging (appointment/posting terms, operational, political) o Aggressive implementation

IMPACT: Delegation of responsibility of the benefit leads to “leakage”


Presenter

Presentation Notes

Canadian Leopard being loaded into an Antonov


“ Seed funding must be supported by a business case, every time.” 3

FUNDING ARRANGEMENTS • Seed funding:

o Centrally managed to prevent overruns and waste • Business cases:

o Required for every bit of seed funding o Centrally coordinated

• Program integrity: o Morphing with other extant initiatives

diminishes visibility and focus

IMPACT: To save money, you have to invest


Presenter

Presentation Notes

CH-147 Cormorant


“We took the benefits from the hollow logs rather than implementing real reform.” 4

BENEFITS • Baselining: essential ingredient • Benefits realisation:

o Robust and consistent mechanism for measurement o Must understand the business o Establish, test/review and apply early o Routinely report

• Centrally coordinated and managed • Management of the interdependencies

(don’t push cost elsewhere)

IMPACT: Failure to manage interdependencies leads to cost transfer.



“We know that the program will take hits and shocks: this will detract from the program unless there’s strong and positive leadership at all levels.”

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THE RIGHT PEOPLE • Senior leadership:

o Commitment and enforcement through KPIs • The people:

o KPIs filter down to lowest level of the organisations o Each person understands the purpose, timelines and role in the reform

• Industry partners: o Greater collaboration from Primes o External support for implementation teams

• Robust Change Management regime with strong communications, engagement and training

IMPACT: It takes a small group of nay-sayers and non-performers to undermine the program.


Presenter

Presentation Notes

HMCS Halifax FFH330

© 2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International).

Liability limited by a scheme approved under Professional Standards Legislation.

Contacts: Peter Griffiths Lead Partner Supply Chain KPMG +61 3 9288 5319 [email protected]

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