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Andreas Glas Kingston, February 2012

The German defense procurement and its relation to industrial policy. Andreas Glas Kingston, February 2012. Canadian – German Cooperation. Agenda. I. Situation in Germany. II. Review of Defense Procurement in Germany.

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Andreas Glas Kingston, February 2012

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  1. The German defense procurement and its relation to industrial policy Andreas Glas Kingston, February 2012

  2. Canadian – German Cooperation

  3. Agenda I. Situation in Germany II. Review of Defense Procurement in Germany III. Major Weapon Systems – CurrentandFuture Challanges IV. Contracting, Cooperation, Partnerships V. Discussion / Conclusion

  4. Situation: Reform ofthe Bundeswehr Realization of long-discussed, fundamental transformation International disasterandmilitaryoperations Afghanistan, Kosovo, etc. 1 Abolishmentofconscriptsystem – towards professional army 2 Significantreductionofthe Bundeswehr 3

  5. Situation: Future Operabilityofthe Bundeswehr The challange to do more with less “Everything for deployed forces” Level of Ambition Concentration on core competencies Capability requirements Budget Personnel Pressure to economize defense budgetAt maximum: Stable budgets 250.000  185.000 soldiers 76.000  55.000 public servants 328  <290 military bases

  6. Situation: Defense Procurement in Germany International comparison – defense procurement in per cent of GDP Massive shortages after Cold War, recently slight recovery USA Columbia UK France Germany * Weltbank - Weltentwicklungsindikatoren, 2012.

  7. Situation: Defense Procurement asEnabler? Purchasing is the key to profits (private sector) capabilities development (defense) Total procurementvolumeof defense procurement in Germany: €billion 10,31 (in 2009) * Quelle: Bundesministerium der Finanzen (2009), Einzelplan 14. ** Quelle: http://www.aerztezeitung.de/politik_gesellschaft/article/596224/motivation-keine-klaren-karrierewege-bundeswehr-aerzte-unattraktiv.html *** Quelle: Deutscher Bundestag (2010), Jahresbericht 2009. **** Quelle: http://de.reuters.com/article/domesticNews/idDEBEE62F02020100316

  8. Situation: Defense Industry in Germany Overview of defense industry companies and their products

  9. Situation: Defense Industry in Germany International comparison * Sipri 2008/2010. ** Weltbank - Weltentwicklungsindikatoren, 2012.

  10. Agenda I. Situation in Germany II. Review of Defense Procurement in Germany III. Major Weapon Systems – Currentand Future Challanges IV. Contracting, Cooperation, Partnerships V. Discussion / Conclusion

  11. Defense Procurement in Germany Development andphases 1 2 3 4 1950/1960s 1970/1980s 1990/2000s Today Modernization with German equipment “Peace dividend” Modern warfare Initial equipment • Problem tobuyequipmentfor ~300.000 soldiers. • Procurement of (old) equipmentfrom US / UK orotherforces(M47 tank, F-84 jet, Destroyer Fletcher etc.) • Technological problems (HS 30, Submarines etc.) • Development ofnewequipment in Germany (Leopard, Marder etc.) • TORNADO jet etc. • Foundationof German defense industry after WWII • Saleofold / supernumeraryequipment. • Fewnewprojects. • Onlysupplementationofexistingequipment. • (e.g. airconditionerforshipstooperateglobally) • Changedthreats(asymmetricwarfare) withnewrequirements • E.g. protectionagainstminesor IED; protected Transport andlogistics • Integrated communicationsanddatasystems etc. • Cold War • „Massive retaliation“ • Quick armamentofhugenumberofsoldiers • Cold War • „Flexible response“ • Mobile forcesforjointoperations • German reunification • Bundeswehr reduction • Economies in defense budget • Global operations • Disasterrelief • Peaceenforcement • Modern, specializedCOTS equipment

  12. Defense Procurement in Germany Structureandresponsibilities “Customer Product Management”(=defense acquisition process) Legal division between military user and civil procurment agency Legal procurement procedures and price law Ministry Civilacquisitionagency Military Industry • Functionaldemanddescription • Preferredapproachofcommercialavailableproducts(withoutdevelopment) • CompetitiveDialogue • Open / restrictedprocedure • Electronic procedure • Frame contract • Negotiatedprocedure • Art. 87a Grundgesetz • (Almost) nodirectcommunicationbetweenmilitaryandindustryaboutacquisitionprojects.

  13. Agenda I. Situation in Germany II. Review of Defense Procurement in Germany III. Major Weapon Systems – Currentand Future Challanges IV. Contracting, Cooperation, Partnerships V. Discussion / Conclusion

  14. Major WeaponSystems The challange of long life-cycles * Usage time estimated. ** Global Hawkwith 12 years R&D in USA *** Fullcapability after 7 years in service.

  15. Major WeaponSystems The challange of long life-cycles (navy)

  16. Major Weapon Systems The challange of small fleets. (Airforce)

  17. Major Weapon Systems The challange of small fleets. (Navy)

  18. Procurement ofservices • Great uncertaintyaboutpurchasingservices • Share (%) ofservicebundles on directspend25% / 20% • Feeledcompetencewhileprocurmentprocessofservices in contrasttogoodsorproduct-service systems • (Durchschnittliche Bewertung auf 5-Punkte-Likert Skala, 5 = sehr hoch, 1 = niedrig ) *: CAPS, 2003, übersetzt und leicht modifiziert; L = Dienstleistungen; DLb. = Produkt-/Dienstleistungsbündel; Mgt. = Management; Besch.= Beschaffung

  19. Major Weapon Systems Challange of life-cycle support costs In €million At least stablemeanstosupportexistingweaponsystems „Fear forfailures“

  20. Agenda I. Situation in Germany II. Review of Defense Procurement in Germany III. Major Weapon Systems IV. Contracting, Cooperation, Partnerships V. Discussion / Conclusion

  21. Contracting, Cooperation, Partnerships The range of possible forms of military-private cooperation. A transaction cost perspective. Market hybrid Hierarchy Long-term contracts (Performance-based Logistics)Public Private Partnership …

  22. HIL, BWI asexamplesfor PPP Successful outsourcing to Public-private partnership organizations Concentration on military core tasks • Bundeswehr 49% • Siemens 50,5% • IBM 0,5% • Responsiblefordomestic IT system • Volume €billion 7.1 • (insteadofformer Bundeswehr personneland (aging) IT equipment) • Bundeswehr 49% • Rheinmetall , KMW andothers 51% • Responsibleformaintenanceandreparisofarmyequipment • Availability of 70% • New contractupto 95% (depends on vehicle) • Savingsofover €million 200 in 5 years.

  23. PBL – Example „Heeresinstandhaltungslogistik“M&R for army combat vehicles • Daily availability of 70% of all army combat vehicles in Germany. • (Guaranteed by HIL) • Optimization of planned and proactive maintenance and repairs. • Maintenance levels 2 – 4. (first level is organic military support) • Institutional PPP. • No incentives but outcome-oriented service levels for each service. • Still cost-plus-structure, but measured with performance. (PBL i.w.S.)

  24. First approachestowards PBL HIL: Availability of 70% Status Quo Law P3C-Orion: Availability of 100% in 30d EC-135:Usagefee per flighthour Service contracts in defense Price law Profit formula Raytheon: Fixed pricewithincreasing MTBUR • Lack ofconfidence in PBL • Lack oftrainingandexperiance • Unclearcompetencies • No stringent processmodel • Noknowledgebase • BUT: Few but strikingsuccessstories (Heron 1-leasing, EC 135 etc.) … (turbineavailability)

  25. PBL – Exampleradarsystemof Marineflieger „Full Service“ „Improvements 3F“ Performance development in terms of MTBUR of the radar system (flight hours) • Fixed Price Contract (10 years) ~ First half of intended usage time. • Internal target performance with 6sigma philosophy and new quality management approach. (changes allowed “form fit function”) • Fixed Price of flight hour with increasing performance measure

  26. Agenda I. Situation in Germany II. Review of Defense Procurement in Germany III. Major Weapon Systems – Currentand Future Challanges IV. Contracting, Cooperation, Partnerships V. Discussion / Conclusion

  27. Conclusion – Somelessons? German approach: Cooperationaskeyfor defense procurement Outsourcing Insourcing Cooperation Of military core tasks? Of military core tasks? Of military core tasks? (Efficient) support? (Efficient) support? (Efficient) support? Hitherto via public private partnership institutions Future: More and more long-term contractual agreements But requirement for knowledge database, structered learning, pro-active management

  28. Conclusion – Somelessons? Future? Korvette 131? (Multi-role combat ship 180) Multi-Role-Helicopter Dockship?

  29. Thankyouforyourattention Discussion • Competence Network PBL • Research Center for Lawand Management of Public Procurement • Bundeswehr University Munich, Germany • Werner-Heisenberg-Weg 39 • 85577 Neubiberg b. München • Telefon:+49 89 6004-3790 • andreas.glas@unibw.de • www.unibw.de/pbl

  30. Aviation Spare PartsFirst approaches towards PBL in Germany From Quality to Performance • Former Procedure: • Service provider managed stock (CP).Basis: INPUT: Working hours, value of stock, required stockage space etc.) • Public Procurement Agency bought parts in dependency of demand. • (oftentimes in very small lot sizes) • Low performance, often stock outs. • Trouble with obsolescences. • Some parts with delivery time over 365d. • Today´s Procedure: • Service provider manages stock and spare parts procurement on basis of CP. • BUT: Performance is measures with KPI: Delivery time. • Public Procurement Agency only involved in some high-value / high-risk categories. • Contractor allowed to optimize stock.

  31. Aviation Spare PartsFirst approaches towards PBL in Germany From Quality to Performance • Delivery Time: • 85% of all parts within 1 day. • 97.5% of all parts within 3 days. • 100% within 30 days. The change in the perception of performance led to a mind-shift at the contractor and customer side. Decrease of “cannibalization” in operating air force units. Increase of “Repair turn around time” with direct impact on the air force fleet availability. Nevertheless: Still a CP-Contract due to high risk of obsolescence and importance for the robustness of forces. (PBL i.w.S.)

  32. PBL – Example Eurocopter „Parts by the hour“ „Repair by the hour“ „From Nose to Tail Worry-Free“ • Customer buys guaranteed performance: • Function: Guaranteed service response time (repair, maintenance etc.) • Availability: Spare parts, immediate support teams, exchange turbines, helicopters … • Results: Flight hours, Pilot training hours…. • Benefit for the customer: • Planning and cost reliability with regular payments • Optimized mission readiness. • Problem: Forecast of utilization profile(Which mission, when, where?) • Full service possible.

  33. PBL – Example EurocopterPilot Training in the German Army „From Nose to Tail Worry-Free“ • Support of a training fleet of helicopters in a military site. • Payments for flown flight hours on basis of a fixed price. • Weather (abortion) risk (<24hrs) at the contractor (!) Managing board Once /year Controlling committee twice/year Operational Planning Team Cyclically(monthly) User(with IT-System) When Used • Very good feed back from both sides. • Success factors: Service orientation. • Enormous improvements in terms of efficiency / effectiveness cp. to CP-Contract. • Fixed Price of Flight Hour  PBL i.n.S.

  34. PBL – Example Radarsystem „Full Service“ „Improvements 3F“ • Customer awarded a full-service-contract for the radar-module of the P3-C Orion. • Key Performance Indicator: • Increasing MTBUR (Reliability) over contract-terms • Fixed Price Contract • Contractor: • Allowed to improve the radar-module without notice as far as • Form • Fit • Function is equal • to pre-improvement status. • Further improvements possilbe (e.g. cables) and issue of negotiations.

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