1

The German defense procurement and its relation to industrial policy

Andreas Glas

Kingston, February 2012

2

Canadian – German Cooperation

3

Agenda

II. Review of Defense Procurement in Germany

I. Situation in Germany

III. Major Weapon Systems – Current and Future Challanges

IV. Contracting, Cooperation, Partnerships

V. Discussion / Conclusion

4

Situation: Reform of the Bundeswehr

Realization of long-discussed, fundamental transformation

1

2

3

International disaster and military operations

Afghanistan, Kosovo, etc.

Abolishment of conscript system – towards professional army

Significant reduction of the Bundeswehr

5

Situation: Future Operability of the Bundeswehr

The challange to do more with less

Personnel Budget

Capability requirements

250.000 185.000 soldiers76.000 55.000 public servants

328 <290 military bases

Pressure to economize defense budgetAt maximum: Stable budgets

“Everything for deployed forces”Level of Ambition

Concentration on core competencies

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Situation: Defense Procurement in Germany

International comparison – defense procurement in per cent of GDP

Massive shortages after Cold War, recently slight recovery

* Weltbank - Weltentwicklungsindikatoren, 2012.

USA

Columbia

UK

France

Germany

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Situation: Defense Procurement as Enabler?

Purchasing is the key to profits (private sector) capabilities development (defense)

Total procurement volume of defense procurement in Germany: €billion 10,31 (in 2009)

Increase in efficiency in per cent

Economies in €million

Equivalent to:

1,0 % 103,1Development costs for platform Eurofighter :

(€million 135 Mio. in 2009) *

2,0 % 206,2Shortage of military doctors:

Equivalent to 69% of requird doctors (in 2010: 600; Educatoin and training € 500.000/doctor) **

3,0 % 309,3Finance of defence research and development insitute:

€million 275 (in 2009) *

4,0 % 412,4Civilian reconstruction in Afghanistan:

(German paid means per year €million 430)***

5,0 % 515,5Development of Airbus A400M:

Equivalent to 79,3% of surplus development costs (€million 650 in 2010)****

* 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

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Situation: Defense Industry in Germany

Overview of defense industry companies and their products

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Situation: Defense Industry in Germany

International comparison

* Sipri 2008/2010.** Weltbank - Weltentwicklungsindikatoren, 2012.

USA

Russia

Germany

France

Netherlands

GB

Italy

Spain

China

Sweden

Canada

Israel

Poland

Swiss

7888

6733

3850

1557

1481

1071

860

803

564

472

227

224

169

144

Global Arms Trade 2006 US$billion*

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Agenda

II. Review of Defense Procurement in Germany

I. Situation in Germany

III. Major Weapon Systems – Current and Future Challanges

IV. Contracting, Cooperation, Partnerships

V. Discussion / Conclusion

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Defense Procurement in Germany

Development and phases

1950/1960s 1970/1980s 1990/2000s Today

1 2 3 4

Problem to buy equipment for ~300.000 soldiers.

Procurement of (old) equipment from US / UK or other forces (M47 tank, F-84 jet, Destroyer Fletcher etc.)

Technological problems (HS 30, Submarines etc.)

Initial equipmentModernization with German equipment

“Peace dividend” Modern warfare

Development of new equipment in Germany (Leopard, Marder etc.)

TORNADO jet etc. Foundation of German

defense industry after WWII

Cold War „Massive retaliation“ Quick armament of huge

number of soldiers

Cold War „Flexible response“ Mobile forces for joint

operations

German reunification Bundeswehr reduction Economies in defense

budget

Global operations Disaster relief Peace enforcement Modern, specialized

COTS equipment

Sale of old / supernumerary equipment.

Few new projects. Only supplementation

of existing equipment. (e.g. air conditioner for

ships to operate globally)

Changed threats(asymmetric warfare) with new requirements

E.g. protection against mines or IED; protected Transport and logistics

Integrated communications and data systems etc.

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Defense Procurement in Germany

Structure and responsibilities

Legal procurement procedures and

price law

“Customer Product Management”

(=defense acquisition process)

Competitive Dialogue Open / restricted

procedure Electronic procedure Frame contract Negotiated procedure

Demand analysis

Development

Procurement and implementation

Usage phase

Functional demand description

Preferred approach of commercial available products (without development)

Legal division between military user and civil procurment agency

MilitaryCivil

acquisition agency

Ministry

Industry

Art. 87a Grundgesetz (Almost) no direct

communication between military and industry about acquisition projects.

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Agenda

II. Review of Defense Procurement in Germany

I. Situation in Germany

III. Major Weapon Systems – Current and Future Challanges

IV. Contracting, Cooperation, Partnerships

V. Discussion / Conclusion

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Major Weapon Systems

The challange of long life-cycles

Leopard 2*

PzHaubitze 2000*

Korvette 130***

Submarine 212A

Euro Hawk**

Eurofighter*

A 400M*

0 10 20 30 40 50 60 70 80 90 100

R&DProductionUsage

* Usage time estimated.** Global Hawk with 12 years R&D in USA*** Full capability after 7 years in service.

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Major Weapon Systems

The challange of long life-cycles (navy)

Platform Number Service Life

Age 2012

Age 2017

Age 2022

Age 2027

T 404 6 30 18,6 23,6 28,6 32,3

Fregatte 122 8 30 27,3 32,3 37,3 42,3

Fregatte 123 4 30 16,7 21,7 26,7 31,7

Fregatte 124 3 30 7,7 12,7 17,7 22,7

Schnellboot 143A 10 30 28,7 33,7 38,7 42,7

Korvette 130 2 (5) 25 4,00 9,00 14,00 19,00

Submarine U212A 4 (6) 25 6,25 11,25 16,25 21,25

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Major Weapon Systems

The challange of small fleets. (Airforce)

A319

A340

Global

5000

A310

Do228

P-3C

A400M

Torna

do

Eurof

ighte

r

Euroh

awk

MALE

HALEVTOL

Bo105

CH 53

NH 90

UH Tige

r

MH90

Mk8

8A

EC135

Couga

r0

50

100

150

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Major Weapon Systems

The challange of small fleets. (Navy)

F 122 F 125 K 130 U 212A

Mjgd 332

Mjgd 333

MsBt 343

HstS 351

HstS 352

V 702 V 703 T 404 Edu Rec 423

0

5

10

15

20

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Procurement of services

Great uncertainty about purchasing services

Share (%) of service bundles on direct spend 25% / 20%

Feeled competence while procurment process of services in contrast to goods or product-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

Mgmt Bundle

Mgmt Service

Mgmt goods

Proc Bundle

Proc Service

Proc Goods

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

3.4

3.5

4.3

3.5

3.8

4.5

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Major Weapon Systems

Challange of life-cycle support costs

In €million

2008 2009 2010 20110

1000

2000

3000

4000

5000

6000

7000

8000

9000

Maintenance, Repairs etc.R&DInvestment

At least stable means to support existing weapon systems

„Fear for failures“

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Agenda

II. Review of Defense Procurement in Germany

I. Situation in Germany

III. Major Weapon Systems

IV. Contracting, Cooperation, Partnerships

V. Discussion / Conclusion

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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

…

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HIL, BWI as examples for PPP

Successful outsourcing to Public-private partnership organizationsConcentration on military core tasks

Bundeswehr 49% Rheinmetall , KMW and others

51% Responsible for maintenance

and reparis of army equipment Availability of 70% New contract up to 95%

(depends on vehicle) Savings of over €million 200 in 5

years.

Bundeswehr 49% Siemens 50,5% IBM 0,5% Responsible for domestic IT

system Volume €billion 7.1 (instead of former Bundeswehr

personnel and (aging) IT equipment)

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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.)

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First approaches towards PBL

Status Quo HIL: Availability of

70%

P3C-Orion: Availability of 100% in 30d

EC-135: Usage fee per flight

hour

Raytheon: Fixed price with increasing

MTBUR

…(turbine availability)

Law

Profit formula

Service contracts in defense

Price law

Lack of confidence in PBL Lack of training and experiance Unclear competencies No stringent process model No knowledge base

BUT: Few but striking success stories (Heron 1-leasing, EC 135 etc.)

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PBL – Example radar system of 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

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Agenda

II. Review of Defense Procurement in Germany

I. Situation in Germany

III. Major Weapon Systems – Current and Future Challanges

IV. Contracting, Cooperation, Partnerships

V. Discussion / Conclusion

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Conclusion – Some lessons?

German approach: Cooperation as key for defense procurement

Insourcing Cooperation Outsourcing

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

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Conclusion – Some lessons?

Future?

Korvette 131? (Multi-role combat ship 180)

Multi-Role-Helicopter Dockship?

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Thank you for your attention

Competence Network PBL Research Center for Law and Management of Public Procurement

Bundeswehr University Munich, Germany

Werner-Heisenberg-Weg 3985577 Neubiberg b. München

Telefon: +49 89 6004-3790

andreas.glas@unibw.de www.unibw.de/pbl

Discussion

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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.

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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.)

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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.

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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 (!)

• 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.

Once /year

twice/year

Cyclically(monthly)

When Used

Managing board

Controlling committee

Operational Planning Team

User(with IT-System)

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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.