Executive Briefings

Putting Performance-based Contracting to the Test

Every company wants to improve the efficiency and cost-effectiveness of its supply chain, but what's the best way? Since 2004, the United States Defense Department has required its suppliers to adopt performance-based contracting (PBC) so that it pays them a fee based on the amount of time big-ticket items like F-22 fighter jets are in use without requiring repairs. But is that better value than more traditional contracts that charge customers for time and materials when products break down? According to a new study co-authored by Wharton researchers, the answer is yes.
This research should spur more suppliers to use PBC and "convert tangible products into a service," says Morris A. Cohen, Panasonic Professor of Manufacturing and Logistics at Wharton and lead researcher on the project. However, most suppliers have preferred to stick with traditional, more lucrative time and materials (T&M) contracts, particularly in the absence of definitive research showing the superiority of PBC. Researchers, in turn, were stymied by a lack of data tracking a product's history of repairs under both PBC and T&M contracts, enabling credible comparisons.

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Every company wants to improve the efficiency and cost-effectiveness of its supply chain, but what's the best way? Since 2004, the United States Defense Department has required its suppliers to adopt performance-based contracting (PBC) so that it pays them a fee based on the amount of time big-ticket items like F-22 fighter jets are in use without requiring repairs. But is that better value than more traditional contracts that charge customers for time and materials when products break down? According to a new study co-authored by Wharton researchers, the answer is yes.
This research should spur more suppliers to use PBC and "convert tangible products into a service," says Morris A. Cohen, Panasonic Professor of Manufacturing and Logistics at Wharton and lead researcher on the project. However, most suppliers have preferred to stick with traditional, more lucrative time and materials (T&M) contracts, particularly in the absence of definitive research showing the superiority of PBC. Researchers, in turn, were stymied by a lack of data tracking a product's history of repairs under both PBC and T&M contracts, enabling credible comparisons.

Read Full Article