The German defense procurement
and its relation to industrial policy
Andreas Glas
Kingston, February 2012
1
Canadian – German Cooperation
2
Agenda
I. Situation in Germany
II. Review of Defense Procurement in Germany
III. Major Weapon Systems – Current and Future Challanges
IV. Contracting, Cooperation, Partnerships
V. Discussion / Conclusion
3
Situation: Reform of the Bundeswehr
Realization of long-discussed, fundamental transformation
International disaster and
military operations
Afghanistan, Kosovo, etc.
1
Abolishment of conscript
system – towards
professional army
2
Significant reduction of the
Bundeswehr
3
4
Situation: Future Operability of the Bundeswehr
The challange to do more with less
“Everything for deployed forces”
Level of Ambition
Concentration on core competencies
Capability
requirements
Personnel
250.000  185.000 soldiers
76.000  55.000 public servants
328  <290 military bases
Budget
Pressure to economize defense budget
At maximum: Stable budgets
5
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.
6
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 %
103,1
Development costs for platform Eurofighter :
(€million 135 Mio. in 2009) *
2,0 %
206,2
Shortage of military doctors:
Equivalent to 69% of requird doctors
(in 2010: 600; Educatoin and training € 500.000/doctor) **
3,0 %
309,3
Finance of defence research and development insitute:
€million 275 (in 2009) *
4,0 %
412,4
Civilian reconstruction in Afghanistan:
(German paid means per year €million 430)***
5,0 %
515,5
Development 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
7
Situation: Defense Industry in Germany
Overview of defense industry companies and their products
8
Situation: Defense Industry in Germany
International comparison
Global Arms Trade 2006 US$billion*
Swiss
144
Poland
169
Israel
224
Canada
227
Sweden
China
472
564
Spain
803
Italy
860
GB
Netherlands
France
1071
1481
1557
Germany
Russia
USA
*
**
3850
6733
7888
Sipri 2008/2010.
Weltbank - Weltentwicklungsindikatoren, 2012.
9
Agenda
I. Situation in Germany
II. Review of Defense Procurement in Germany
III. Major Weapon Systems – Current and Future Challanges
IV. Contracting, Cooperation, Partnerships
V. Discussion / Conclusion
10
Defense Procurement in Germany
Development and phases
1
2
1950/1960s
Initial equipment
 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.)
 Cold War
 „Massive retaliation“
 Quick armament of huge
number of soldiers
3
1970/1980s
4
1990/2000s
Modernization with
German equipment
“Peace dividend”
 Development of new
equipment in Germany
(Leopard, Marder etc.)
 TORNADO jet etc.
 Foundation of German
defense industry after
WWII
 Sale of old /
supernumerary
equipment.
 Few new projects.
 Only supplementation
of existing equipment.
 (e.g. air conditioner for
ships to operate
globally)
 Cold War
 „Flexible response“
 Mobile forces for joint
operations
 German reunification
 Bundeswehr reduction
 Economies in defense
budget
Today
Modern warfare
 Changed threats
(asymmetric warfare)
with new requirements
 E.g. protection against
mines or IED; protected
Transport and logistics
 Integrated
communications and
data systems etc.




Global operations
Disaster relief
Peace enforcement
Modern, specialized
COTS equipment
11
Defense Procurement in Germany
Structure and responsibilities
Legal division between
military user and civil
procurment agency
“Customer Product
Management”
(=defense acquisition
process)
Legal procurement
procedures and
price law
Demand analysis
Ministry
Development
Civil
acquisition
agency
Military
Procurement and
implementation
Industry
 Art. 87a Grundgesetz
 (Almost) no direct
communication
between military and
industry about
acquisition projects.
Usage phase
 Functional demand
description
 Preferred approach of
commercial available
products (without
development)
 Competitive Dialogue
 Open / restricted
procedure
 Electronic procedure
 Frame contract
 Negotiated procedure
12
Agenda
I. Situation in Germany
II. Review of Defense Procurement in Germany
III. Major Weapon Systems – Current and Future Challanges
IV. Contracting, Cooperation, Partnerships
V. Discussion / Conclusion
13
Major Weapon Systems
The challange of long life-cycles
A 400M*
Eurofighter*
Euro Hawk**
R&D
Submarine 212A
Production
Korvette 130***
Usage
PzHaubitze 2000*
Leopard 2*
0
20
40
60
80
100
* Usage time estimated.
** Global Hawk with 12 years R&D in USA
*** Full capability after 7 years in service.
14
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
15
Major Weapon Systems
The challange of small fleets. (Airforce)
150
100
50
0
16
Major Weapon Systems
The challange of small fleets. (Navy)
20
15
10
5
0
F 122 F 125 K 130
U
Mjgd Mjgd MsBt HstS HstS V 702 V 703 T 404 Edu
212A 332 333 343 351 352
Rec
423
17
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 )
Proc Goods
4.5
Proc Service
3.8
Proc Bundle
3.5
Mgmt goods
4.3
Mgmt Service
3.5
Mgmt Bundle
3.4
0
1
2
3
4
5
*: CAPS, 2003, übersetzt und leicht modifiziert;
L = Dienstleistungen; DLb. = Produkt-/Dienstleistungsbündel; Mgt. = Management; Besch.= Beschaffung
20
Major Weapon Systems
Challange of life-cycle support costs
In €million
9000
8000
7000
6000
5000
Maintenance, Repairs etc.
R&D
4000
Investment
3000
2000
1000
0
2008
2009
2010
2011
At least stable means to support existing weapon systems
„Fear for failures“
22
Agenda
I. Situation in Germany
II. Review of Defense Procurement in Germany
III. Major Weapon Systems
IV. Contracting, Cooperation, Partnerships
V. Discussion / Conclusion
23
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
…
24
HIL, BWI as examples for PPP
Successful outsourcing to Public-private partnership organizations
Concentration 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)
25
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.)
26
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
Service contracts in
defense
Price law
Profit
formula
 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.)
27
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
28
Agenda
I. Situation in Germany
II. Review of Defense Procurement in Germany
III. Major Weapon Systems – Current and Future Challanges
IV. Contracting, Cooperation, Partnerships
V. Discussion / Conclusion
29
Conclusion – Some lessons?
German approach: Cooperation as key for defense procurement
Insourcing
Cooperation
Of military core tasks?
Of military core tasks?
(Efficient) support?
(Efficient) support?
Outsourcing
Of military core tasks?
(Efficient) support?
Hitherto via public private partnership institutions
Future: More and more long-term contractual agreements
But requirement for knowledge database, structered learning, proactive management
30
Conclusion – Some lessons?
Future?
Korvette 131?
(Multi-role combat ship 180)
Multi-Role-Helicopter Dockship?
31
Thank you for your attention
Discussion
Competence Network PBL
Research Center for Law and 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
32
Aviation Spare Parts
First 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.
33
Aviation Spare Parts
First 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.)
34
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.
35
PBL – Example Eurocopter
Pilot 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.
36
PBL – Example Radarsystem
„Full Service“
„Improvements 3F“
• Customer awarded a full-service-contract for the radarmodule 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.
37