Optimal Cost Avoidance Investment and Pricing Strategies for Performance-Based Post-Production Service Contracts
Download
Author
Nowicki, David
Ramirez-Marquez, Jose
Randall, Wesley
Murynets, Ilona
Date
2011-04-30Metadata
Show full item recordAbstract
Performance-based contracting (PBC) is altering the fundamental relationship between buyers and suppliers engaged in the support of capital-intensive systems such as high-speed rail, defense, and power generation. This relationship is shifting from a traditional transactional-based (return on sales) business approach to a collaborative, performance-based (return on investment) multi-year contractual model. With PBC, the supplier is compensated for system performance rather than for each maintenance, repair, and overhaul (MRO) transaction. PBC success lies in the incentive structure. Under PBC supplier profits, system performance and operator costs are improved when smart investment decisions are made that trade year after year MRO costs for upfront investments that reduce total cost of ownership.
This paper develops a decision-theoretic model that determines the optimal contract length and optimal investment and pricing strategies for performance-based, post-production service contracts that simultaneously maximizes the profit to the supplier while satisfying the customer''s needs. The model accounts for reliability as a function investment, the average and variance of the cost to perform maintenance tasks, and for customers'' willingness to pay for a contract depending on its length. Numerical examples illustrate how optimal strategies depend on potential market size, expected cost per failure, and on other parameters of the model.
Description
Proceedings Paper (for Acquisition Research Program)
Rights
This publication is a work of the U.S. Government as defined in Title 17, United States Code, Section 101. Copyright protection is not available for this work in the United States.NPS Report Number
NPS-AM-11-C8P21R01-071Related items
Showing items related by title, author, creator and subject.
-
Examining the effects of source selection method on procurement outcomes
Landale, Karen A.F.; Rendon, Rene G.; Hawkins, Timothy G. (Emerald Publishing Limited, 2017-05-03);The purpose of this research is to explore the effects of supplier selection method on key procurement outcomes such as procurement lead time (PLT), supplier performance and buyer team size. Design/methodology/approach Data ... -
Modeling a Severe Supply Chain Disruption and Post-Disaster Decision Making with Application to the Japanese Earthquake and Tsunami
MacKenzie, Cameron A.; Barker, Kash; Santos, Joost R. (2013);Modern supply chains are increasingly vulnerable to disruptions, and a disruption in one part of the world can cause supply diffi culties for companies around the globe. This paper develops a model of severe supply chain ... -
OPERATIONAL ANALYSIS OF TIME-OPTIMAL MANEUVERING FOR IMAGING SPACECRAFT
Yeau, Wenjie (Monterey, California. Naval Postgraduate School, 2013-03);There is currently a gap in translating the performance enhancements made possible by new maneuver strategies into operational benefits derived for spacecraft missions. In the context of imaging satellites, slew time is ...