Flexible Contracts = Responsive Supply Chains

 

In the December 2020 Supply Lines column, we discussed the national imperative for transparent supply chains and contracts in the post-COVID era. Transparency is a key component of supply chain preparedness for emergencies, disasters, and catastrophes. Preparedness requires that firms be both aware and capable of response. Firms and governments must be able to orient themselves to their surroundings. For firms, prior to COVID, this landscape typically involved markets and global trade policies, but no longer. Now it includes availability of contingency support material such as PPE and services such as cybersecurity.

As an example, just days after the announcement of three successful COVID-19 vaccines, the US Cybersecurity and Infrastructure Security Agency sent out suspicious hacking alerts to organizations supporting cold chain storage and delivery systems for the vaccines.[1] These hackers were not just creating mischief. These appear to have been either sophisticated attempts to steal intellectual property, implement system sabotage or both.

Again, we can’t overstate the importance of gaining clear insight into supply chains of every sort for federal, state, and private entity. Once this transparency is achieved and we identify risks such as hacking, counterfeiting, human disruption, etc., we then must determine how to respond. That takes planning—and it takes flexibility.

In the future, supply chains must be able to pivot to additional sources and means of channeling requirements in the face of disruptions. This requires advanced planning, effective category intelligence, and strategic sourcing plans for every key need that might arise in an emergency. Planning teams need to develop war-gaming situations/simulations and capacity requirements that span both domestic and global sources. Firms must develop playbooks—quick ‘go-to’ references for those times when the fog of war impedes information-gathering and rapid decision making is imperative.

Air Force Colonel John Boyd developed the Observe, Orient, Decide, Act (OODA) loop model of decision making[2] primarily for combat operations. During a contingency, events pop up that drive the need for immediate decisions and actions. The faster a person can observe and orient to the need to decide and act, the more likely he or she is to prevent unnecessary loss or casualty. Providing prepositioned information in the form of playbooks for emergencies allows users and organizations to get through the OODA loop faster by providing primers for observation and orientation.

The military uses playbooks and handbooks for contingencies in a variety of organizations, many related to contracting and acquisition management. For example, the Department of Defense’s (DOD) Defense Contingency Contracting Handbook has been used for over a decade to “help DOD Contingency Contracting Officers (CCOs) and other Operational Contract Support staff meet the challenges they may face in contingency environments.”[3] The Marines develop tactical battle playbooks based on countless after-action reports that establish lessons learned from successes and losses in the field. DOD planning and operations that include contracted support are subject to the requirements of the Federal Acquisition Regulation (FAR) and its supplement the Defense Federal Acquisition Regulation Supplement. They also are directly guided by Joint Publication 4-10, Operational Contract Support. However, the DOD recognizes that during a contingency or natural disaster, people in the thick of crises can’t be expected to download, carry, or process thousands of pages of rules. So, the department offers an easy to follow and easy to carry handbook. The handbook answers the basic questions or who, what, where, how, and when. This also allows contracting professionals to pull to front of mind considerations that may not be of daily concern.

For instance, the CCO Handbook begins with a chapter on fraud, waste, and abuse, covering issues such as human trafficking and contract fraud that may concern defense personnel in nonemergency situations but are much more likely to occur during a crisis and during deployments. Reading regulations clarifies prohibitions and mandates, while the handbook provides real-time support information.

In the case of contract fraud, for example, it describes potential schemes, conditions that make fraud more likely, and common fraud indicators. Governance is spelled out as well, making clear who is in charge under different circumstances. These details would have been very helpful to many firms and governments during the PPE sourcing stampede that has occurred post-COVID.

The U.S. Army Corp of Engineers (USACE) has a contingency operations playbook as well, the Center of Army Lessons Learned (CALL) Special Study No. 16-01 (October 2015) USACE Overseas Contingency Operations Playbook. It’s large—412 pages—but covers an enormous variety of issues. One of the most impactful features of the USACE playbook is its treatment of enduring contingency engineer mission principles captured from experiences in Operations Iraqi Freedom and Enduring Freedom. This is a table of seven guiding principles developed from lessons learned during OIF and OEF. It includes adapt, design sustainability, develop capacity, integrate command and effort, maximize reach back, standardize process, and train. It also includes highly useful case studies to highlight lessons learned for each principle.

Federal requirements should adopt industry standards to create maximum flexibility and increase alternatives in the event of need. Establishing standards for the types of materials required during particular contingencies enables procurement staff to identify suppliers that can provide them quickly. Adopting industry standards, which usually call for commodity commercial items, allows procurement to source more easily. This is the opposite of stockpiling of unique items, but rather involves contractual requirements and effective supplier development to ensure availability of supplies. Such contracts are useless if suppliers are unable to obtain supplies from global sources, thus globally sourced material must be in a secure location within U.S. borders. Holding material in anticipation of need requires managing inventory expiration and refreshment. This likely is a job for private-sector companies that have other customers to whom they can sell material in order to replenish it.

Firms and government agencies should establish optimal contracting mechanisms that include appropriate governance during times of use. Governance can be codified in a contract or achieved in a variety of ways up to and including custom and even verbal agreements. No matter how it is put in place, governance must guarantee flexibility, funding, and reliable sourcing. Accomplishing this can include reducing color of money constraints (funding) and developing robust category market intelligence practices (sourcing).

U.S. government agencies should shy away from large indefinite-delivery, indefinite-quantity (IDIQ) contracts for items and services with just a few suppliers in favor of agreements such as Blanket Purchase Agreements, Basic Ordering Agreements, Basic Agreements, and even standing price quotes under FAR 13.103. Such agreements allow the parties to hash out the particulars of governance that can stymy rapid decision-making during crisis and provide the ability to pivot towards additional sources when the current ones cannot satisfy needs. Funding is also more fluid when it is not tied directly to a contract based on minimum order quantities and maximum ceiling amounts.

Some argue that only traditional contracts mechanism can ensure that firms are on the hook to perform. Our experience is that a firm either can perform an order under an agreement (and never will turn down work it can perform), or it cannot fulfill the order under an agreement. Attempting to force performance under an IDIQ won’t solve that problem. Government agencies and private companies always are on the hunt to develop suppliers and work to sustain strong supplier relationship management. We are not suggesting that formal contracts have no place during contingencies, but rather that emergencies call for additional agreements with suppliers to better prepare for rapid response.

Formal contracts should include majeure terms and conditions that allow the buyer to shift mandatory ordering and funding from one contract to others when it becomes apparent that contracted sources cannot meet requirements in time. We also need to rethink government “color of money” practices in times of crisis. We should not have dollars held hostage to appropriation account categories when doing so puts the future of programs at risk. No program can continue if all the personnel supporting it can’t get vaccinated or obtain necessary personal protective equipment (PPE).

Finally, we suggest increased flexibility via mutual aid networks. Mutual aid networks have popped up all over the world during the COVID pandemic. However, they generally consist of local governments and nonprofits sharing food and supplies for needy families or communities. This model can be expanded to large agencies and companies across the country sharing supply chain items necessary to continue operations during a crisis, thereby reducing hoarding and other negative behaviors.

During the DoD COVID-19 supply chain response state and federal agencies, commercial hospitals and private firms competed for common PPE items. Spurred by crisis and perceived scarcity, organizations bought well in excess of what they absolutely needed, causing dramatic shortages. As a result, some hospital systems were flush with PPE, while others were forced to wash gloves and reuse them.

Mutual aid networks can establish ground rules for sharing resources between otherwise competing or nonassociated entities. When goods and services become part of a “global commons,” they are no longer simple free market commodities. There must be an orchestrated approach to supply and demand during crises. Firms must establish grounds for enacting robust information sharing during emergencies. Companies and agencies should establish clear prioritizations with each other regarding use of shared ordering on contracts. For example, if Company X has a large contract for cleaning materials and their subtier supplier Company Y doesn’t have any such sources, Company Y can use the contract vehicle once Company X has met its internal need. Further, Company Z, a competitor, may have the same options during a declared emergency, but at a lower priority than Company Y. Thus, Z will need to seek additional sources.

It may seem counterintuitive that competing firms would help each other survive, but some calamities reach beyond the market and affect the nations in which companies operate. In those cases, it is paramount that companies see the bigger picture and consider the overall future health of the entire system. Further, while COVID is the catalyst for this concept, it is not the only reasonable contingency for its use. With climate change, additional diseases, and cyber terrorism threats on the horizon, mutual aid networking should be baked into every part of the supply chain and contracting processes.

Supply chain and contractual flexibility never has been more necessary. After COVID, agencies and firms will have to look to each other for lessons and support. Government can learn from industry about flexible contractual arrangements and advanced supply chain visibility. Industry can observe the DOD’s robust contingency sourcing preparedness planning and exercises. We all can help each other. Supply chains have become the Achilles heel of many companies, organizations, and governments during this pandemic. We must get better. Step 1 was transparency; step 2 is increased flexibility. Both are strong examples demonstrating that we no longer can divorce supply chain from contract management. CM


Daniel J. Finkenstadt, Maj. (USAF), PhD

  • Assistant Professor, Graduate School of Defense Management, Naval Postgraduate School.
Rob Handfield, PhD

  • Bank of America University Distinguished Professor of Supply Chain Management, North Carolina State University.
  • Director, Supply Chain Resource Cooperative (http://scm.ncsu.edu/).
  • Also serves on the Faculty for Operations Research Curriculum, North Carolina State University.
The positions, opinions, and statements in this column are solely those of the authors and do not reflect the official positions of the U.S. Air Force, Department of Defense, or federal government.

Post about this article on NCMA Collaborate at http://collaborate.ncmahq.org.

Endnotes

[1] William Booth, “Hackers try to penetrate the vital ‘cold chain’ for coronavirus vaccines, security team reports,” Washington Post, Dec. 3, 2020, https://www.washingtonpost.com/world/coronavirus-vaccine-hackers-phish-ibm-cold-chain/2020/12/03/27a5b0b2-355d-11eb-9699-00d311f13d2d_story.html.

[2] Boyd, J.R. (1987). A discourse on winning and losing. Maxwell Air Force Base, AL: Air University Library Document No. M-U 43947.

[3] DPC | Contingency Contracting | DCCHB (osd.mil).