Predicting adequacy of supplier responses for multi-year government contracts based on supplier performance metrics

Abstract

Aerospace Company X (ACX) is a designer and manufacturer of advanced aerospace systems and its primary customer is the United States Government (USG). In order to reduce cost and minimize risk, both parties have embraced a multi-year contracting model in which productions agreements are signed for up to five-year periods. This allows for significant cost savings over single-year contracts while allowing for predictable production levels for ACX and its suppliers. At the time of this research, the company was soliciting bids from suppliers for the next five-year multi-year contract. Since this is a sole-source situation, ACX must substantiate all costs to justify that the pricing is fair and reasonable. Costs of purchased hardware are substantiated through three primary means: competition, commerciality, and cost-price analysis. Competition is preferred because the pricing can be justified by free-market forces. However, due to intellectual property rights or unique capabilities, suppliers are often contracted as sole-source. The supplier then can claim commerciality (i.e. the part is for sale commercially) or submit for a complete cost review of material, labor, and overhead rates. In some cases the supplier will not release this data to ACX and a government agency performs the review. The success of the cost substantiation phase hinges on getting complete and accurate data from suppliers in a timely manner. This thesis explores the challenges of obtaining cost data from suppliers and proposes recommendations that can be applied to general supplier management situations. First, a metric of proposal adequacy is developed and used to score the adequacy of each received bid. These scores are then analyzed to determine if there is any correlation with the existing enterprise ACX supplier rating system. Finally, recommendations for process improvements are made which focused on communication, IT systems, and standard work.