Original Date: 02/26/2001
Revision Date: 01/18/2007
Best Practice : Long-Term Agreements
General Dynamics Armament Systems uses Long Term Agreements to forecast business over a period of time with the understanding that forecast quantities will become firm when its prime contract with the customer becomes firm. The result is a mutually beneficial procurement process between General Dynamics Armament Systems and each of its suppliers which has produced impressive cost savings, improved supplier relationships, and significantly reduced contract administrative paperwork.
In the past, a single purchase order at General Dynamics Armament Systems (GDAS) often required four to eight weeks of administrative processing (e.g., materials requirement, source selections, request for quotes, analysis of quotes, supplier history reviews) before awarding a contract. The cumbersome, time-consuming process had to be repeated for every single purchase. This approach often resulted in no bids or unstable prices because suppliers could not anticipate when parts would be ordered, and therefore, were unable to commit/adjust their workflow planning to maximize efficiency. The concept of Long Term Agreements (LTAs) began in the mid-1980s and grew from single part purchases to families of parts across all major programs today.
A LTA is a definitized long-term contract, typically three to five years, between GDAS and a supplier which identifies the product or product families at a firm fixed price. LTAs enable GDAS to forecast business over a period of time with the understanding that forecast quantities will become firm when its prime contract with the customer becomes firm. The result is a mutually beneficial procurement process for GDAS and its suppliers. Suppliers can now focus on better long-range workload plans to anticipate long-range needs. Prices are more competitive and stable because the LTAs allow production costs to be amortized over an extended period. Likewise, GDAS gains firm pricing for contract length, higher quality parts, and a significant reduction in contract administrative paperwork. As a long-term investment for all parties, this approach promotes closer working relationships, continuous process improvements (CPIs), and joint strategies for improvements.
Since implementing LTAs, GDAS has reduced the process time for administering a requirements contract from four to eight weeks to just one day. As a result, the company decreased the number of buyers by greater than 50%. The close long-term partnering with suppliers also enabled GDAS to reduce its supplier base from 2,600 during the 1980s to 150 in 2001. The company estimates the initial cost saving from these contracts at about 30% with at least a 99% increase in part quality.
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