Lou Kratz is vice president and managing director, Focused Logistics Enterprise, at the Lockheed Martin Corporation. As such, he is responsible for coordinating Lockheed Martin's logistics and weapon system sustainment efforts. He leads Lockheed Martin's logistics strategic planning, performance based logistics efforts, logistics technology development, logistics human capital development, and cross-corporate logistics business initiatives. Prior to joining Lockheed Martin, Kratz served as assistant deputy under secretary of defense (logistics plans and programs), within the office of the Deputy Under Secretary of Defense.

John Hatch joined Lockheed Martin as corporate vice president, Global Supply Chain Management, in 2001. He is responsible for supply chain strategy and policy, corporate outsourcing agreements, subcontract management and supplier diversity activities. The corporate sourcing agreements have been credited with saving $800 million over three years. Additionally, he is corporate sponsor of the Operation Leadership Development Program. Before joining Lockheed Martin, Hatch held a series of executive positions with FMC Corporation, ending as director of e-business for the corporation's worldwide Energy Systems Busines

WT: How does the supply of military equipment, systems and support differ from typical supply chain activities?

Kratz: War, unfortunately, is inherently unpredictable. In the consumer world, you may work very diligently to have good demand forecast tools; we're in a business that is not prone to linear demand curve.

Second, our customer moves. We support forces worldwide that are engaged with adversaries that move. Where we deliver the equipment and where that equipment is used is subject to constant change.

WT: You have current involvement in Iraq?

Kratz: We have systems deployed in Iraq as well as Afghanistan. That experience has clearly proven that the United States government can rely on the commercial sector to support their products in a hostile environment. Our HIMARS-High Mobility Artillery Rocket System-has an operational availability over 95 percent. We are providing both technical support and parts and maintenance in Iraq today.

WT: What are the problems particularly associated with supply chain in a war zone?

Kratz: Starting at the top, one problem is that you get shot at. That's the biggest challenge. The second is that the forces do move-so you have to anticipate where they will be next. And the third is the communication from the relatively safe area into the hostile areas, and, finally, transportation in those hostile areas. The tactical level communications structure associated with communications in a war zone is not as robust as our national structure. There are a lot of things we take for granted in the United States-satellite lines, for instance-that may not be available in Iraq.

WT: What has your effort in Iraq taught you about supply chain?

Kratz: I think Iraq and Afghanistan demonstrated that we as a nation do not predict well from the equipment and the supply point of view: that hostile operations are essentially unpredictable. We as an industry, therefore, have to build flexibility into our logistics chain and not concentrate so much on what we call static demand forecasting.

WT: How do you do that?

Kratz: We build our efforts around a net-centric logistics structure, which is linked directly to our primary customer's operational concept, which is a net-centric operation. We would view the future not as a logistics or supply chain, but a logistics or supply network. We have globally distributed parts and service that can be called upon as required.

WT: What are the major tasks to moving from a chain to a network?

Kratz: The biggest challenge is to imagine the cultural change, and to enable people to visualize that they don't have to live in a chain. They can live in a network. Technically, there are two keys areas of change. One is the communications backbone that ties the weapons platforms to a supply infrastructure. And second, once the network is evolve-and it is evolving-is to capitalize on technology to allow us to source materials and services from the best available source. If you have a chain, then everything moves through the chain. With a network, you can source material or solutions from various places; the challenge is to build the infrastructure to support it.

WT: A more general question: have your supplier relationships changed?

Kratz: Like most of the aerospace industry, we treated our suppliers on a sort of hands-off transaction basis. Now, they are much more engaged with our design teams, engaged across the width of the life cycle.

WT: Compared with five or ten years ago, what's changed in what your employees need to know in dealing with customers?

Kratz: The biggest change over the past five years has been the need to understand the overall information flow across the entire chain; the need to understand risk management associated with a global supply, and the need to understand modeling and simulation so we can integrate our logistics services with our overall capabilities.

WT: And your IT requirements?

Kratz: The biggest change in IT is the migration from what we historically used in support of government transactions-somewhat limited networks-to today when we have near real-time operation. Not just real-time information on demand, but real time data on equipment health: how are our systems performing?

WT: A closing thought?

Kratz: The point to stress, I think, is that we're not dreaming about net-centric logistics. We're implementing net-centric logistics. I know your publication has a lot of commercial readers, and what I would tell them is that I think the next wave in the commercial world is going to be net-centric, and will rely on technologies like RFID.

WT: With your suppliers what are major tasks at present?

Hatch: As we expand as a systems integrator, we are taking a much more integrated approach to what we supply to the customer. This requires that our internal supply chain and our personnel become much more strategic and integrated with the business operations.

WT: How do you predict supplier performance?

Hatch: We've made a major effort the past two years to develop what we call our predictive risk tool suite. We've worked with an outside company to build a tool that takes inputs related to a supplier, then runs them through learning algorithms to produce a supplier stability indicator score. This indicates potential business and financial risk for that firm. We've found it be very accurate in giving nine to twelve months of early warning.

WT: What happens next?

Hatch: That warning lets us have a meaningful discussion with the supplier: 'We see these things are happening. How is this going to impact both our business and the suppliers?' How can we work together to mitigate the situation? With this tool, we've focused a lot on early identification of a supplier's capacity to perform. We actually go in and look at a supplier's processes. Then, we judge them on a nine-point basis in terms of their responsiveness, their management, their ability to hit their affordability target, how well they respond to requests for corrective action, and so forth.

WT: What share of the problems are you able to diagnose?

Hatch: This system has been operational for about 18 months on the financial and the business side. We find it captures 80 to 90 percent of the problems out there.

WT: Now, personnel. What do your people need to know?

Hatch: Our folks need greater technical expertise. We are trying to grow skills within the function, but we're also trying to attract people with engineering and business management disciplines. We've established some rotational opportunities so they can come in, train, learn the functions and then continue to rotate out into other career paths, like program management or technical leadership.

Further, we need people with a strategic understanding of the cross-functional nature of the business world. Sourcing, in supply management, is really a team sport. We're doing more and more with teams, perhaps led by a program manager, that include an engineer, a business manager, a finance manager and other needed subject matter experts.

WT: How difficult to find people you want?

Hatch: We have an Operations Leadership Development Program. At any time, we have about 200 new recruits out of college in that program, which provides accelerated training and job experience.

Second, we have a training suite-Subcontract Program Management 101, 201, 301-for all existing personnel.

WT: You mentioned leveraging.

Hatch: Several points here. First, we have a centralized group that looks across our businesses at all our procurement spend. We're spending about $21 billion a year, and this group looks at commonalities where we can put a single corporate agreement into place. The real benchmark we use is the incremental savings generated by the program-tracking the last price against the current price.

Next, we have a team looking at the whole process of our supply chain, or what we term subcontract management. Effectively, about 60 percent of all our buys are custom-engineered products. So the process of subcontractor management is essentially supply chain management.

WT: What are the key things you've learned about supply chain?

Hatch: Several things stand out. First, we can truly create tools and approaches that are predictive in their application, irrespective of the fact that we have different types of businesses.

Second, to really advance supply chain management, you have to address the cultural barriers, the attitude of 'but this is how we've always done business.'

The other piece is that supply chain management is really a path for continuous improvement.

Sidebar:
War Drives Lockheed to State-of-the-Art Supply Chain Responsiveness

As a major defense contractor, Lockheed Martin faces supply chain tasks-for example, in Iraq and Afghanistan-considerably different from those of most major corporations. With headquarters in Bethesda, Maryland, Lockheed Martin is ranked as the 52nd largest U.S. corporation, with 2005 sales of $37 billion. Of that total, 58 percent is with the U.S. Department of Defense; 28 percent with other public bodies, including the Department of Homeland Security, NASA and the intelligence community, and 14 percent internationally. The company is responsible for 40 percent of total U.S. defense exports.

Lockheed Martin does business in five areas-aeronautics, electronic systems, information and technology services, integrated systems and solutions and space systems. The corporation is a major systems integrator-its 135,000 employees include 23,000 information technology professionals and systems and software engineers.

The different tasks it faces are underscored by some recent logistics achievements. Today in Iraq and Afghanistan, Lockheed Martin delivers engineering support, spare parts and other logistics and sustainment support in between two and four days of registered demand, compared with the government's own average of 16 days. Further, it is providing the Marine Corps in Iraq with an RFID-enabled supply chain management at the desert-deck level, which has dramatically reduced response times, inventory requirements and cost.

In the four years it has been providing repair parts support to the Navy H60 helicopter, it has reduced the previous average logistics response time from 53 days to less than seven.