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Using Simulation for Setting Terms of Performance Based Contracts

In: Operations Research Proceedings 2010

Author

Listed:
  • James Ferguson

    (Code 81: Torpedoes, Naval Undersea Warfare Center)

  • Manbir Sodhi

    (Univ. or Rhode Island)

Abstract

This paper discusses the use of a simulation model for setting terms of performance based contracts. Metrics commonly used in measuring service and supply performance are examined for their utility in achieving the outcomes of interest for contracts, and the correlations amongst these metrics are determined using simulation models. These correlations are used to highlight the most significant measurable quantities, and the performance limits for these are specified so as to achieve desired outcomes for various system performance indicators. The impact of penalties and incentives are also evaluated using the simulations. Practical issues such as obsolescence, reliability, and cost are also discussed. The exploration of this concept in setting terms for a contract at the Naval Undersea Warfare Center is also illustrated.

Suggested Citation

  • James Ferguson & Manbir Sodhi, 2011. "Using Simulation for Setting Terms of Performance Based Contracts," Operations Research Proceedings, in: Bo Hu & Karl Morasch & Stefan Pickl & Markus Siegle (ed.), Operations Research Proceedings 2010, pages 465-470, Springer.
    • Handle: RePEc:spr:oprchp:978-3-642-20009-0_74
    DOI: 10.1007/978-3-642-20009-0_74
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