Reducing Total Ownership Cost (R-TOC)
and
Value Engineering (VE)
Dr. Danny L. Reed
Institute for Defense Analyses
June 8, 2006
1
R-TOC Genesis
• Initiated in 1999 by the USD(AT&L) to address:
– O&S cost growth at expense of force modernization and
readiness
– O&S budget constraints limit programs to near-term, critical
solutions only
– R-TOC program seeks to seed O&S cost avoidance
solutions that have broader impact
– Thirty Pilot Programs
Rising
O&S Cost
Less $ for
Modernization
Aging
Equipment
Fixed Top Line
DEATH SPIRAL
Declining Future
Readiness
2
Significant FY05 O&S Cost Avoidances
from R-TOC Pilots
Reported FY05 & Life Cycle Savings/Benefits
FY05 % Savings
LCC % Savings
FY05 Goal
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
10.0%
5.0%
Program Dropped
15.0%
Program Cancelled
20.0%
Program Dropped
Reported Savings/Avoidances
• FY05 cost
avoidances
exceeded
$2.1B
• Projected life
cycle cost
avoidances
will exceed
$76B
R-TOC Pilot Programs
0.0%
3
R-TOC Program Strongly Supported by
USD(AT&L) and Services
• R-TOC PE was created
using funds ($25M)
provided by the
Services in PBD 707
• PBD 707: USD(AT&L)
and the Services agreed
to move 1/3 each from
the Services accounts
to the OSD account
each year through the
FYDP to fund the RTOC PE
4
USD(AT&L) FY 2010 R-TOC Goal
• USD(AT&L) Goal: “Maximize cost avoidance on total
defense systems FY2010 O&S costs from an FY2004
baseline, by offsetting 30% of predicted inflation.”
– Goal extends to all defense systems on program-by-program
basis
– 15 Special Interest Programs (SIPs) designated lead
programs to “show the way” towards achieving goal
– SIPs are monitored through semi-annual reports and
quarterly R-TOC Forums
– Services will include this goal in their reviews
• Ultimately expand to all defense systems
PE will provide critical funds to help achieve this goal
5
R-TOC Special Interest Programs (SIPs)
Army
• Bradley A3 Upgrades
• UH-60M – Upgrade
• Stryker
• UAVS
• Guardrail
Navy
• H-1 Upgrades
• V-22
• F/A-18E/F
• H-60
• ASE
• Common Ship
Air Force
• Global Hawk
• Engines (2)
• F-16
Joint
• F-35 (JSF)
6
Status of R-TOC
• Reduction in Total Ownership Cost (R-TOC) program
initiated in 1999 by the USD(AT&L) to address:
– O&S cost growth places limits on force modernization / readiness
– O&S budget constraints limit programs to near-term problems
– R-TOC program seeks to seed O&S cost-avoidance solutions
• R-TOC Program has successfully demonstrated cost
avoidance
• Program Element Budget Actions
– “zeroed” in FY05 budget – no projects to show at that time
– No Congressional “Marks” for FY 2006 budget – Funded
• OSD has:
– Continued proactive steps to institutionalize O&S cost avoidance
in all defense systems
– Created Special Interest Programs (SIPs)
– Combined R-TOC and VE under same DOD leadership
7
Programs Contributing to R-TOC
•
•
•
•
•
Lean Enterprise Value
Six Sigma
Supply Chain Management
DoD Manufacturing Technology (ManTech)
Value Engineering
– FAR provisions offer contractual incentives
– Methodology offers approach to partner with industry
8
Value Engineering is an
R-TOC Best Practice
• VE provides:
– Cost reduction (VEPs and VECPs)
– Product or process improvement
• Higher quality
• Reduced cycle time
– Better means and materials for maintenance
• Increased reliability
• Greater safety
• Less environmental impact
VE Goal: Lower the government’s costs for goods and
services & provide cost effective solutions to problems
in design, development, fielding, support, & disposal
9
DOD VE Strategic Plan
• DoD VE Strategic Plan signed by USD(AT&L)
– Improve the value proposition of defense systems
– Align industry and government value propositions
– Increase VE expertise
• Strategic Plan
– Establishes a goal of cost savings and avoidances of
1.5% of TOA by FY06 for all the Services and other
DoD Agencies
– At least 500 people will have completed VE continuous
learning module by FY06
– 90% of VECPs should be fully processed within 180
days by FY06
– VECP Community of Practice (CoP)
10
DOD VE Savings & Cost Avoidance
TOTAL
3,500
(VEP)
Over
Over$30B
$29B
3,000
(VECP)
$M$M
2,500
2,000
1,500
1,000
500
0
83
85
87
89
91
93
95
Fiscal Year
97
99
01
03
05
11
11
12
VECP CoP Home Page
VECP CoP Home Page
Subcontractor
Suggests
Improvements
Reject
Contractor
Generates
Idea
Govt
Encourages
VECPs
Contractor
Markets
Preliminary
Idea
To Govt
Govt
Expresses
Technical
Interest
Contractor
Determines &
Markets
Proposal
Strategy
Govt
Expresses
Support
for VECP
Contractor
Summits
VECP;
Maintains
Interest
In Process
Contractor Begins
VECP Implementation;
Records Change
Configuration
Contractor
Delivers
VECP Unit(s)
Govt
Processes &
Contractually
Approves VECP
Govt
Definitizes
VECP
Govt Pays
Settlement
13
Idea Generation
Subcontractor
Suggests
Improvements
Contractor
Generates
Idea
Govt
Encourages
VECPs
To Selling VECP
14
VECPs Benefit Contractors
• Provides A Source Of Profit Not Available Under Other
Provisions Of The Contract
• Provides For Reimbursement Of Development Cost On
Approved VECPs
• May Provide Usable Technology On Other Product Lines
• May Provide A Competitive Edge On The Item In
Production
• Positive Working Environment
– Challenging / Skill Enhancement Work
– Improves Competitiveness
– Empowerment
15
Potential Benefits to Government
From VECPs
•
•
•
•
•
•
•
Upgraded technology (eliminate obsolescence)
Improved system performance
Increase in system readiness
Reduced logistics footprint
Savings on the contract
Reduced operation and support (O&S) costs
Better insight and improved working relationship with
contractor
16
SUMMARY
• R-TOC and VE are alive and well in the DOD
• R-TOC/VE info website: http://rtoc.ida.org or
http://ve.ida.org
• VE Strategic Plan approved and being worked
• Annual DoD VE Awards Ceremony
• Three VE documents in-work: 1) VE Contractor’s
Guide, 2) VECP Contracting Guide, and 3) VE
Handbook
• The VECP CoP exists now on the DAU CoP website
– https://acc.dau.mil/vecp
• VE – Needs support from contractors - VECPs
• R-TOC is driving towards institutionalization of O&S
cost reductions across all programs with a defined
USD(AT&L) FY 2010 goal and with an R-TOC PE
• R-TOC / VE Contact: Danny Reed: dreed@ida.org
17