Lean Aerospace Initiative Plenary Workshop Economic Incentives within Acquisition Reform: A Summary of Six Case Studies October 14, 1998 Presented By: Wes Harris MIT Research Sponsored By Lean Aerospace Initiative Lean Aerospace Initiative l Outline Motivation – Financial perspectives – Pre-acquisition reform environment l l l l Definitions Key questions Data sources Findings – Barriers – Enablers – Incentives l Results – The gains – Lessons learned l l Acquisition prescription Back-up data PE Harris 101498-2 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Motivation: Financial Perspectives l Contractor – – – – l Cash flow Return on Net Assets/Investment Earnings Sales Government – Reduced productions costs – Reduced lifecycle costs Stakeholders Stakeholdersare aredependent dependentupon upon each eachother otherfor for‘win-win’ ‘win-win’solutions solutions PE Harris 101498-3 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Motivation: Pre-Acquisition Reform Environment l l l Cost-based pricing results in reduced profit levels when costs are reduced In the production of major weapon systems, cost reductions achieved through the implementation of lean practices are frequently “captured” by the government customer Cost reductions often occur before the contractor received adequate return on investment (ROI) PE Harris 101498-4 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative l Definitions Barriers: Conditions or qualities that detract from processes and goal supporting a successful system procurement as viewed by both supplier and customer. l Enablers: Conditions or qualities that enhance those processes and goals supporting a successful system procurement as viewed by both supplier and customer. l GOALS Incentives: SUPPLIER BARRIER Implementation of contractual clauses, structures or provisions which allow the sharing of risk and cost savings generated through lean practices between supplier and customer. Incentives are the tools which are used to achieve program goals, to encourage desired behavior. ENABLERS CUSTOMER PE Harris 101498-5 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative l l l l Key Questions What are the primary strategies, barriers, enablers and relationships of economically incentivized procurement of weapon systems in production? When production costs are reduced, how can contractors share in the benefits? What practices motivate defense aircraft contractors to invest more of their resources to become lean? What are the lessons learned in these studies are are they transferable to other procurements? Identify Identifypractices, practices,strategies, strategies,enablers enablersand andbarriers barriersrelated relatedto tocompanies’ companies’ investments investmentsand andsharing sharingof ofcost costsavings savings PE Harris 101498-6 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Data Sources Interview of Experts 3 Airframe companies 2 Engine companies 3 Electronics companies 7 Government program offices (ASC) 2 Pentagon (SAF) offices 4 FFRDCs, universities Case Studies 2 munitions programs 2 Airframe programs 2 Engine programs 1 Follow-up study (Airframe) More than 150 people have been interviewed PE Harris 101498-7 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Findings: Barriers Munitions I l Technical difficulties l Cost overruns l Adversarial relationship l Decrease in order quantity l Munitions II l Technical difficulties l Schedule slip l Acquisition reform generated anxiety Non value added oversight Recovery Recoveryfrom fromnear nearloss lossof ofprogram programvs. vs. proactively proactivelydesign designfor forprogram programsuccess success PE Harris 101498-8 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Findings: Barriers Airframe I Airframe II l Increasing unit cost l Budget instability l Technical difficulties l Technical difficulties l Budget instability l Lack of mission for l Adversarial relationship l Technical requirements instability aircraft l Commercial practices generated anxiety Rebuild Rebuildhighly highlycontentious contentioustraditional traditional procurement procurementprogram programvs. vs.procurement procurementof ofaamajor major weapon weaponsystem systemusing usingcommercial commercialpractices practices PE Harris 101498-9 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Findings: Barriers Engine I l Budget instability l Non-value added oversight l Engine II l Commercial practices generated anxiety l Increasing unit price Acquisition reform generated anxiety Traditional Traditionalprocurement procurementwithin withincontext contextof of acquisition acquisitionreform reformvs. vs.COTS COTS PE Harris 101498-10 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Findings: Summary of Barriers l l Technical difficulties Budget instability l Cost over-runs l Adversarial relationships l Anxieties l Technical requirements Barriers are sources of program uncertainty instability PE Harris 101498-11 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Findings: Enablers Munitions I l New effective leadership l Jointly developed cost model l Munitions II l IPTs l Transition of risk from Effective joint IPTs Jointly developed cost model l Pilot acquisition program l Waiver of TINA l Contractor investment to government to contractor l Advocacy and core joint become lean Supplier Supplierand andcustomer customerare arejoined joinedto toreduce reducecost cost and andshare sharerisk riskand andreward reward PE Harris 101498-12 ©1998 Massachusetts Institute of Technology Findings: Lean Aerospace Initiative Enablers Airframe I Airframe II New effective lean l Effective leadership leadership l Effective joint IPTs l Should cost exercise l Pilot acquisition l Effective joint IPTs l Economic order l quantity (EOQ) funding program l No military specifications Top Topcover, cover,program programlevel levelleadership leadershipplus plusjoint joint IPTs IPTsdrive driveefforts effortsto toovercome overcomebarriers barriers PE Harris 101498-13 ©1998 Massachusetts Institute of Technology Findings: Lean Aerospace Initiative Enablers Engine I Engine II l Effective leadership l Effective leadership l Pilot acquisition l Should cost exercise program l Waiver of TINA Contractor investment l Use of commercial l to become lean l practices Effective IPTs Effective Effective(lean) (lean)leadership leadershipat atprogram programlevel level essential essentialto toovercoming overcomingbarriers barriers PE Harris 101498-14 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Findings: Summary of Enablers MUNITIONS Supplier and customer are joined to reduce cost and share risk and reward ENABLERS AIRFRAMES Top cover, program level leadership plus joint IPTs drive efforts to overcome barriers ENGINES REDUCE UNCERTAINTY Effective (lean) leadership at program level essential to overcoming barriers PE Harris 101498-15 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Findings: Incentives Munitions I l l l Implied USAF long term commitment Foreign military sales Reinvested government savings Munitions II l l l l Implied USAF long term commitment Foreign military sales Reduced government oversight Contractor retains savings Increased Increasedvolume volumeof ofsales salesover overtime timeperiod period sufficient sufficientto togenerate generatecost costsavings savingsand andresulting resulting sharing sharingof ofsavings savings PE Harris 101498-16 ©1998 Massachusetts Institute of Technology Findings: Lean Aerospace Initiative Incentives Airframe I Airframe II l Multi-year contract l Foreign military sales l Performance based l Use of commercial payments l NDAA competition practices l Early sign-up provisions l Use of government tooling Reduction Reductionof ofdebt debtservicing servicingand andreduction reductionof of government governmentoversight oversightenable enablesupplier supplierto toinvest invest own ownresources resourcesto tobecome becomemore morelean lean PE Harris 101498-17 ©1998 Massachusetts Institute of Technology Findings: Lean Aerospace Initiative Incentives Engine I Engine II l Foreign military sales l Multi-year contract l Incentive fees l Use of commercial practices l Performance based payments Production Productionof ofadditional additionalunits unitsdrives drivesimproved improved performance performanceand andreliability; reliability;price pricemay mayincrease increase PE Harris 101498-18 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Findings: Summary of Incentives MUNITIONS Increased volume of sales over time period sufficient to generate cost savings and resulting sharing of savings AIRFRAMES Reduction of debt servicing and reduction of government oversight enable supplier to invest own resources to become more lean ENGINES Production of additional units drives improved performance and reliability; price may increase INCENTIVES ARE PATHWAYS TO GOALS PE Harris 101498-19 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Results: The Gains l U.S. Government – Technically sound systems – Reduced cost – Most competitive product – More complete understanding of contractors goals and constraints – Potential for additional cost reduction l Contractor – Reasonable-firm government commitment – Reward for accepting additional risk – Enhanced corporate reputation – Reduced debt service – Government assistance in becoming more lean – Share in cost reduction savings PE Harris 101498-20 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Results: Lessons Learned l l l l High level senior commitment and support enhance program success Information and risk, openly shared, precede development of economic incentives through delicate negotiations Reasonably-firm customer commitment, over a finite time period, to the production program reduces mutual risk Contractor investment of its resources to reduce unit cost enhance program success PE Harris 101498-21 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Results: Lessons Learned l Innovative use of U.S. government of the following concepts can form foundation of risk-reward balance – Multi-year contract – Waiver of Certified Cost and Pricing Date (CCPD) – Performance Based Payments (PBP) – Economic Order Quantity (EOQ) Funding – Joint Cost Model (JCM) – Variations in Quantities (VIQ) options l l Leadership and use of IPTs increased communication and information flow goals and visions Mutual trust and respect enabled internalization of strategic goals and visions PE Harris 101498-22 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative l l l l l l l l l l l Acquisition Prescription for Systems in Production Provide top cover Select effective leadership team (supplier and customer) Built mutual respect and trust Establish and use joint IPTs Develop joint cost model Establish additional markets (FMS) Eliminate TINA, CCPD, WGL, non-value added oversight, milspecs Reduce debt servicing Provide long term customer commitment Buy commercially only tested systems Balance performance warranties and liabilities Assumptions: Assumptions:stable stablebudget budgetand andtechnical technical requirements requirements PE Harris 101498-23 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Case Study Characteristics Airframe I Munitions I l Sole source, FPI l Conventional acquisition program l l l Competitive, CPIF l Sole source, CPIF (initially) l Acquisition reform pilot Initially a conventional l In production acquisition program In production > 5,000 units Engine I l In production >50 units Munitions II Airframe II l Competitive, FPI/FFP l Sole source l Acquisition reform pilot l Contractor developed l In production l Engine II Sole source l Contractor developed l Procured through commercial practices l In production Procured through commercial practices l l >200 units Not currently pass FAA certification l 95% identical to commercial engine PE Harris 101498-24 ©1998 Massachusetts Institute of Technology Lean Aerospace Initiative Results: Policy Implementations l Reduced government oversight through use effective joint IPTs – CCPD – PBP – TINA l Increased use of commercial practices – – – – – – SPI Performance warranties Best value One color of money Flexible foreign military sales Increased supplier stake PE Harris 101498-25 ©1998 Massachusetts Institute of Technology