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
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Outline
Motivation
– Financial perspectives
– Pre-acquisition reform environment
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Definitions
Key questions
Data sources
Findings
– Barriers
– Enablers
– Incentives
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Results
– The gains
– Lessons learned
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Acquisition prescription
Back-up data
PE Harris 101498-2 ©1998 Massachusetts Institute of Technology
Lean Aerospace
Initiative
Motivation:
Financial Perspectives
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Contractor
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–
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–
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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
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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
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Definitions
Barriers:
Conditions or qualities that detract from processes and
goal supporting a successful system procurement as
viewed by both supplier and customer.
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Enablers:
Conditions or qualities that enhance those processes
and goals supporting a successful system procurement
as viewed by both supplier and customer.
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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
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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
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Technical difficulties
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Cost overruns
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Adversarial relationship
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Decrease in order
quantity
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Munitions II
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Technical difficulties
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Schedule slip
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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
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Increasing unit cost
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Budget instability
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Technical difficulties
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Technical difficulties
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Budget instability
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Lack of mission for
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Adversarial relationship
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Technical requirements
instability
aircraft
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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
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Budget instability
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Non-value added
oversight
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Engine II
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Commercial practices
generated anxiety
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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
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Technical difficulties
Budget instability
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Cost over-runs
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Adversarial relationships
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Anxieties
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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
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New effective leadership
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Jointly developed cost
model
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Munitions II
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IPTs
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Transition of risk from
Effective joint IPTs
Jointly developed cost
model
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Pilot acquisition program
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Waiver of TINA
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Contractor investment to
government to contractor
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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
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Effective leadership
leadership
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Effective joint IPTs
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Should cost exercise
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Pilot acquisition
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Effective joint IPTs
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Economic order
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quantity (EOQ) funding
program
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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
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Effective leadership
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Effective leadership
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Pilot acquisition
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Should cost exercise
program
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Waiver of TINA
Contractor investment
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Use of commercial
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to become lean
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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
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Implied USAF long term
commitment
Foreign military sales
Reinvested government
savings
Munitions II
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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
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Multi-year contract
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Foreign military sales
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Performance based
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Use of commercial
payments
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NDAA competition
practices
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Early sign-up provisions
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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
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Foreign military sales
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Multi-year contract
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Incentive fees
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Use of commercial
practices
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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
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U.S. Government
– Technically sound
systems
– Reduced cost
– Most competitive
product
– More complete
understanding of
contractors goals and
constraints
– Potential for additional
cost reduction
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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
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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
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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
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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
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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
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Sole source, FPI
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Conventional acquisition
program
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Competitive, CPIF
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Sole source, CPIF
(initially)
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Acquisition reform pilot
Initially a conventional
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In production
acquisition program
In production
> 5,000 units
Engine I
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In production
>50 units
Munitions II
Airframe II
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Competitive, FPI/FFP
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Sole source
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Acquisition reform pilot
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Contractor developed
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In production
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Engine II
Sole source
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Contractor developed
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Procured through
commercial practices
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In production
Procured through
commercial practices
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>200 units
Not currently pass FAA
certification
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95% identical to
commercial engine
PE Harris 101498-24 ©1998 Massachusetts Institute of Technology
Lean Aerospace
Initiative
Results:
Policy Implementations
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Reduced government oversight through use
effective joint IPTs
– CCPD
– PBP
– TINA
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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