Reducing Total Ownership Cost in DoD - Defense Acquisition ...

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propriations and major commands,based on actual historicals (rather thanestimates). Eventually, AFTOC will captureall Air Force TOC. AFTOC was designedto satisfy the needs of managers,at both headquarters and field level, forinformation such as cost-per-flying-hour,top cost drivers, and cost trends (e.g.,due to aging aircraft). AFTOC implementsa data warehouse concept by integratingdata from 10 different Air Forcedatabases, in contrast to the situationthat existed prior to AFTOC, where individualmanagers had to consult a widevariety of databases and then integrateresults themselves.Air Force pilot programs have been theAir Force’s way of getting somethingstarted. They encompass the B-1, KC-135, F-16, Space-Based InfraRed Systems,F-117, Airborne Warning and ControlSystem, Cheyenne Mountain, Joint SurveillanceTracking and Attack Radar System,C-17, and C-5. In this case, as istrue generally for DOD R-TOC, the pilotprograms include a mix of systems indifferent environments and stages of thelife cycle. The Air Force established reductiongoals for each of these pilots,put implementation plans in place, andis now able to measure preliminary results.Specifically, 48 initiatives fromwithin the pilot programs are currentlyforecast to generate over a third of a billiondollars in savings.The Air Force also recognized the needfor an incentives program to redressthe historical concern about higherlevelmanagement appropriating savings,potentially leaving the organizationthat generated the savings worseoff than before. The Air Force responsewas the Cost Savings ModernizationInitiative (CSMI) process, which in effectis the starting point for the institutionalizationprocess. Similar in conceptto the Navy CREI, savingsgenerated by a major command (MAJ-COM) are available for reinvestmentby the MAJCOM that generated them.If the CSMI is forwarded to the ViceChief of Staff for Air Council approval,then the savings would be available forreinvestment anywhere in the AirForce. The bottom line of this process,Although the PMnaturally is betterpositioned to “see”across a specificprogram, sustainmentfunctional managershave superior visibilitywithin functions:neither is in a positionto go it alone.TheArmy considers thisfact of life to be one ofthe major lessonsfrom Army pilotprograms — long-terminstitutionalization ofR-TOC depends onunderstanding it.as was the case for the Navy, is thatsavings are available for reinvestmentby the organizational level that generatedthem.Results Are Not InstantaneousOne of the realities of TOC reduction isthat results are not instantaneous. It takestime to identify promising initiatives, toput them in place, and then more timeto see evidence that ownership cost isdecreasing. The Department’s R-TOCprogram has been formally in place sinceJanuary 1999, when Into the 21st Century— A Strategy for Affordability was published.Already, leading indicators confirmthat R-TOC is working, but also reflectevidence of future challenges.First Indicator — Logistics CostsThe first indicator is the behavior oflogistics costs. As noted earlier whendiscussing the Department’s approach,one of the more important objectivesof the strategy was to reduce logisticscosts by 7 percent in fiscal 2000; 10percent in fiscal 2001; and, as a stretchtarget, 20 percent by fiscal 2005. Figure3 shows the current projections astaken from the fiscal 2002-2007 POM.Clearly, the trend is in the right direction,but the fiscal 2005 stretch targetremains a challenge. The fact that fiscal2005 procurement is projected at$68.4 billion will also help — increasedmodernization will reduce O&S costseven further.Second Indicator — TOA CostsA second indicator is the behavior of totalDoD logistics and other infrastructurecosts as a percentage of TOA. Trendshere are also very favorable. The Departmentwill surpass its goals in fiscal2000 and fiscal 2001, and based on POM2002-2007 data (Figure 4), is projectedto achieve its fiscal 2005 goal.Third Indicator — OverallNumbers Tell the StoryFinally, looking at the evidence from thepilot programs themselves is instructive.Of the 30 pilot programs, 13 have nowreported that they would achieve or exceedthe 20 percent stretch goal with increasedreadiness. A year ago, only sixprograms projected that they wouldreach the target. Average savings areabout 18 percent as compared to 10 percentone year ago.The FutureTo enable further significant improvement,several fundamental issues — eachassociated with building better relationshipswith customers and stakeholders— must be addressed explicitly.Competitive Sourcing and theCongressional StakeholderOne of the important enablers of R-TOC,as noted at the beginning of this article,is the Department’s strategy of reengineeringlogistics through competitivesourcing of product support. The expectation,for which abundant empiricalsupport exists, is that competitivesourcing will result in a more efficientinfrastructure, will further reduce sup-PM : JULY-AUGUST 2001 81
port and infrastructure costs, and willenable transfer of those savings intomodernization accounts.Since competitive sourcing will affect thechoice between public and private providerswith regard to the Congressionalstakeholder, a dialogue is needed on logisticssupport generally and depot maintenancespecifically, to provide for anagreed-to means of selecting the bestproviders. Neither the public nor the privateprovider is, per se, inherently themore effective and efficient provider. Efficiencyis inherently higher where competitionor some similarly powerful incentiveexists. Further, the situation todayis viewed in bipolar (private or public)terms, where the choices are actually becomingricher, especially with the adventof public-private partnerships orpartnership-like arrangements.Better Interfaces with IndustryBetter interfaces are also needed with industrystakeholders. In a February 2000letter to the Principal Deputy Under Secretaryof Defense for Acquisition, Technologyand Logistics, the Aerospace IndustriesAssociation noted “industry’sinability to get a DoD decision on proposedlogistics innovations … [and thelack of an effective] … mechanism withinDoD for evaluating and implementingattractive, innovative contractor proposedsolutions.”DoD has always recognized the need tolook to industry for weapon system technologies.It is increasingly clear, however,that DoD should look to industryfor advances in business processes aswell. As is evidenced by the continuingincrease in U.S. industrial productivity,“best commercial practices” is more thana slogan — it summarizes a set of new,often information technology-enabledprocess improvements that are of considerablepotential value to the Departmentin reducing TOC.Needs of PM StakeholderPMs for the R-TOC pilots are anotherset of crucial stakeholders. They oftenfind it difficult to obtain the funding necessaryto develop and validate solutionsto R-TOC problems. Even when solutionsare known, funding is always anissue — a great deal of “lobbying” timeis needed, and the outcome is uncertain.This is particularly true when, as is oftenthe case, the initiative will directly or indirectlyaffect the business base or structureof an organization that is in the approvalchain. PBD 721 is an importantstep in the right direction, but R-TOCproblems will undoubtedly require anenduring, probably more robust solution.Warfighter Customer’s RoleDoD’s R-TOC efforts have not alwaysleveraged the Department’s greatestasset — the warfighter customer. DoDneeds to find a way to provide thewarfighter customer a more active role.One of the original tenets of R-TOCwas establishing formal performanceagreements with the warfighter. Thusfar, few examples of this are currentlyin practice. Key to implementingneeded changes in this arena is probablydeveloping effective ways to blendcapability increases with R-TOC viamodernization programs.Simplifying Funding FlowsAnother lesson — and a problem yet tobe resolved — is the need to simplifyfunding flows. The complexity of fundingflows, in terms of both the numberand “layers” of organizations involvedboth inside and outside the Services, isa significant impediment to TOC reductioneffectiveness. Additionally, obtainingrealistic estimates of the total systemcosts (present, past, and future) isa daunting challenge. Total system costsinvolve second- and third-tier indirectcosts, which are difficult to evaluate becauseof the lack of recordkeeping andthe lack of adequate algorithms to determinesuch costs.Pointing in the Right DirectionRemarkably, even at this early stage ofthe R-TOC initiative, the Department hasachieved overwhelmingly positive results.Critics will be quick to point out projectedsavings (cost avoidances) are notthe same as realized savings. However,cost avoidances equate to savings in futurebudget years. Meanwhile, to seethese early, leading indicators consistentlypointing in the right direction isindeed heartening.Pilot programs have shown the way forward— all programs should eventuallyshow similar savings. Work, however, remainsto be done to fully capture thelong-term savings yet to be realized fromthis vital initiative.Editor’s Note: The authors welcomequestions or comments on this article.Contact Mandelbaum at Jay.Mandelbaum@osd.mil; contact Pallas at spiros.pallas@.osd.mil.FIGURE 4. Total DoD Logistics and Other Infrastructure CostsAs a Percentage of TOA100%80%60%40%64% 63% 63%59%57%53% is FY 2005extrapolation20%0%FY97 FY98 FY99 FY00 FY0182PM : JULY-AUGUST 2001
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