The headline in Breaking Defense says it all: “LCS: Production Surges, Price Drops.” Once again a major acquisition program demonstrates a truism known by every commercial producer on the planet. Numbers matter when it comes to a manufacturer’s ability to achieve an efficient rate of production, move down the learning curve, get a good deal on materials and ultimately, lower the unit price to the customer. This is as true for commercial products as it is for defense items. Produce ten million iPhones a year and the cost per item is extremely low. Build just 20 B-2s, particularly when the plan had been to acquire up to 100, and each one costs over $1 billion.
Moreover, manufacturers design their production lines and develop supply chains based on calculation of the best ways to achieve efficiencies and minimize production costs informed by the expected annual production goal. Clearly, if the demand does not materialize or if the scale of the program is reduced, costs will rise. Think Ford’s Edsel. According to the latest GAO assessment, most of the recent Nunn-McCurdy breaches experienced by defense acquisition programs have been the result of reductions in the number of systems being acquired and not because of inefficiencies in their production.
The Littoral Combat Ship (LCS) program is a remarkable success story, particularly in light of its early difficulties and missteps. According to the data, the price of the Lockheed Martin variant of the LCS went from about $537 million for the first one, USS Freedom, to some $347 million for number nine, the USS Little Rock. The Navy’s decision to contract for a block buy of both variants of the LCS had much to do with the decline in price. A major redesign of the Marinette Marine shipyard that actually builds the ships by its new owner, Fincantieri, helped with workflow and reduced labor hours. Fincantieri invested more than $75 million of its own money in the facility, which it was able to do only because of the certainty that the Navy would stick with its procurement plans.
There are a number of similar examples. The cost of the F-35 Joint Strike Fighter has declined with each production contract reflecting, in particular, the impact of the workforce moving down the learning curve and investments in manufacturing advances to reduce labor and material costs. Once full rate production is achieved in Lockheed Martin’s state-of-the-art, highly automated production facility at Fort Worth, the cost of the F-35A is projected to be right on target at $85 million in then-year dollars. The collaboration between submarine makers Electric Boat and Huntington Ingalls on ways of improving construction of Virginia-class submarines resulted in cost savings sufficient to allow the Navy to order an additional boat per year for most of the next thirty years.
Acquisition programs that maintain predictable funding and move over time to a steady and efficient rate of production virtually always achieve reductions in unit price. If this also involves multi-year procurements or block buys, where the contractors can procure materials and, in particular, long-lead items in economical ordering quantities, the savings can be even greater. The Army/Navy multi-year contract for Black Hawk helicopters saved the Pentagon over $1 million per aircraft. Similarly, the latest Navy multi-year contract for the V-22 Osprey is expected to achieve about $1 billion in savings. Since these are mature programs performing well down the learning curve, the savings are due largely to efficiencies in labor force, supply chain and production management.
The success of the LCS program also shines a light on another issue: concurrency or beginning production while a platform or system is still in development. This is now considered, to use Under Secretary of Defense Frank Kendall’s phrase, “acquisition malpractice.” But if the Pentagon waits until the design is letter perfect and fully tested, it will take years before efficient production is achieved. Moreover, if any production problems are discovered that require a redesign, it is very late in the game. This is one of the lessons learned in the space between the USS Freedom and Little Rock.
Find Archived Articles: