Optimizing Procurement Decisions: A Cost-Benefit Analysis Approach

1. AMERICA’S ARMY: THE STRENGTH OF THE NATION Cost-Benefit Analysis (CBA) Four-Day Training Briefing Step 3: Define Alternatives Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more https://cpp.army.mil Version 3.0 (Draft) Last Updated: 10 November 2011

2. Four-Day CBA Training Schedule Monday Tuesday Wednesday Thursday

3. Day 2 Agenda 0830 – 0915: “Step 3: Define Alternatives” 0930 – 1200: “Step 4: Developing Cost Estimates for Each Alternative” and Mini-case #4 1200 – 1300: Lunch 1300 – 1630: “Step 5: Benefits” and Mini-case exercises #5 and 6

4. Step 3: Define Alternatives Use problem solving techniques to identify innovative and robust alternatives. • Alternatives: • Potentially optimal solutions to the Problem Statement, given Scope, Facts, Assumptions, and Constraints. • They should include the status quo or current state, if applicable. Questions for the reviewer: - Have all feasible alternatives been considered to include alternatives that represent creative thinking? - Have the alternatives been defined and described clearly to a sufficient level of detail to support the development of a cost estimate? - Is the status quo included, or is its absence explained? - Do the alternatives span a reasonably wide range of potential solutions?

5. Define the Status Quo Status Quo (“As-Is” state): • The status quo is the “baseline” program, process, or system: the solution that will exist if everything proceeds along the current trajectory. • The CBA must be forward-looking, not historical. Therefore, the status quo is not always static—it must account for scheduled changes that might occur within the timeframe of the analysis.

6. Assess the Status Quo for Viability Is the status quo a viable alternative? • Ask this question: Can the status quo solve the problem, given the scope and facts/constraints we’re dealing with? • Yes: Status quo is viable • No: Status quo is not viable • For example: • Problem: A storage depot is given a new task to store sensitive items that cannot be exposed to the weather • Fact: Existing storage facilities are concrete pads with overhead cover but no walls • Conclusion: Status quo cannot solve the problem and is therefore not viable • If the status quo is not viable: • It should still be costed and mentioned in the CBA. • In the CBA, explain why the status quo was rejected

7. Developing Alternative Courses of Action • Beyond defining the status quo, there is no prescribed doctrine or methodology for developing other courses of action. • So long as facts, assumptions, and scope are taken into account, any COA that falls within the boundaries and parameters thus defined can be a potential solution to the problem statement. Only COAs that are potentially optimal solutions should be included in the CBA.

8. Developing Alternative Courses of Action • The number of possible COAs generally increase with the number of decisions being made.

9. Developing Alternative Courses of Action • The set of COAs included in a CBA should • be potentially optimal solutions to the problem • represent the potential range of solutions • COAs should not • be “anchored”: they should not be affected by a psychological bias towards a favored alternative. • be subsets of each other—the COAs should not all be different “flavors” of the same alternative.

10. Developing Alternative Courses of Action • For example, if the objective of a CBA is to determine what four-passenger car to buy, and if the selection criteria are cost and reliability: • Including just Mercedes and Porsche as the two COAs under consideration would not cover the span of possible solutions. It can only be representative of those solutions that are both expensive and reliable. • Including a COA that purchases a used car with 300,000 miles would also be unreasonable—this is not likely to be a reliable car and clearly not a potentially optimal solution. • A set of COAs that spans a wider range of possible solutions and is also potentially optimal (i.e., spanning a wide range of costs and all reliable) might be COA1: New Porsche Panamera, COA2: New Toyota Corolla, COA3: Used Nissan Maxima with 80,000 miles.

11. Example: Finding Optimal Solutions U.S. Army Central Command has secured $198M for the procurement of two different models of the “HIMARS 2” multiple rocket launcher—class X and class Y—for deployment to Afghanistan. The class Y HIMARS 2 costs $9M each and weighs 27,000 pounds. The class X HIMARS 2 costs $11M and weighs 12,000 pounds. After procurement, all the HIMARS 2 will be transported to Afghanistan by a fleet of C-130 Hercules aircraft, each with a total maximum payload of 405,000 pounds.

12. Example: Finding Optimal Solutions How do you maximize the total number of HIMARS procured? If you buy only Class X, you can afford 18. If you buy only Class Y, you can carry 15. So is “buy 18 Class X HIMARS” the optimal solution?

13. Example: Finding Optimal Solutions COA 2 COA 3 COA 4 COA 1 (Status Quo)

14. Example: Finding Optimal Solutions You can procure 9 Class X and 11 Class Y HIMARS, for a total of 20. Moral of the exercise: analysis is sometimes necessary to determine the optimal solution.

15. Suggested Methods for COA Development • DOTMLPF: A methodology used by JCIDS to brainstorm possible solutions within the dimensions of Doctrine, Organization, Training, Materiel, Leadership, Personnel, and Facilities. • Consult Stakeholders, team members, and subject matter experts. • Mathematical analysis and/or optimization.

16. Courses of Action Common mistakes • Proposing the hoped-for course of action along with several obviously less attractive options in an attempt to force the decision in favor of one COA. In other words: presenting only one feasible option. • Adding a course of action where the main difference is the funding solution

17. Developing Alternatives: Example 1 Situation Because of BRAC moves, the transportation office will have to process property shipments for three times the number of people that it normally supports. The current process is based on face-to-face meetings with individuals and manual preparation of forms. The increased workload level will last for 3-4 years. Conventional Solution Since workload is increasing by a factor of three, the solution is to triple the office’s manpower. • Innovative Problem Solving • Don’t assume that existing policies, procedures, and standards cannot be changed. • Consider wide range of solutions, such as: • Increase manpower staffing • Outsource part of the process • Automate the preparation of forms • Reduce time for face-to-face meetings by enabling individuals to conduct part of the interview online • Challenge existing requirements for forms and data collection (i.e., the policies and rules that govern the process)

18. Developing Alternatives: Example 2 • Problem Statement: a review panel has determined that an annex facility in Arlington, VA housing an Army weapons costing division does not meet information security requirements. • Possible alternatives: • Determine unmet requirements, and install the necessary modifications to meet them. • Move the costing division to another facility that meets security requirements. • Keep the costing division in its current facility, but only allocate work with a non-sensitive classification.

19. Developing Alternatives: Exercise Due to BRAC, it is anticipated that demand for electric power at Ft. Good will decrease by 40%. There are currently five separate power plants supplying electricity exclusively to Ft. Good, with full operational capacities of 1.2 GW (gigawatts), 1.8 GW, 0.8 GW, 1 GW, and 1.5GW. Normal operational capacity is 75%. To run each plant, there is a fixed cost of $1M per month, and a variable cost of $0.5M per GW-month. If the objective is to reduce cost where possible, propose at least four alternative courses of action for this (fictional) scenario.

20. Review Exercise: Henry Ford • In a rented garage at 58 Bagley Street in Detroit, Henry Ford completed his first gas-powered car on the morning of June 4, 1896. He had spent $250 FY1896 dollars on equipment to build the car, and $100 on labor. The garage cost $15 per month to rent. After the car was assembled, it was clear that it would not be able to fit through the door of the rented garage. The car was to be used as a model for the two-year long test-driving phase of his R&D process, with the final goal of arriving at a model for mass production and sale. Define possible alternative Courses of Action.