OUTLINE

1. OUTLINE • Reduction in Total Ownership Cost (RTOC) • Life-Cycle Cost vs Total Ownership Cost • Life-Cycle Cost Distribution • CAIV • R-TOC Program • Technology Insertion • Exercise • Ways to Reduce TOC in Your Program

2. Background • DoD migrated from modernization funds (e.g., R&D and procurement) to operations account (operations and support) • Cause • Flat or declining DoD budgets • Equipment was aging • Support costs of older equipment increased • Readiness was adversely impacted • Modernization funds were frequently the “bill-payer” • Solution • Improve efficiency of support systems (i.e., reduce costs) • Insert technology to improve reliability (and hence decrease future support costs)

3. Background (con’t) • R-TOC established in 1999; oversight by the Defense Systems Affordability Council (DSAC) • 30 Pilot Programs identified/10 per Service • Mixed acquisition phases • Motivations for R-TOC • Concerns about the adverse impact of budget and operational trends on force structure and readiness • Declining procurement funds result in few new starts; aging legacy systems raise O&S costs, consuming higher portions of the budget and less available for modernization. • Failure of DoD activities to keep pace with private sector improvements in logistics and supply chain management

4. VISION Reducing Total Ownership Cost While Meeting the Warfighter’s Needs

5. Life-Cycle Cost (LCC) Definition LCC is the total cost to the government of the acquisition and ownership of a system over its useful life. It includes the cost of development, acquisition, operations, support (to include manpower), and where applicable, disposal.

6. LCC Interfaces:Total Ownership Cost (TOC) • “DoD TOC is the sum of all financial resources necessary to organize, equip, train, sustain and operate military forces sufficient to meet national goals in compliance with all laws, all policies applicable to DOD, all standards in effect for readiness, safety, and quality of life, and all other official measures of performance for DoD and its components.” “…….and all other costs of business operations of the DoD.” • “Defense Systems TOC is defined as Life Cycle Cost (LCC). • LCC includes not only acquisition program direct costs, but also the indirect costs attributable to the acquisition program (I.e., costs that would not occur if the program did not exist). For Example: indirect costs would include the infrastructure that plans, manages, and executes a program over its full life and common support items and systems.” SOURCE: USD(A&T) Memorandum, “Definition of Total Ownership Cost (TOC), Life Cycle Cost (LCC), and the Responsibilities of Program Managers,” November 13, 1998

7. DoD TOC Is More Than Defense System TOC DoD TOC Sum of all defense systems’ TOC (or LCC) Non-system TOC

8. Acquisition infrastructure costs Other indirect acquisition costs TOC Components(DoD vs. System vs. Non-System) Warfighter Program office System developer Weapon system costs (TOC = LCC) Disposal costs O&S costs CAIG element structure Service appropriation format R&D costs Procurement costs RDT&E infrastructure costs DoD TOC Non-system costs

9. ARE TOC & LCC THE SAME? DoD TOC = the DoD Budget Defense Systems TOC = LCC

10. Ship Total Ownership/Life Cycle Cost Composition Source: http://www.ncca.navy.mil/resources/ncca_strategic_business_plan.pdf

11. Aircraft Total Ownership/Life Cycle Cost Composition Source: http://www.ncca.navy.mil/resources/ncca_strategic_business_plan.pdf

12. WEAPON SYSTEM O&S

13. LCC Management Guidance “Program Manager responsibility in support of reducing DoD TOC is the continuous reduction of LCC for their systems” USD (AT&L) November 1998

14. Problem Examples:Defense System Life Cycles HEMTT 44 yrs SSN 688 56 yrs F-15 51 yrs F-14 41 yrs CH-47 71 yrs M-113 59 yrs UH-1 69 yrs 49 yrs X X KC-135 86 yrs 72 yrs AIM-9 93 yrs X C-130 79 yrs X 67 yrs B-52 94 yrs 19401950 1960 1970 1980 1990 2000 2010 2020 2030 2040

15. Effect of a Longer Life Cycle on TOC • Extending equipment service life has increased O&S costs • Just increasing the service life will increase O&S and TOC (in absolute terms) because equipment is used longer • Increasing the service life also increases the proportion of O&S costs relative to the TOC (in relative terms) • Readiness concerns also increase as service life is increased • R-TOC focus • Maintain or improve readiness of systems • Reduce O&S costs through • More efficient maintenance and support activities • Insert cost-reducing technology into fielded systems

16. SYSTEM RESEARCH AND DEVELOPMENT Historical LCC Distribution (TYPICAL 1970 DOD ACQUISITION PROGRAM WITH A SERVICE LIFE OF ABOUT 20 YEARS) life-cycle Cost OPERATION AND SUPPORT SYSTEM ACQUISITION PRODUCTION 60% 30% 10% 20 YEARS

17. More Recent LCC Distribution (TYPICAL 1980 DOD ACQUISITION PROGRAM WITH A SERVICE LIFE OF ABOUT 30 YEARS) life-cycle Cost OPERATION AND SUPPORT SYSTEM ACQUISITION 72% 72% 28% 28% Disposal Disposal ? 30 YEARS

18. Acquisitions Costs 28% Operations Cost 12% Logistics Support Costs 60% Recurring Support Costs 92% Fabrication - 72% Personnel - 67% Repair Materiel 10% Maint Labor 70% Investment Costs - 8% Misc 1% Design 12% Installation Checkout 14% POL 32% Documentation 2% Replenishment Spares - 20% Initial Trng 7% Initial Spares 68% Other 25% Life Cycle Cost Distribution F-16 O&S Costs = 78% Courtesy DUSD Logistics

19. Life-cyclecost actuallyexpended Out of service Early Decisions Affect Life-Cycle Cost(based on historical data) 100 90 80 70 Life-cycle cost effectivelyrendered unchangeablefor a given design Cumulativepercentageoflife-cyclecost 50 10 I II III IOC Milestones Opportunities to affect TOC Development MODs

20. Cost as an Independent Variable (CAIV) • CAIV is a major tool in reducing Life Cycle Cost/Total Ownership Cost. • Strategy • Aggressively set realistic cost objectives for acquiring and supporting defense systems, and • Manage programs to meet those objectives. • Approach • Set realistic but aggressive cost objectives early in each program • Manage risks to achieve cost, schedule and performance objectives • Devise metrics for tracking progress in setting and achieving cost objectives • Motivate/incentivize government/industry to achieve objectives • Incentivize operating and support cost reductions for fielded systems

21. TOC & CAIV … how do they relate? • CAIV is a process- a way to reduce costs • TOC is a domain- a set of costs to be reduced • TOCReduction* is a program - a set of processes “CAIV is a verb, TOC is a noun!” - Bob Jones, NSWC-CD *Also Called “Reducing TOC (R-TOC)”

22. Tools to Estimate TOC • A partial listing of models that may assist in estimating TOC or LCC

23. Take Home Learning Points • The PM is responsible for TOC and LCC Management • The lowest-cost R&D or procurement alternative is not necessarily the lowest TOC or LCC alternative. There are many components to TOC - Research and Development - Procurement - O&S (O&S costs historically require the majority of a system’s life-cycle costs • TOC or LCC is required for each milestone review • TOC/LCC management is a continuous process used to reduce total operating cost - CAIV is an important tool for analyzing and managing TOC - Best time to impact TOC is early in s system’s life cycle

24. R-TOCThe Program