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Breakout Session # 605

Transformation Through the Reduction of Total Cost (R-TOC). Breakout Session # 605 Nan Ramsey, Acquisition Initiatives Team Lead, US Army AMSAA Jim Vickers, Senior Manager, Raytheon Missile Systems

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Breakout Session # 605

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  1. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  2. Transformation Through the Reduction of Total Cost (R-TOC) Breakout Session # 605 Nan Ramsey, Acquisition Initiatives Team Lead, US Army AMSAA Jim Vickers, Senior Manager, Raytheon Missile Systems Date April 27, 2004 Time 11:00 am NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  3. Organization of Briefing • R-TOC • R-TOC – VE Affordability Project • OSD VE Strategic VE Plan • Contractor Perspective • Other Initiatives NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  4. Why Was R-TOC Started? • Initiated in 1999 by the USD(AT&L) to address: • Adverse impact of budget and operational trends on force improvements and readiness • Annual O&S cost growth at the expense of modernization NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  5. Improved readiness Improved capability Reduced O&S costs Improved quality of life Reduced logistics footprint Systems Engineering Sustaining improvements in: • Reliability and maintainability • Supply chain management • Support processes Logistics Policy & Practices Modernization Programs What’s R-TOC Trying To Accomplish? NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  6. R-TOC Approach • Pilot Programs were established to: • Demonstrate innovative ways to improve reliability and maintainability, reduce supply chain response times/footprint, and/or promote competitive sourcing of product support • Maintain or improve readiness while reducing FY05 O&S costs by 20% or more (developmental programs instructed to focus on life cycle O&S costs) • Quarterly forums to monitor progress and share problems and solutions NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  7. R-TOC/VE/Affordability Projects • For FY05 and on: A budget line has been created • $25M per year • Project selection process has been defined • Process has started to select projects NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  8. R-TOC Goal Maximize cost avoidance on total defense systems FY2010 O&S costs from an FY2004 baseline, by offsetting 30% of predicted inflation NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  9. R-TOC Impact • Significant O&S cost savings • Pilots include some of the principal O&S cost drivers for each Service (e.g., Apache, Abrams, CVN-68, F-16, B-1, C-5) • Best practices demonstrated • Broad cross section of weapon types and acquisition phases provide different challenges and opportunities • Best practices guide published • Force readiness posture improved • Reliability and supply chain improvements • Pilots include some of the most critical, high demand systems (C/KC-135, EA-6B, C-17, C-5, JSTARS, Apache, CH-47, AWACS) NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  10. Significant O&S Cost Savings • 46% of the eligible 26 R-TOC Pilot Programs project FY05 cost reductions of 18% or greater. • Projected FY05 cost reduction (26 R-TOC Pilot Programs) exceeds $1.5B, $75B over the LC of all 29 Pilot Programs NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  11. Is R-TOC a Requirement? R-TOC is not a requirement Because survival is not mandatory NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  12. Programs Contributing to R-TOC • Lean Enterprise Value • Manage the Value Stream • Eliminate Waste • DoD Manufacturing Technology (ManTech) • focuses on the needs of weapon system programs for affordable, low-risk development and production • matures and validates emerging manufacturing technologies to support low-risk implementation in industry and DoD facilities • Value Engineering • FAR provisions offer contractual incentives • Methodology offers approach to partner with industry NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  13. Approved idea Incorporated in contract Submit Idea to the Government (VECP) Voluntary Clause FAR 52.248-1 Invest their own funds, on a voluntary basis, to develop cost saving ideas Development & Implementation Contractor Savings Government NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  14. Benefits to Contractors From VECPS • Provides A Source Of Profit Not Available Under Other Provisions Of The Contract • Provides For Reimbursement Of Development Cost On Approved VECPs • May Provide Usable Technology On Other Product Lines • May Provide A Competitive Edge On The Item In Production • Positive Working Environment • Challenging Work • Skill Enhancement • Improves Competitiveness • Empowerment NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  15. Potential Benefits to Government From VECPS • Upgraded technology (eliminate obsolescence) • Improved system performance • Reduced logistics footprint • Savings on the contract • Reduced operation and support costs • Better insight and improved working relationship with contractor NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  16. C2 Canister Packaging VECP OLD PACKAGING DESIGN • Susceptible to Rust • Safety Issue/Sharp Edges • Old Canning Technology • PKG is High % of TOC • Key is Easily Lost • Finish is not Envr Friendly • Costs paid out of VECP incentive • NEW DESIGN • $1 savings per unit • Current & future contract savings ~$8M (will be shared) • Reduction of 4 lbs/carton • Easier to open, safer and won’t rust NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  17. An Adaptive Radio Network Specifically Designed to Distribute Digital Data O with Embedded Security Position Location Automatic Relaying From Many Mobile Users To Many Other Mobile Users EPLRS is a Mobile Wireless Network What is EPLRS? NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  18. EPLRS VECP #1 • VECP1 (FY97) • Utilize new packaging and design concepts to reduce manufacturing cost & improve supportability (eliminate obsolescence problems) • Reduce 18 CCAs to 12 and eliminate 6 interconnections • Weight reduction, reduced log footprint & improved reliability • VECP savings totaled $24.77M • New performance spec NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  19. EPLRS VECP #2 • VECP2 (FY00) • •Upgraded the technology and incorporated the latest hardware packaging techniques (eliminate obsolescence) • • The new packaging scheme reduced 12 CCAs to 7 and eliminated 5 interconnections • • Improved system performance (increasing bandwidth by 230%) while reducing the RT price substantially • Government saves $3.03M in FY01 & 02 • Additional savings in FY03 & 04 (4-yr sharing period) NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  20. EPLRS VECP #3 • VECP3 (FY03) • Continued reduction of production cost thru repackaging of internal modules. • Other benefits from the VE change include elimination of obsolescence issues, weight reduction, increased reliability, ease of maintenance, and increased system performance. • Government saves $361K in FY03 and $1.69M in FY04. • Additional savings will be realized if FY05 & 06 options exercised. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  21. First step: Facilitate VECP process Building a VE Community of Practice to Link Knowledge Seekers with Knowledge Sources NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  22. DOD VE Strategic Plan • DoD VE Strategic Plan signed by Mr. Wynne – Dec 03 • Improve the value proposition of defense systems • Align industry and government value propositions in defense systems • Increase VE expertise • Strategic Plan • Establishes a goal of cost savings and avoidances of 1.5% of TOA by FY06 for all the Services and other DoD Agencies • At least 500 people will have completed the VE continuous learning module by FY06 • 90% of VECPs should be fully processed within 180 days by FY06 NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  23. A Strategic Plan for Engineering in DoD Dec. 2003 • Promulgated by Mike Wynne 16DEC2003 memo challenge arsenical to • Achieve an annual list saving and avoidance of 1.5% of total obligation authority by FY06 • Other Goals of the Tue Plan • 90% of all VECPs should be fully Passed within 180 days by FY06 • At Least 500 people completed DAU offered VE continuous learning module by FY06 • A VE community of practice of at lease 250 member by FY06 • Other Activities • Prepare VE Guide Booth with case studies • Perusing advanced VE courses NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  24. Contractor’s Perspective • We use many cost reduction techniques, such as • Six Sigma • LEAN • Agile Manufacturing • Value Engineering (VE) The main difference is that under VE we get to share in the savings. To be a VECP, we need a change in the contract. Many Six Sigma or LEAN projects do not require a change in the contract in order to be implemented: NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  25. Contractor’s Perspective (cont.) • Many saving initiatives are not financially viable because under FAR pricing rules, all future units sold must be at the new lower prices • But for these changes that can qualify as a VECP, the “contractor is entitled to a share of the future savings.” • With a willing customer, almost any change can be a VECP NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  26. A VECP is • A Value Engineering Change Proposal is a VE proposal submitted by the contractor. A VECP must do the following: • Save $’s • Change the contract NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  27. CHARACTERISTICS OF A VECP • Developed, documented & submitted by the contractor • Reduces overall cost • Does not impair essential functions • Requires a contract change to implement • Is not required by another contract provision • Is technically compatible NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  28. WAYS TO SHARE THE SAVINGS Acquisition Savings Instant Contract Concurrent Contract Future Contract Collateral Savings (Logistics) Post acquisition government costs Based on average year expenditures as determined by the PCO From 20 to 100 percent as determined by the Contracting Officer NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  29. VE SHARING PROVISION • Typical VECP Sharing: • 50% of the Savings • Share for 3 Years • 20% Collateral Savings of a typical year • FAR 52.2 48-1 (Feb 2000) • Extend Sharing from 50  75% • Share Period = 3  5 Years • Collateral Savings of 20  100% NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  30. Negative Instant Contracts Savings NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  31. NEGATIVE INSTANT CONTRACT SAVINGS • Amortizing the non-recurring costs to develop and test changes on existing programs often exceeds the performance period of the entire contract. This makes it difficult to justify significant cost reduction changes. • Those cost reduction changes whose non-recurring development costs exceed the savings they will generate on the instant contract are said to have Negative Instant Contract Savings (ICS) NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  32. NEGATIVE INSTANT CONTRACT SAVINGS • Negative Instant contract Savings are common with complex weapons systems changes involving a lot of testing and qualification • On 50+ AMRAAM VECPs, only 3 did not involve negative ICS • The FAR provides that the contract price should be increased by the negative ICS amount • This rarely happens; the money is not available NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  33. NEGATIVE INSTANT CONTRACT SAVINGS • Contractors usually end up being at risk for the negative ICS • There are ways to mitigate the risk and reward contractors for taking it NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  34. NEGATIVE INSTANT SAVINGS K EXAMPLE UCR (Per Unit Savings) $35,000 No. of units to share 2,000 Gross Saving $70,000,000 Contractor Development $18,000,000 Gov’t Cost $ 2,000,000 Approximately 400 units a year NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  35. Savings Calculations BUY FY’02 FY’03 FY’04 FY’05 FY’06 FY’07 FY’08 FY’09 Qty (1) 399 (1) 200/200 400 400 400 400 199/20 400 As is $70K $70K $70K $70K $70K $70K $70K $70K Total Savings $35K $35K $35K $35K $35K$35K$35K $35K Gross Savings $35K $7,035 $21,035 $35,035 $49,035 $63,035 $70,000 $84,000 Kr Savings ($17,965)($10,965) $3,035 CUM Gov’t Cost ($2,000K) NET Acq Savings $1,035K $15,035 $29,035 $43,035 $50,000 $67,000 Contractor Share 75/25 $776K $11,276 $21,776 $32,267 $37,500 $37,500 Gov’t Share $224K $3,759 $7,259 $10,759 $12,500 $26,500 NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  36. Cross Program VECP NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  37. RAYTHEON/CUSTOMER VECP - IPT • Concept proposed by Naval Sea Systems Command • IPT to identify common VECP opportunities with Navy • Other services join team • Government/Industry IPT • Allows parties to focus VE resources toward common needs. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  38. RAYTHEON/CUSTOMER VECP-IPT (continued) • Value Engineering IPT Formed • Representatives from customer buying commands take part • Identify VECP opportunities to incorporate across programs • Discuss sharing of development and testing costs • Increase quantities for Savings Share/Cost Offset • Resulted in DoD DCMC 2001 Award NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  39. RAYTHEON/CUSTOMER VECP-IPT (continued) • To share VE technologies across programs for maximum benefit • APPROACH • Identify common problems and needs • Share resources to achieve • LEARN BY DOING • ESAF • Contract Fuze • Low Cost IMU NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  40. Value Engineering Change Proposal Where To Look For Changes? • Deviation • Acceptance Criteria • Sharing of Savings • Development & Implementation (D&I) Cost • Contractor Allowable D&I Cost (CADIC) • Contract Proposal • The Change May Be Obvious • Parts Of The Contract • Not All Parts Will Be Performance Spec Why Would The ContractorWant To Submit A VECP On Performance Spec? Why Would The Government Want To Do A VECP On Performance Spec? • Gives Gov More Insight • Gives Gov More Control • Saves Gov Money • Mitigate/Share Risk • Most Contracts Are A Mix Of Performance Spec And Specific Spec • Contractor’s D&I Results In Negative Instant And Little Concurrent • High Risk With New Technology • Return In Investment For Instant May Be Too Low • Required By A Mandatory VE Clause NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  41. EXAMPLE – HOW FAR YOU CAN GO • A major missile program had a stretch out resulting in annual buys of half what was expected • Radomes are a high cost item with large lot charges. If purchased in contract quantities the price is 50% more • Radomes do not change • The Gov't would like a quantity buy, but did not have the money • The contractor could buy the quantity, but would have to sell future lots at the lower bulk buy price NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  42. EXAMPLE – HOW FAR YOU CAN GO Solution – Make the buy as a bulk buy under a VECP share in the savings ‘98 100 $7060 $4753 $2307 $230,700 ‘99 100 $7060 $4753 $2307 $230,700 ‘00 150 $7060 $4753 $2307 $346,050 ‘01 100 $7060 $4753 $2307 $230,700 '02 50 $7060 $4753 $2307 $115,350 Qty As Is To Be Total Items qty Total Savings $1,153,500 Share 50/50 $ 576,750 Investment 500 X 4753 = 2,376,500 – 100 x 706,000 = $1,670,500 * * Actually the Navy put up some of the money NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  43. The Contract Change • WHAT WAS THE CONTRACT CHANGE? • The basic contract still had Mil-Std-973 • Reporting Requirement – • The VECP has to be on a DD Form 1692, “Engineering Change Proposal” • The VECP showed no contract change to the configuration. • It said this change will have no effect on the end item’s system performances. • “This Value Engineering proposal simply allows us to take advantage of the substantial cost savings obtained by the multi- year finishing contract that Corning/Raytheon have negotiated”. • The contract modification just cited the VECP number and shared the savings. • If this can be a VECP, virtually anything can! NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  44. PENDING VE-RELATED ISSUES NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  45. SHARE-IN-SAVINGS Not to be confused with “Shared Savings” or Efficiency Savings VE was used as the example for the concept Share-In-Savings was authorized on a trial basis in 1996 by the Clinger-Cohen Act: Originally for Energy Savings 2002 E-Government Act, Section 210 allows them for Information Technology Rep. Tom Davis is looking to expand them to all DoD as part of the Service Action Reform Act (SARA) Today, it is widely used by state governments Some Industries use them 18 NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  46. SHARE-IN-SAVINGS (continued) • Share-In-Savings allows the government (or client) to enter into a contract to save the government (client) money: • The contractor’s pay comes from the savings • Some arrangements give the contractor a little up-front money for labor (most don’t) • If the contractor does not save money, he does not get paid EXAMPLES: • MIT Environmental Controls Contract • Saved $980K a year on energy cost • Contractor’s pay came out of it NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  47. EXAMPLES (continued) • Texas State Internet Service • Private company set up a system so people can pay fees via Internet, e.g. Auto License Renewal • The company bought all the equipment and set up the operation • It charges a fee per transaction • Until it gets its investment back, it gets 90% of the fee • After that, it splits the fee 50/50 with the State NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  48. REQUIREMENTS • Share-In-Savings Requires (per GAO Report GAO-3-327 1/31/03) • Clearly Defined Outcome • Incentives • Assurances they will be there • An agreed-to baseline from which to measure • Client (aka Gov’t) to implement contractor’s recommendations on how to save • This offers the opportunity to turn the entrepreneurship of industry (especially small business) on to address logistics problems and get paid through a share in the savings NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  49. EXAMPLE • Obsolete or out of production parts • Obsolete 486 Based Processor • Someone buys rights to it and sells it at a premium • Separately run provisioning activity • Instead of buying parts annually, contractor will provide all you need for “X” • There is still a problem of linking payment (incentive) to user, but there is a growing database of how to do it, e.g. a surcharge for the part you buy NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

  50. Title III Program • Purpose • To create, expand, maintain, and modernize domestic production capacity for essential technologies needed for national defense. • Goal • Establishment of economically viable production capabilities by providing financial incentives to industry. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

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