Reducing Total Ownership Cost (R-TOC) and Value Engineering (VE)

1. Reducing Total Ownership Cost (R-TOC) and Value Engineering (VE) Dr. Danny L. Reed Institute for Defense Analyses June 8, 2006

2. R-TOC Genesis • Initiated in 1999 by the USD(AT&L) to address: • O&S cost growth at expense of force modernization and readiness • O&S budget constraints limit programs to near-term, critical solutions only • R-TOC program seeks to seed O&S cost avoidance solutions that have broader impact • Thirty Pilot Programs Aging Equipment Rising O&S Cost Fixed Top Line DEATH SPIRAL Less $ for Modernization Declining Future Readiness

3. FY05 cost avoidances exceeded $2.1B Projected life cycle cost avoidances will exceed $76B FY05 % Savings R-TOC Pilot Programs LCC % Savings FY05 Goal Reported FY05 & Life Cycle Savings/Benefits 50.0% 45.0% 40.0% 35.0% 30.0% Reported Savings/Avoidances 25.0% 20.0% 15.0% Program Cancelled 10.0% Program Dropped Program Dropped 5.0% 0.0% Significant FY05 O&S Cost Avoidances from R-TOC Pilots

4. R-TOC Program Strongly Supported by USD(AT&L) and Services • R-TOC PE was created using funds ($25M) provided by the Services in PBD 707 • PBD 707: USD(AT&L) and the Services agreed to move 1/3 each from the Services accounts to the OSD account each year through the FYDP to fund the R-TOC PE

5. USD(AT&L) FY 2010 R-TOC Goal • USD(AT&L) Goal: “Maximize cost avoidance on total defense systems FY2010 O&S costs from an FY2004 baseline, by offsetting 30% of predicted inflation.” • Goal extends to all defense systems on program-by-program basis • 15 Special Interest Programs (SIPs) designated lead programs to “show the way” towards achieving goal • SIPs are monitored through semi-annual reports and quarterly R-TOC Forums • Services will include this goal in their reviews • Ultimately expand to all defense systems PE will provide critical funds to help achieve this goal

6. Army Bradley A3 Upgrades UH-60M – Upgrade Stryker UAVS Guardrail Air Force Global Hawk Engines (2) F-16 Navy H-1 Upgrades V-22 F/A-18E/F H-60 ASE Common Ship Joint F-35 (JSF) R-TOC Special Interest Programs (SIPs)

7. Status of R-TOC • Reduction in Total Ownership Cost (R-TOC) program initiated in 1999 by the USD(AT&L) to address: • O&S cost growth places limits on force modernization / readiness • O&S budget constraints limit programs to near-term problems • R-TOC program seeks to seed O&S cost-avoidance solutions • R-TOC Program has successfully demonstrated cost avoidance • Program Element Budget Actions • “zeroed” in FY05 budget – no projects to show at that time • No Congressional “Marks” for FY 2006 budget – Funded • OSD has: • Continued proactive steps to institutionalize O&S cost avoidance in all defense systems • Created Special Interest Programs (SIPs) • Combined R-TOC and VE under same DOD leadership

8. Programs Contributing to R-TOC • Lean Enterprise Value • Six Sigma • Supply Chain Management • DoD Manufacturing Technology (ManTech) • Value Engineering • FAR provisions offer contractual incentives • Methodology offers approach to partner with industry

9. Value Engineering is an R-TOC Best Practice • VE provides: • Cost reduction (VEPs and VECPs) • Product or process improvement • Higher quality • Reduced cycle time • Better means and materials for maintenance • Increased reliability • Greater safety • Less environmental impact VE Goal: Lower the government’s costs for goods and services & provide cost effective solutions to problems in design, development, fielding, support, & disposal

10. DOD VE Strategic Plan • DoD VE Strategic Plan signed by USD(AT&L) • Improve the value proposition of defense systems • Align industry and government value propositions • 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 VE continuous learning module by FY06 • 90% of VECPs should be fully processed within 180 days by FY06 – VECP Community of Practice (CoP)

11. DOD VE Savings & Cost Avoidance Over $29B $M 11

13. VECP CoP Home Page Idea Generation Selling the VECP VECP Approval VECP Settlement

14. Idea Generation Subcontractor Suggests Improvements Contractor Generates Idea Govt Encourages VECPs To Selling VECP

15. VECPsBenefit Contractors • 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 / Skill Enhancement Work • Improves Competitiveness • Empowerment

16. Potential Benefits to Government From VECPs • Upgraded technology (eliminate obsolescence) • Improved system performance • Increase in system readiness • Reduced logistics footprint • Savings on the contract • Reduced operation and support (O&S) costs • Better insight and improved working relationship with contractor

17. SUMMARY • R-TOC and VE are alive and well in the DOD • R-TOC/VE info website:http://rtoc.ida.org or http://ve.ida.org • VE Strategic Plan approved and being worked • Annual DoD VE Awards Ceremony • Three VE documents in-work: 1) VE Contractor’s Guide, 2) VECP Contracting Guide, and 3) VE Handbook • The VECP CoP exists now on the DAU CoP website • https://acc.dau.mil/vecp • VE – Needs support from contractors - VECPs • R-TOC is driving towards institutionalization of O&S cost reductions across allprograms with a defined USD(AT&L) FY 2010 goal and with an R-TOC PE • R-TOC / VE Contact: Danny Reed:dreed@ida.org