Tuesday, January 14, 1997 - 2:00 p.m.
Dr. Kaminski: Good afternoon.
I want to discuss with you today our plans for the Dual Use Applications Program, or DUAP (Chart 1). The idea here, if I may have the first chart (2), is to be taking advantage of dual-use - - commercially developed -- both technology and components in our DoD systems.
As we look to structure the program this year, we structured into two different components. We looked first across this matrix of deciding where to look to apply either the technology or the components from the spectrum of S&T projects to advanced concept technology demonstrations to new acquisition programs to ongoing acquisitions or fielded systems or to brand new requirements.
We picked two places. One, dual-use technology in the S&T base. What we're really trying to do here is institutionalize this dual-use place -- this dual-use approach. Moving it from a concept that was centered in the Office of the Secretary of Defense as the TRP was; moving it to the services for execution as part of their normal science and technology program. That is, institutionalizing in the services the look for commercial technology, building paths for that commercial technology into their S&T base. The second piece that we picked was to look to apply commercial technology, commercial systems to upgrades of our existing weapon systems.
I want to talk about each of these a little bit more. Let me first start with the dual-use S&T component (Chart 3). We've divided the budget, as I've indicated in red, at $100 million into upgrades and $85 million into dual-use S&T. Both of these will include cost sharing with the participants in the program, and I'll describe that a little more as well.
With respect to the S&T piece of this, I've spoken with you many times before about the fact that the Department of Defense must take advantage of the opportunity to apply commercial technology to enhance our capabilities. And I've told you that the growing trend of commercial investment in R&D is such that it's past the DoD: it now exceeds us by about a factor of two. So what we're trying to do here is leverage what's being spent on commercial R&D and apply it in our own infrastructure. This is the role of this DUAP science and technology initiative.
It will take the lessons learned during our early dual-use efforts and implement an integrated dual-use technology program. In this case, in the services. Our intent is to migrate this program into the services. The sharing formula that we're planning to operate on is as follows. We have this base of dual- use funds, $85 million that's been appropriated. You can think of it as sitting here. The services then will be looking at proposals in which they're prepared to fund 25 percent as well -- as a good faith indicator of the seriousness of their interest in the program. Then non-federal sharing from the industrial participant to the tune of 50 percent. So I think viewed from a service perspective, and I will invite the Service Acquisition Executives who are here with me today to comment if they choose, they're getting a four to one sharing -- four to one leverage of their dollars to be able to undertake and apply this commercial S&T.
I look forward here to working with the Service Acquisition Executives in each of the services and their science and technology counterparts as we launch this initiative to do, as I say, institutionalize the idea of applying commercial S&T at the core of our S&T programs.
Next chart (4), please.
A little bit of the motivation for that second block: using technology to deal with fielded equipment. I've spoken with many of you before about the issue of operations and support cost and the fact that some 65 to 70 percent of the life cycle costs of our major weapon systems is incurred after those systems are fielded. It does not, I think, get sufficient attention in terms of looking at what we ought to do to attack and to reduce those operating and support costs of our various systems. I would also point out is that as the composition of our weapon systems' ages, the operation and support cost will only be growing. So this is a problem we have to attack in a fundamental way. I will tell you in our Quadrennial Defense Review, this is a problem we have teed up in a major way to be looking at our infrastructure and our operating and support costs. This initiative is now aimed as a pilot to give us another tool, another means, to look at attacking these O&S costs.
Next chart (5), please.
I wanted to show you two charts here that are just indicative of the inventory in the future. This chart shows our force composition of tank and infantry fighting vehicle inventory plotted by years. And as you look to see, even out to the year 2010, I show new systems coming into the inventory. The preponderance of the systems that are in the inventory, even in the year 2010, are existing systems. That's what we're looking to attack in this program: dealing with the operating and support costs of the fielded systems. We can do a similar chart (6) for tactical air.
It's very interesting, all of us -- in our management, you in your coverage of the Department -- are focusing a lot of attention right out here: the Joint Strike Fighter, the F-22, the F-18E/F -- the major investments that we're looking to make in tactical air in the future. We need to spend equal attention dealing with the cost of the present systems that are in the inventory today.
This is a zero sum game. Money that we don't have to spend for operating and support of those systems is money that, in turn, we can be spending on modernization. That's really the bottom line thrust that we're looking at here.
Next chart (7), please.
I wanted to just give you an illustration of a couple of examples. It helps me to see an example about what are we talking about here as a specific illustration.
Here I've indicated an inertial navigation system that is on our F-14A/ B today. In that inertial navigation system is a mechanical gyroscope. Supporting that mechanical gyroscope today causes us to incur a yearly cost which puts us on this curve. So every year we have that same increment of cost associated with repairing and maintaining that system. That current mechanical gyro has a mean- time-between-failures of about 40 hours, so it requires some fairly frequent repair and replacement.
Instead of continuing to use that old system which breaks often, the alternative is to go to a GPS -- Gobal Positioning System -- aided inertial navigation system which has a mean-time- between-failures of 4,500 hours -- about 100 times longer So we need to repair it much less frequently.
The problem is, that costs some money to start with. It requires applying, for example, a commercially developed inertial navigation system, testing it, and qualifying it on one of our platforms. That's what this front end money is being spent to do -- to be able to take a piece of commercial equipment, test it, and qualify it for a military application.
Then we have the opportunity to buy that and to buy it in some numbers. As a result of doing that, we start operating on this green curve. It costs us some money to begin with to replace the component, but then as we operate on in time, we're on this very flat curve as opposed to this growing curve. That's an example in aviation.
If I may, let me show you another example dealing with more mundane trucks. (Chart 8)
This is an initiative that with good management the Army is already undertaking. We're already implementing this program, but I wanted to show you as an example.
In our five-ton trucks today, those trucks were built with U- Joints. That's the old way of doing things. The downside of those U-Joints is that they cause tires to wear. As those U- Joints wear out, we are replacing them, really, with commercially developed constant velocity joints, so-called CV Joints that you probably have in your automobile.
The impact of that over a period of time is a reduction of tire wear. The annual fleet average for our five-ton trucks, after implementing the constant velocity joints, requires about $6.5 - $6.7 million per year to keep those tires up to speed. Using the old U-Joints, it was $19 million per year. So once again, we're on this kind of a cumulative O&S savings curve as a result of introducing this improved component.
Our system needs some incentive for this kind of work because, as you can see, the pattern is to spend a little bit of money now to save a lot more money in the out years. So that's the idea here.
What's new in this Commercial Operations and Support Saving Initiative -- or COSSI (Chart 9) -- is that we're using commercial technology not only for our newly developed systems, but we're looking to apply it to reduce the O&S costs of systems that are fielded today. We may realize some benefits in increased performance or decreased acquisition costs, but our real focus here is on improving life cycle costs for these systems for the long run.
In this initiative, our acquisition executives of the Army, Navy, and Air Force have the lead in looking at projects that they think are going to pay off. The service acquisition communities will help choose the commercial products and the processes that make sense for their individual fielded military systems.
To do this, they must work closely with commercial industry and the weapon system prime contractors to be able to engineer and adapt that commercial product for our specific weapon system applications, and then test a product to ensure that it achieves at least comparable performance with a decreased operating and support cost. In fact, we will require that the industry include some sense of support from the military customer as a part of their team proposal for it to be considered and evaluated. We'd want to look at the ones which have strong military support for introduction in the field.
This is really the culmination of DoD's trend toward partnership with industry for mutual benefit which is key to so many of our acquisition reform efforts.
The Director of Defense Research and Engineering, Dr. Anita Jones; Mr. Page Hoeper, Deputy Under Secretary of Defense for International and Commercial Programs, together as a team will be working with our service acquisition executives as we look to implement and institutionalize both of these programs.
One of the more interesting aspects of this COSSI approach is that it will begin to prototype an innovative acquisition approach for various weapon systems upgrades. For the development and the testing of what we are calling the modification kits, that is the whole installation package for a particular component for example, the services will be using our Section 845 prototyping agreements which are not constrained by these sometimes inflexible government procurement policies and standards that we're dealing with using the FAR. So we have the 845 authority here to be much more flexible in the arrangements. These agreements will also allow prime contractors to apply their independent research and development funds -- their IR&D funds -- as a cost-sharing mechanism and also to use commercial practices that attract commercial partners to the development team. So these will be done in two stages. The first stage which is applying these funds -- to be shared with industry funds -- to develop, deliver, and demonstrate the prototype kits. When those kits then are proven, a stage two follow-up provides the basis for the service to contract for those kits to be able to buy them and install them in the fleet to save O&S costs long-term.
The last chart (10).
These two initiatives will proceed on the schedules that I've indicated: the S&T program having service efforts to identify dual-use procurements, leading to proposals in the March timeframe; services submitting those proposals to our Joint Dual Use Program Office -- this is an effort run by Dr. Lee Buchanan; the commencement of negotiations for those proposals; and then awards of those contracts by September 30th of this year. These are one-year funds so they have to be awarded within this fiscal year. Then the schedule for the COSSI effort involves a solicitation, a BAA which will be made tomorrow; followed by proposals due the 18th of March, leading then to negotiations. And again, all projects using the 845 authority underway by September 30th.
Let me invite any of the service acquisition executives who would like to make any comment about the program. This is something that we have been really working as a team. The element I want to emphasize again, I think, is the importance of institutionalizing both of these activities as a part of the normal way of doing business in the services. That is leveraging the commercial S&T and leveraging commercial component technology for insertion to reduce O&S costs. While this activity had been started in OSD in the past, our interest here is getting service ownership, service buy-in, and service pushing of these programs.
Gil Decker: I don't have any specific things to add. I might say that we've looked awfully hard the last three years at our operation support costs as equipment ages. And I think the problem that Paul indicated with the examples, we are clearly going to be upgrading and sticking with our basic platforms -- compared to the number of new systems -- at an ever-increasing rate. We'll see the M-1A2 tank with modest upgrades around probably until 2020 when you get down to it.
The operating support cost goes up if you can't find ways to modernize certain components in there. So it's hard because you've got a big bill to do O&S costs today. If you pull money out of the O&S budgets today you'd see a decline in current maintenance. Our modernization accounts have been under severe pressure -- you all know that -- to maintain readiness and other ongoing one-year accounts. So we've got to try something new. If this seed money can be used, we probably will find ways to take a little bit out of our O&M accounts each year to add to the service accounts to go along with the 25 percent he pointed out. And industry, I think, will be interested. If they can be assured that they're going to end up being able -- the winning contractors on these -- to deliver the items that are the improved items that show these high reliabilities, I'm convinced we can see a 10 or 15 percent dent in our total O&S costs over the next year or two. So we've got to have seed money to do this. So we're committed to trying to make this happen.
Dr. Kaminski: This right now is a pilot effort. Clearly $90 and $85 million efforts aren't going to turn around the whole system, but if these efforts...
Decker: But if we can get four or five things going analogous to the U-Joint tire saving drill that's ongoing now -- and the money savings are going to be real in terms of tire life -- if we can identify a few of those, I think that will convince the institution that we can do a little bit more prioritization on budgets in the future anyway.
Dr. Kaminski: John, let me invite you and Art to come up, and let us see if we can field any questions.
John Douglass: I just want to make a couple of comments about how this applies to the Navy. The first is that in terms of how we're going to contract for this. The 845/804 authority that we have for other agreements, which means we don't have to write a standard bureaucratic contract, is key to this. It allows us to get on contract very quickly and to form cost- sharing agreements and so on that we could not form in the normal armed services procurement regulation structure.
The other point that I think is really important is that the main area of application for this technique is going to be areas where there are state of the art developments taking place in the commercial market. This isn't going to work, obviously, on tank treads or some thing that is unique to the military. I don't mean to...
Is that right? Maybe they use tractors or something, I don't know.
For example... For those of you that don't know, he buys our tanks for our Marine Corps over in the Army.
But where it really applies for us in the Navy are things like the displays that are in weapon systems and the displays that are on ships and the computers and the antennas. All of you know, for example, those little TV antennas now that we're all getting direct broadcast TV on. Well, those have application in the military, obviously. If we can get a lot of band width down to our troops, whether they're on the ground or on the ship or whatever, it's too our advantage to do that. So that's just one example in the electronics area that I think is going to be a real step forward.
Also in the avionics and the displays in airplanes. Paul, you know the 4BN/ 4BW program that we have in the Marine Corps for remanufacturing our helicopters: we're essentially putting all new cockpits in. A lot of commercial technology could go in to that program which will allow us to buy better equipment and equipment that we could maintain cheaper. So we're solidly behind this initiative. Art, why don't you do the Air Force part?
Kaminski: This could apply to electronics across the board.
Art Money: Much like my colleagues were enthusiastically supporting this as well. As you know, in the past we've had initiatives to buy commercial, that's ongoing. The major emphasis herein the latter part of this is to insert commercial technology into ongoing systems to lower O&S costs. Today in the Air Force, as I believe in the rest of the services, the O&S costs far exceed the investment amounts. So we're trying to shift that so we can modernize while at the same time continue to modernize and modify the existing weapon systems as well. So we enthusiastically support that and look forward to industry's investment.
The other benefit of this 845 agreement is it also allows industry is it also allows industry to use their IR&D funds. So that also gets some leverage. So we're behind this and this is a pilot as Dr. Kaminski said, so we'll see what comes forth from industry and then we'll make the down-select and announce that in a few months.
Q: Do you have an estimate of the out year savings for...
Kaminski: No, I don't, because we really haven't picked the projects yet. Let me tell you, though, some lists of programs that I've looked at for these kind of applications are showing payback of seven or eight to one.
Q: Will the cost sharing arrangement, the flexible cost sharing arrangement require any change in the law?
A: No. We have the 845 agreements authority, and in the '97 bill there's a Section 804 which takes the 845 authority and extends it to the services. So that's really the enabling piece, enabling the services to apply this 845 authority. And those are the skills we were wanting to get honed up in the services to use this flexibility. It's part of the pilot.
Q: How much commercial technology -- advanced technology - - is being developed outside the United States? Does Buy America have anything to do with this program?
A: I don't think I see any major restrictions associated with the Buy American Act. Lee, any comment that you would...
Lee Buchanan: There's certainly no intent to concentrate either inside or outside Wherever the good deal comes is where we're looking. The objective here is to save money. If we can buy Japanese or Dutch or South African technology.
Kaminski: We're looking to do this on a commercial basis. And in that sense, it is a pilot. There are probably some things we'll learn as we go off to do this -- on the positive and the negative side -- and that's the reason for the pilot.
Q: So Japanese display companies, for instance, can participate in your program here?
A: Yes. Nothing prevents that from happening. They may be working with a U.S. prime to be able to develop a kit and to qualify the kit.
Q: The S&T side seems more like what the TRP had been. Why the decision to take the COSSI approach rather than just go entirely, let's say, with an S&T as has been done?
A: First off, my simple description as the S&T program we've proposed here is just like the TRP program was in its latest rendition in the last round that we did as we tuned up and really found out how to do it, with one exception -- it's being executed by the services. And that is a big difference.
The second question, why the push on this COSSI approach? As I look at my perspective on our overall investment accounts in the Department and the need to increase our modernization funding, I believe there is huge potential for us to reduce our O&S costs. And I believe increasing modernization is critically dependent upon reducing those O&S costs in the long run.
So I wanted to take this opportunity here sort of to put our money where our mouth was in terms of actually following up to demonstrate some positive initiatives that show, in fact, we can do that.
Q: Is the DoD industrial base in trouble given what you're seeing right now in the defense community with all the mergers and acquisitions and so many companies wanting to get out of defense? The industry and defense markets...
Q: Is DoD in trouble, looking out into the future?
A: I don't see trouble in the foreseeable future. We continue to do various industrial base assessments. If there are areas where there are concerns, in my mind, it is more in some of the supporting tiers than it is at the prime level. I think we are going to come onto some issues.
If you recall those charts seeing our old inventory equipment and the inventory for as long as it's going to be, we are going to run into some issues on what I call diminished manufacturing sources; that is, people who no longer are making a part that's in our equipment. That's probably going to be happening more in electronics than in some other fields in the future because of the turnover rate in electronics. So that's a problem we're going to need to deal with on a systematic basis: seeing how we replace those sources. But another way around that problem is to upgrade the equipment -- is to keep the electronics more modern -- through this kind of insertion. That is where we'll run into problems first, though, I believe, in the diminished manufacturing sources.
Q: So lack of competition in the defense sector and people's unwillingness to stay in this market doesn't really concern you right now, or...
A: In terms of where we are today with the degree of consolidation that has happened, I'm not concerned today. There are areas that we are monitoring today in some of the supporting sub-tiers. There are some component levels for example. One area that we watch closely are some of the components that support nuclear submarines, nuclear propulsion units -- valves, other parts, etc. That's probably one of the areas high on my watch list.
Decker: I might just comment on what Dr. Kaminski is saying. In the Navy we're not worried too much except, perhaps, in that area that he mentioned on nuclear components for nuclear propulsion, that we won't have an industrial base, but we are concerned that we don't have enough business to sustain the industrial base that exists today.
If you look at the mergers that are going on in industry, there's not a lot of them going on in the shipbuilding industry. There is some indication that there may be some in the future; but over the longer haul, I am concerned about the shipbuilding industrial base in this country. We either have to get our shipyards into the commercial shipbuilding business in some way so that we're building ships here in America for the world commercial market, or we have to get the number of ships up that the Navy can afford to buy, or we're going to have less shipyards over the longer haul. But we will still have the capacity that we need to support the force structure we see in the future. But that one sector is one that I think we in the Navy are keeping a very, very close eye on to make sure not only we can do as Paul said in a very narrow sense, meet our requirements, but how do we look at it from a national asset point of view in case we need to expand into a much bigger base later on? It's something of concern to me. It wouldn't raise too many red flags, but we're certainly worrying about it and looking at it.
Kaminski: One of the things that we look at is the industrial base's restructuring: in situations where it really doesn't make economic sense to sustain more than one prime, and that will happen in some markets, that we create an environment in which we can have robust competition in the supporting tiers. So sometimes issues of vertical integration are important. In fact I have chartered a Defense Science Board task force -- I did that maybe four or five months ago -- to begin to look for us more carefully at the whole issue of vertical integration, signs that we ought to be watching for.
Q: It seems in the electronics and communications arena, DoD's already leveraging a lot of commercial technology. Is a key part of this, is a basic difference that you're sort of going into this consciously thinking ahead of time we're going to build something that can be used both in the military and in the commercial sector?
A: Exactly. The idea that something is being developed, for example, for a commercial purpose. So industry is developing that for a commercial use. We see a benefit to that item being developed for our own use and we're prepared to co-invest in that development so that as a commercial production line ramps up we'll be able to buy this component now at a much lower price because it's being produced in volume on a commercial line as opposed to having a dedicated line that's producing it for us.
And I want to emphasize here... I'm stressing this a lot, but I'm trying to stress this a lot for the following reason: it requires a change in culture. Our culture in this Department in the past has been we have our own laboratories, we develop all of our own technology. It is easier to do that if you have the resources to do that than to take the time to see what's happening commercially and to try to leverage what's being done commercially so it has a few hooks that we need for our applications. You can see that a culture adjustment is needed to move from the first to the second. What we're trying to do is incentivize this change in the culture. Trying to do that through this leverage of funds.
Q: A lot of companies are channeling as much R&D funding as they can to return shareholder value. How do you think you can convince companies? What sort of guarantee is there for them to put this kind of investment in there? Is there sort of a guarantee of a return somewhere down the road, or a tax incentive or anything else you can give them?
A: Let me answer it separately for each of these programs. For the S&T initiative, one of the things we're providing here is some shared investment money to bring about an application -- an application which might be teetering by itself or it might take longer to bring about. We're also offering some intelligent real applications that provide a little bit of a market pool as a customer.
In the COSSI area, what we're really doing is providing an invitation for companies to apply a product to a known market need and supporting a piece of equipment. We're willing to share the cost of taking something already developed commercially and now particularizing it to our application and testing it in the application. So in a sense we're creating an opportunity for a company. The company has to use its own business sense to look at the size of that market; to put some probability on of winning the awards to equip the whole fleet; and to see what the cost is -- is involved. What we're trying to do here is incentivize that a little bit. That is, show our good faith and being willing to share some of the costs developing that kit for our application.
Q: There was some talk about naming an official within the Department to have particular purview over dual-use and I wondered A, what's happened to that; and B, where's DUAP both in its relations to the services and in its relations to either DARPA or OSD?
A: That person is Lee Buchanan. If Lee would stand... It was Lee who was really party to constructing this approach. But we have set up a steering committee composed of the people you see here plus Dr. Anita Jones who is absent traveling today. And the idea behind this whole approach is really to take the spirit of what was in the authorization bill: and that's to get this institutionalized into the services. So Lee Buchanan is the person responsible for this program, but I will tell you that Lee's job assignment here is to get this program transitioned to the services. That's what we're trying to do: to get this to be swept up and done as a normal course of business, both in the service S&T program, and as they look at investments to reduce O&S costs.
Q: Can you talk about the potential for dual-use savings in the F-22 program in particular?
A: There already has been a fair amount done in the F-22 program. For example, some significant piece of the avionics are really leveraged off of dual-use production. Probably one of our biggest issues, though, in a program like that, is when we have a 12- or a 15-year development and fielding cycle, the avionics that we chose at the beginning of the program are not going to be in commercial production at the end of the program. There's still some advantage to be had over the ramp-up and the maturity of those lines, but there may even be some candidates for reinsertion of this type in programs that we're still developing.
Money: Maybe the most salient example as there's been some pilot programs relative to F-22: developing some of the avionics/electronics on an automotive electronics line. The same production line with a different product. So those things will be expanded.
Kaminski: What we're really pushing here is for people to think about this in a new way, rather than simply developing their own gear to be produced on a military line: to see what's being done commercially and do your best to leverage that where it makes sense.
Q: Given the examples you've shown, you're already going to be saving tens of millions of dollars on a few very small programs. What happens after the pilot if it proves to be successful? Do you have plans for the outyears? Is it still going to require a pot of money to entice people to do this?
A: We expect to provide some funds here in the outyears to continue a piece of this, but the ideal will be to transition it to the services and then let it succeed or fail on its own merits. My anticipation... I wouldn't be doing this if I didn't think this was going to catch on and end up being a more significant initiative in the long run.
Q: So the services would then request money for their own programs in this regard?
A: Yes. What I'd like to see start happening is see an Office of the Secretary of Defense for this purpose begin to fade away, and to see this line begin to appear in the service budgets.
Thank you all very much.