Friday, December 8, 1995 - Noon
[NOTE: Participating in this briefing were Dr. Perry and Dr. Paul Kaminski, Under Secretary of Defense for Acquisition and Technology]
Secretary Perry: When I came to the Pentagon in 1993, one of my most important initiatives was to achieve real acquisition reform. Obviously, it's important to do this because we don't want to waste taxpayers' money, but the objective of that acquisition reform is to allow the Defense Department to buy products and weapon systems not only at lower cost, but also to get higher quality products because we can use the most modern technology.
I was confident that this objective could be achieved. We had the support of the President, the Vice President, and strong support in Congress. We knew it was important because we needed the savings in acquisition in order to rebuild the modernization program.
We also need better access to commercial industry because we cannot afford the cost of a separate defense industrial sector, nor the missed opportunities of the technology advances being made every week in the commercial industry.
We have had some success in this acquisition reform to this point, and I have talked with the press about it before. In particular, we took a major step in June of 1994 by authorizing the use of commercial specifications and standards, and encouraging innovative contract management. But that direction affected only future contracts. Today, I'm here to talk to you about an initiative that gets at ongoing contracts where we can have near-term savings that can affect our acquisition programs in the immediate future.
This initiative addresses a very real problem. Currently in many of our contract facilities, there will be different processes or specifications used for similar manufacturing or management operations because of the different requirements in various contracts. For example, a contractor has one manufacturing process for his commercial customers and a different one imposed by the Defense Department -- or he may have one imposed by the Air Force and a different one imposed by the Army. This costs him more. He passes those costs on to us. That's fair, but it's expensive. It's expensive for us. So why can't he move to the same system? The answer is because of our regulations. So we want to change those regulations to permit this efficiency to take place.
We would, obviously, save money if we could piggyback off what is being done on the commercial side and consolidate the processes used by the Defense Department.
So with this initiative -- and starting now -- we will seek to reduce the number of processes used.
In our real life, the process is more complicated than the simple example I gave you because the contractor may have a Navy contract for one type of plane; an Air Force contract for another type; and an Army contract for a missile. Therefore, we will seek to modify the contracts as a block -- not simply contract by contract. Modifying all contracts at once in a given facility to consolidate the number of processes or eliminate all but one.
I have asked this be done on a streamlined basis, because the longer it takes the longer we will continue to incur the costs of duplicate and unnecessary processes, specifications and standards.
To summarize, the changes that will been effected with this new directive is that, first of all, we will be able to consolidate processes on ongoing contracts. Secondly, we will consolidate these -- attempt to modify -- the contracts as a block -- not contract by contract. Third, we will do this on a streamlined basis in order to get the savings as soon as possible.
I'd like to introduce Paul Kaminski now to give you more details on this important new initiative.
Q: Sir, could we just beg you to answer one question? There are reports that Russian Akula submarines are off Georgia and off Washington, watching our boomers as they go in and out. Do you have any comment on that?
A: No, I don't right now, but I'll be happy to give you a more detailed comment on that later, Charlie.
Q: Thank you.
Dr. Kaminski: As Secretary Perry mentioned, implementation of this policy requires a streamlined approach so that we can get it done quickly, and so that we can begin to benefit from the savings and the cost avoidance associated, sooner rather than later.
This morning, I signed a memo promulgating implementation guidance to proceed with this program with the idea of achieving four basic objectives in the process. The first one -- quick implementation -- for the reasons I've just stated.
Number two, to obtain consideration when there are one-sided savings in the process. We will make a modification and there are savings to be accrued to the contractor and it's a fixed-price contract over a long period of time, and the government doesn't benefit in the savings, we want to go back in those situations and seek consideration.
Thirdly, to minimize the cost of implementation. We could go through a very cumbersome procedure to implement this change. In those cases where we see that the savings will be dual-sided; that is, the government will benefit, for example, in a cost contract where the cost avoidance one taken by the contractor will be passed on to us. We see no need for a cumbersome process that would add expense or delay in implementation.
Fourthly, we want to protect the interests of the principal stakeholders in this process -- the individual program managers who may be affected, and the individual program teams who are operating in a given facility.
What we will be using here is an integrated product team approach to make a block change for modifying the specifications and the standards for all existing contracts on a facility-wide basis, rather than on a contract-by-contract basis. Here, really, the issue is you can't make a contract-by-contract change for a facility that has many contracts. You have to try to go through a set of common processes across the whole facility.
Our goal here is to consolidate or eliminate multiple management or multiple manufacturing processes when they're not needed. These multiple processes add unnecessary costs to the goods and the services that are purchased by the Department.
Let me give you a frame of reference here. About a year back, we had a study conducted by Coopers & Lybrand. They looked to see what were the added costs of requirements associated -- imposed by the DoD on our major contractors costs above what would be imposed by normal commercial practice. I would cite for you a couple of examples that they found. They looked, for example, at one military standard -- our MilQ 98-58A. It's a particular quality standard used by the DoD. They found that the contribution of that standard caused a cost premium of doing business with the DoD. That premium was about 1.7 percent of the cost of items purchased by the Department in the facilities that they serviced. So that's a pretty significant number if you look at the overall cost, say, on a procurement budget of about $40 billion per year.
They also looked at material management and accounting systems imposed by the government, and found this, too, to be a major contributor to cost, adding about six-tenths of a percent to the Department's cost. In one facility, for example, Coopers & Lybrand found that the government was requiring the same parts to be stocked in 15 different locations because of multiple contracts, each with their own requirements. This, obviously, drives up the stockage levels of parts required, adds to obsolescence and also deterioration problems, and it creates inefficiencies that we would like to avoid.
Another example of the sort of problem, the "what's-broken-that-we're-trying- to-fix," soldering specifications. One contractor facility is required to use eight different soldering specs -- five for the government, three for contractor/commercial purposes. This is for similar types of products. This means personnel doing the soldering and those inspecting it must be trained on all the different techniques involved -- and production documentation, such as travelers and drawings are all different for the different processes.
It's very difficult to streamline manufacturing process across a facility in this environment. If we can consolidate to one or two major specifications, manufacturing personnel can become more efficient, the inspection requirements and the paperwork can be reduced, and we can, where possible, leverage off the commercial process.
What I've tried to illustrate here is how this may play out over time. There's going to be a period of transition. This might be a year -- maybe a year and a half long -- in which there will be costs of transitioning to a new process base. We don't know enough today to predict whether in the short term there's going to be a net savings of a small cost. Whatever is going to happen in the short term is going to be small, because I've seen situations where there are easy savings to be reaped. We've identified much of the low-hanging fruit; but there are some places where the savings will be less and there will be some cost during a transition period. As I said, I would expect this to play out in a year or a year and a half or so -- where we now start to cross the line and get into the green where there's a net savings to the Department.
What I've illustrated here is if we went about our business the way we did in the past we would be moving up this line with separate processes in place by consolidating --.by reducing the number of processes that we would be using. We will be operating on this kind of a line. The green layer in between is what you might call savings, or, really, what it is is cost avoidance. It is avoiding the cost of keeping up these multiple process lines over time. These savings will accrue to the contractor who will avoid costs of the processes. For most contracts that we have in place, there will be bilateral savings that is, the savings will be passed directly to the government; and, in the end, to the taxpayer. That will be happening with cost-reimbursable contracts; it will be happening in those situations where we have options that have been priced, where we can go back and readdress those options.
In the case of longer term fixed-price contracts where there's a possibility of what I would describe as unilateral savings -- that is, savings to the contractor but not to the government because of the fixed-price structure based upon our cost analysis -- we will look at making adjustments to those contract prices in that unilateral case.
The focal point for this activity will be the administrative contracting officer assigned to the Defense Contract Management Command which is located in the contractor's facility. They will follow a process that will include the streamlined review and the adoption of contractors' proposals to proceed with this initiative across the whole facility.
This doesn't mean that the customers, the program managers, and the buying activities, won't be involved. Our local DCMC activities will use management councils, to include the involved program managers and other customers, as well as our Defense Contract Audit Agency, to review contractor proposals related to elimination or consolidation of these requirements. Only when there is agreement on the extent of the change will the administrative contracting officer execute the block changes to the contracts for that facility.
But we intend for this to be a streamlined approach. We will not spend months having detailed cost proposals prepared, audited and negotiated unless the initial review by an administrative contracting officer indicates that the possibility exists of substantial unilateral savings after the contractor transition costs and the government administration costs are considered. As I said earlier, we expect the number of these unilateral savings cases to be minimal, so we don't want to overburden the system to deal with them where it isn't required.
The longer it takes us to implement this, the longer we will bear the cost of inefficiency on these separate processes. So in my opinion, we want to move very quickly to get on with it and to see if we can't begin to reach closure here in this year or year and a half time frame that I've illustrated.
That concludes my briefing. I'd be happy to take questions.
Q: Have you got any idea how much you will save over a year, two years?
A: I don't have a precise number, but I can give you some feel. If you took as just an indicative figure that Coopers & Lybrand study, they've indicated that the costs of unique military quality requirements was something like 1.7 percent. I don't think we'll get all of that back because there are going to be some unique remaining quality requirements. But, even if you used a number like a percent you can see that the area, the annual savings in that curve will be measured in the hundreds of millions of dollars. The way I expect to see that come about is in terms of cost avoidance that will show up in the pricing of all the contracts downstream. I don't expect us to try to run some kind of an audit system here which says price it in the old way with the old processes and price it in the new way so we can account precisely year by year in the future what the savings will be.
Q: Where will the big savings come? Esoteric things like computer chips and vacuum cleaners and things? Or in big ticket items like...
A: I think they'll come in big ticket items as well. I think what we're talking about here is something measured in the hundreds of millions of dollars per year as we get over that cross-over.
The important thing here is, unlike many of the acquisition reform initiatives that we're undertaking, this one affects all current programs. Much of what we've done this far we've implemented for new starts, new activities. This cuts across the board with everything in the Department. That's why the potential is so large.
Q: Do you have a feel for how many of these will be unilateral? What percentage of your total contracts?
A: I do not think it's going to be a large number. I think it will be a very small number. But I can't give you a percentage today.
Q: Do you have any feel for how long it's going to take to renegotiate...
A: Our expectation is to be through this basic process in something around a year, maybe just a little over.
Q: During the Gulf War, America's technological prowess was very much on display. For this deployment to Bosnia, are there going to be any new technologies or things the building has acquired during this Administration's tenure that we'll see over in Bosnia that we have not seen before?
A: There will be some new technologies. I think perhaps the things that will make the biggest difference has to do with what we're doing in a system of systems -- pulling things together to have a much more effective intelligence system to support tactical kinds of operations, for example.
Q: Can you give us an example?
A: We're doing some substantial work right now to improve the integration of the various elements in our forward base intelligence analysis and processing and dissemination systems.
Q: Say that again.
A: I can't give you a one-word program example. Really the right description: a system of systems. That is, seeing individual systems that operate in the field today -- for example the U-2 reconnaissance system, a tactical UAV system. The ability to put together the information derived from the various systems...
Q: Real time to the ground?
A: Yes. To fuse that information together to gain a sensible picture of what's happening -- a situational awareness -- and distribute it to the right people. We're making dramatic improvements in doing that and doing that in a very timely way -- something being done in minutes and hours as to a process in the past which might take 24 hours. That's where I think we'll see the biggest impact.
Q: What will happen with the savings from the initiative? Are they going back to the individual services?
A: The place where the savings are going to show up is in cost avoidance. So the programs, as we execute them, will cost less in the future than they will today. The way that will be taken account of, as I indicated, after about a year or perhaps slightly more in this process... Each of our individual program managers and the services, as they prepare their POM next year, will begin to be able to make forecasts for these savings.
I gave you some indication of what I called the "tops down" view. That is, taking a big gross number like the Coopers & Lybrand study, to give you an indication for the kind of size of potential cost avoidance that's here. We've also looked now from the bottoms up. We've begun to do some work in some facilities to look to do cost avoidance.
Here in individual facilities, we're seeing the potential for savings in the tens of millions of dollars per year.
Those are going to be picked up as we go through our annual budgeting cycles in terms of avoiding the costs that we have been incurring today.
Q: What drove this difference between the two? The separation that's developed between the military side and civilian products? Was it a passion for secrecy, or the idea that civilian stuff wasn't good enough for the military?
A: I think it has many roots, but one of the strong roots is that 20 years ago as electronics were being developed, the reliability of electronics just wasn't up to snuff as to what was needed for military applications. What's really happened here is that the reliability of commercial electronics has gone up dramatically through the years so that, in many cases, we can just buy off commercial lines, and the processes used are adequate. That was not the case 20 or 25 years ago -- is what forced us to set up some of our own requirements.
Q: Have there been any companies or program offices that have been selected to initiate this process?
A: We have, in effect, beta sites. I have with me today one of our PEOs. George Williams is one of the accounts that I refer to who is responsible for having done a major piece of work at one of the Raytheon manufacturing facilities -- showing us the potential from the bottoms up.
Q: Any others you can cite?
A: Texas Instruments has done one, Boeing. We've got several reinvention sites who have been giving us the base for the bottoms up.
Q: Would this program be applied to the Hunter program, for example, as they're about ready to transition from low-rate production to full scale production? That would be a program which I guess right now you're in negotiations. So would this program be applied...
A: I expect this to be applied to every program, but I think that's the wrong way to think about it. You have to think about this being applied to a facility, and then being applied to all the programs that are produced in that facility.
Q: The TRW program...
A: Part of Hunter is produced and integrated in a TRW facility, part of it is produced in an Israeli...
Q: Would this be applied in Israel as well?
A: That is something that, in principle, yes, we have the base to do that. But our principal thrust here is going to be in the U.S.
Q: Speaking of Hunter, you canceled or delayed the Hunter DAB scheduled for last Monday?
Q: When can we expect a decision on that program?
A: I think our next decision on the Hunter program is going to come down to a budgetary decision, which is in the process of being discussed as we put together our '97 budget. We haven't made it yet.
Q: Have there been guidelines developed on identifying adequate consideration where you anticipate modifications of contracts where the savings will be unilateral?
A: We have developed guidelines for beginning to go about the process in terms of identifying the kind of pricing data that will be required for the process; but what we have tried to do is streamline this process to allow the ACO to exercise some fair judgment as to whether the savings -- the unilateral savings -- is likely to be significant or not. If the judgment is that it's not likely to be significant, we will keep this process simple and streamlined. If the judgment is that the unilateral savings is likely to be significant, then we really have to go into full swing to obtain the detailed proposals to get pricing and auditing data, and go back and do that in a very quality way.
Press: Thank you.