As we watch the BEA circus in Paris, I remember 30 years ago the US Air Force was very concerned about  the deterioration of the US Defense Industrial base and the Reagan Administration set forth DoD procurement policies to fix this problem.

C-17_imageThe new Administration is handing out Billions of dollars on “windmill technology” and “golf cart battery improvements” (i.e. green technologies) for “shovel ready” projects.  What about American industry?  I understand that when the American population votes into office  a new “socialist” government, the “guns” will receive less, and “butter” will receive more.

However, while Airbus is to received over 2.5  Billion dollars from European governments to fund their new aircraft systems, should the US Government be doing more assisting the American industrial worker while maintaining our National Security?

It has been a long time since I was directly involved in Systems Command procurement policy decisions, however, I believe that: “History is repeating itself again!” When the next World War starts, will America be ready?

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Signs of the Times

“Today’s Navy faces a challenging world. Uncertain economic growth, globalization and rapid, radical technological change are coupled with increasingly powerful competitive, and diversified naval threats.”

John C. Weaver, Rear Admiral, U.S. Navy, May 1989

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“The only way to bulletproof our country is to design and make the best products in the world.”

Ross Perot Fortune, March 26, 1990

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The U.S. defense industrial base is deteriorating. Long lead times to procure weapon systems, high costs, uncertain quality, and dependence on procurement of electronic components from other countries are symptoms of a decline in the capability of the U.S. defense industrial base. A primary cause of this decline is the failure of the Department of Defense(DoD) and its contractors in the U.S. defense industry to invest sufficiently in manufacturing technology. The lack of investment reflects DoD’s history of concentrating its resources and attention on product technology rather than process technology. … existing procurement policies and regulations do not provide sufficient investment incentives the contractors:’

Manufacturing Technology – Cornerstone of a Renewed Defense Industrial Base, National Research Council, 1987

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THE INDUSTRIAL BASE AND NATIONAL SECURITY: A NEW STRATEGY

Distribution Limitation(s): APPROVED FOR PUBLIC RELEASE – ADA276873 APR 1993

ABSTRACT:  There is a direct and clear link between industrial base capability and U.S. national security. The weapon systems of the 21st century will require complex manufacturing processes and advanced production equipment. Without a flexible and responsive manufacturing base, the U.S. will not have the means to producethe weapons required for our national security. In the face of a declining defense industrial base and budget reductions, there is concern that the capital and human resources will not be available to meet this future challenge.

In order to ensure that the necessary capital and human resources are available, this research paper champions a new pro-active government/industry partnership for a defense industrial productivity strategy. This partnership supplants the outdated laissez-faire strategy of the previous administrations. It builds on the philosophy of the Air Force’s Industrial Modernization Program (IMIP) and focuses on the areas of education, research and development and capital investment to address the productivity issues facing the defense industrial base in the 21st century.

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EARLY 80’s

The Air Force, the Office of the Secretary of Defense, and the nation as a whole have been concerned about the health of the industrial base for over a decade. Specifically, this concern has been focused on low productivity, old plant and equipment, and low levels of capital investment within the defense industry. There are several reasons for concern:

“* these problems are major contributors to rapidly increasing weapon system procurement costs

“* they directly affect the growing acquisition lead times

“* they inhibit industry’s ability to manufacture the increasingly advanced designs using exotic materials.

In 1980, a comprehensive study on the defense industrial base was conducted by the Defense Industrial Base Panel of the House Armed Services Committee. Its final report, known as the Ichord Report, painted a gloomy picture about the state of the industry.

Two specific findings of the report stated:

” productivity growth rates for the manufacturing sector of the U.S. economy are the lowest among all free world industrialized nations; the productivity growth rate of the defense sector is lower than the overall manufacturing sector; and

“the means for capital investment in new technology, facilities and machinery have been constrained by inflation, unfavorable tax policies, and management priorities.

Captain Richard Heffner and Major John Weimer, in their 1983 masters thesis, painted a vivid picture of the defense industry’s health, citing work by Mr Jacques Gansler and the Ichord Report:

The relatively low level of investment in plant and equipment modernization is one of the most striking features of the current U.S. defense industry. During the1970s, the U.S. aerospace industry invested only 2 percent of sales in new capital,while the average rate of investment for all U.S. industry was approximately 8percent, and the average rate for all U.S. manufacturing was 4 percent of sales.The lack of investment has resulted in: 60 percent of the metal working equipment used on defense contracts being over twenty years old, the technology base in the industry declining by approximately 50 percent, and the cost per aircraft increasing by roughly 10,000 percent over the past thirty-five years.

LAST FIVE YEARS

In opening statements at a 1987 hearing on manufacturing capabilities, Senator Jeff Bingaman, Chairman of the Senate Armed Services Subcommittee on Defense Industry and Technology, stated:

The central thread running through the hearings… was that the underpinnings ofdefense, that is the industrial base and the technology base, are deteriorating …. Since innovation in those industries which produce the buildingblocks for our weapon systems is critical to our long-term ability to maintain aqualitative advantage… we need to focus attention on the problems… and try to come up with constructive solutions to them.

Two vears later, Dr. James Blackwell, Deputy Director Political-Military Studies at The Center for Strategic and International Studies, testifying before the same Senate subcommittee said:

The defense sectors performed worse than U.S. manufacturing overall and,contrary to the rest of the base, capital spending in defense sectors actually declined, falling from a sectorial average of 3.9 percent in 1980 to 3.6 percent in1985. Yet, no matter how convincing these reports and speeches, they, like the MIT Commission Report, do nothing for industrial productivity unless someone implements action. The Air Force chose to act.

AIR FORCE RESPONSE

In 1978, the United States Air Force formed a partnership with industry to combat the declining productivity of the aerospace industrial base. Over the next decade, this partnership, called the Industrial Modernization Incentives Program (IMIP), grew to significant proportions both in terms of dollars invested and weapon systems cost savings realized. Its impact was so great that, by 1983, it was expanded to encompass the entire defense industrial base. The program’s stated objective was as follows:

Create a top-level partnership between the government and industry to reduceweapon system, subsystem, or equipment acquisition costs; and to accelerate the implenrentation of productivity enhancing equipment and management techniques”in the industrial base.The Air Force selected two fundamental concepts as the foundation for its productivity enhancement efforts:

“* contracting for productivity

“* technology modernization

These efforts were designed to overcome two problems cited most frequently as inhibiting modernization in the defense sector.

“* program uncertainties – a risk that hinders investment amortization andlong-term planning.

“• cost-based profit policy – a policy that negates long-term benefits forcontractors who modernize.

This IMIP program was implemented on the various major weapon system production contracts. (i.e. F-16 System Program Office)

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IMIP: AN HISTORIC PERSPECTIVE –THE AIR FORCE EXPERIENCE

IMIP’s beginnings can be traced back to the late ’70s with the first production contract for the F-16 multi-role fighter. What ensued was a program strategy which was unique, innovative, and more importantly successful. The strategy involved a partnership between [Prime Contractor] and the Air Force to share the risk of “contracting for productivity.”  The Air Force called this program Technology Modernization or Tech Mod for short.

TECH MOD

The focus of this program was on productivity growth: capital investment and technology. The goal was to reduce direct assembly line labor costs and supporting indirect costs at the prime contractor’s facility.

Defense industry ([Prime Contractor] included) understood the relationship between capital investment and productivity growth; yet, there was tremendous reluctance to invest in a cost reduction program. Why? Industry cited two primary reasons:

Maximizing return on invested capital. Return on investment has long been ayardstick in measuring where a corporation spends its money. Corporations set standards for returns in terms of percent of investment and time – called corporate “hurdle rates.” For example,a typical corporate hurdle rate in 1980 would have been a 20% return with a maximum 3 yearpayback. Investment in technology and capital equipment requires large sums of capital up-front(short term) with productivity gains typically in the long term. With emphasis onquick returns, investments in manufacturing technology and equipment could not compete with alternative investments. This was especially true in the late ’70s and early ’80s when interest rates were around 20%.

DoD Contracting Practices

Two practices in particular served to hinder cost reduction investments: annual year and cost-based contracting. Since investment returns accrue over the long term, the viability of the investment requires afairly long and stable production base. With the exception of multi-year cancellation protection, the government does not guarantee any production base.

Under DoD pricing policies, all cost reductions beyond the immediate contract would accrue to the Air Force. Under the Truth in Negotiation Act, contractors must report its most current and accurate costs in proposal submissions — this includes cost avoidances due to productivity gains through capital investments. In addition, since profits are based on costs, any cost reductions would translate into a lower profit return in terms of actual dollars.

OSD REVIEW

In 1982, Deputy Secretary of Defense Carlucci initiated a review of the Air Force’s Tech Mod program for DoD-wide implementation. The test was monitored by a steering group composed of flag or equivalent rank officers for each of the military services, the Office of the Secretary of Defense, Defense Logistics Agency, Defense Contract Audit Agency, and the National Aeronautics and Space Administration. Mr Carlucci charged the steering group to review alternative contractual approaches to implementing IMJP, to develop financial analysis tools, and to address a multitude of technical issues.

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RESULTS

In 1985, after a two and one half year test program, Rear Admiral Sansone, Chairman of the DoD Tri-Service Steering Group, wrote the following to the Deputy Under Secretary of Defense (Acquisition Management),

“… the IMIP test has been completed and the unanimous view is that the program is an astounding success.”

Notwithstanding this glowing appraisal, the Steering Group did raise several issues:

” implementation at the subcontractor level is very complex since savings and incentivescould flow over many programs. The contractual arrangement would have to involve numerous program offices and prime contractors

” validating cost savings could prove to be costly and time consuming if it could be accurately done at all. Validation of cost savings would usually involve developing an automated cost tracking system that compares “before” and “after” cost of changed manufacturing processes. It becomes more difficult if indirect costs are involved

” IMIP should focus on the defense marketplace where price competition is not a factor.It was felt that price competition is adequate to motivate cost-reducing investments without any additional incentives.

DoD IG REVIEW

On 8 September 1989, the DoD IG issued an audit report entitled, “The DoD Industrial Modernization Incentives Program.” The one year audit was to determine whether the program was effective in reducing system acquisition costs and improving the defense industrial base.

Specific audit objectives included:

“* whether DoD components have effectively implemented the program

“* whether the basis for sharing industrial modernization savings with defense contractors was reasonable

“* whether projected program savings were actually achieved

RESULTS

Mr Steven A. Trodden, Assistant Inspector General for Auditing, wrote the following in his letter to the Under Secretary of Defense for Acquisition, “Overall, we could not verify the claimed projected reductions in weapon system costs for the Program, but the Program helped modernize a small portion of the Defense industrial base.”

The IG had two major findings:

“* limited OSD management oversight hindered program effectiveness

“* inadequate savings validation procedures hindered verification of program savings The OSD oversight finding was basically an administrative finding due to a lack of program data (such as savings achieved, projected savings, incentives paid, etc.). The second finding, however, was more substantial and parallels the OSD and later the Air Force’s findings in 1985 and 1991 respectively.

AIR FORCE PROCESS ACTION TEAM REVIEW

In October 1990, Air Force Systems Command established an IMIP process action team (PAT) According to the Deputy Chief of Staff for Engineering and Technical Management, “Although IMIP had been successful, there was concern, both within the Air Force and industry, that IMIP had not achieved its full potential.” Therefore, the PAT was chartered to assess the status of IMIP and provide the most meaningful recommendations for change. The final report, which was approved in the summer of ’91, identified several strengths and weaknesses of the program:

Strengths: IMIP clearly brought technology and capital investment to the defense industrialBase IMIP created a culture in which government and industry sought better waysto do things

Weaknesses: Process is too lengthy and complex Inadequate savings validation proceduresCommitment and resources limited performance Low priority in the acquisition process

PERSONAL OBSERVATIONS

IMIP was successful for three reasons:

Air Force and industry leaders supported the innovative ideas that broke from traditional contracting paradigms and resisted the functional bureaucracies who did not like government supported programs interfering in private sector decisions

productivity decline was a priority on the President’s domestic agenda. Any creativesolution that enhanced productivity on the factory floor was supported by the military leadership and realized success in the budgetary process. Simultaneously, the Reagan build-up increased the number of systems in production. These two events, funding and business base, created an environment for capital investment and allowed IMIP to claim huge savings

IMIP was able to influence both the prime and sub-tier base. Significant benefits could only be achieved if the second and third-tier contractors were allowed to enhance their productivity through this capital investment incentives program

IMIP was based on a win/win philosophy which was starkly different from the traditional adverse environment of contract negotiations. It also broke down functional barriers within industry that hindered change — especially change on the factory floor. The concept of a total top-down factory analysis was, if not new, an under utilized planning tool for industry. Not only was management blind to their inefficiencies,’ few had plans for factory modernization as part of a strategic vision. Typically, the manufacturing engineering department was physically and organizationally separate from production operations. Production’s focus was on meeting delivery dates with a product — they had no time for factory analysis planning much less downtime to install, debug, and train for new manufacturing technology. IM1P forced the marriage between these two vital functions and created an atmosphere where the technologists and production managers could mutually support the others goals.

In the end, the very thing that sold the program — -,savings — quickened its demise. The government proved to be just as short-term minded as the industry it was trying to resuscitate. The government’s total focus, as evidenced by the IG and other findings, was on returns and payback periods. This unfortunate shortsightedness missed the value of IMIP. The government is not a profit generating entity; therefore, the focus should have been on industrial productivity, capacity and capability. The government should be more concerned with industry’s ability to produce affordable, reliable weapon systems rather than on savings validation.

LESSONS LEARNED

After a decade of focus on productivity growth and capital investment, programs such as IMIP and industry’s experiences with implementation of production technology offer excellent lessons from which to create policies for the future. This chapter will reach conclusions to these lessons learned focusing on education, R&D, and investment deficiencies.

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EDUCATION

A theme resonating throughout industry is that human resources are the critical link to extracting maximum benefit from manufacturing innovation. Story after story is told about how a capital investment will not be utilized at peak capacity until workers are trained on how to use it. Ms Marcie Tyre, an assistant professor at MIT’s Management of Technology Group, addresses this issue in her article entitled, “Managing Innovation on the Factory Floor”: Manufacturing managers often buy the most advanced equipment and systems but then fail to integrate them fully into production. Unsolved problems can persist for years, hindering quality improvement, product delivery, and factory efficiency… Trouble-shooting new technologies often requires expertise-say, in electronics, software, and systems integration–that is not available in the factory.

In Japan, a different picture emerges. Their factories are staffed with the best and brightest manufacturing engineers. Their blue collar workers are graduates of technical schools and receive extensive on-going training throughout their careers. As a managing director of one Japanese company said, “if you are going to have flexible manufacturing, you have got to have flexible people.”

The IMIP program was deficient in the area of workforce education for a couple of reasons. first, the program originators and implementors were “transfixed” on the hardware solution. This was acceptable in that the hardware solution reaped huge productivity gains; however, a more flexible workforce could have optimized these gains. Take the example of where a new technology is moved from the lab to the factory floor. In many instances, the introduction of new equipment actually reduced productivity for that specific operation until the production workers were trained in its application.

All too often, during the development and test phases the manufacturing engineers worked in a separate and isolated environment from the production management and workers. New technologies were tested and blessed without the benefit of the eventual operators’ input. This lack of communication and teamwork hindered implementation creating additional cost. This additional cash outflow negatively impacted the cash flow analysis which in turn decreased the return on investment and increased the payback period.

Second, workforce education was viewed as a liability in an accounting sense with no offsetting measured benefit. Because of industry’s and government’s short-term perspective regarding capital investments, the traditional cost-benefit analysis could never justify spending (either corporate or government money) on worker education without a quantifiable savings verification associated with a specific product or government contract. Our ability to quantify educational savings is elementary at best and neither party would have been willing to recognize savings cash flows from an otherwise subjective source.

RESEARCH AND DEVELOPMENT GOVERNMENT

“• Increase annual appropriations for the DARPA and MANTECH programs

“• Support institutions such as the National Center for Manufacturing Science and expand DoD’s role in them

“* Offer tax incentives to industry for R&D investment in both product and manufacturing technology

“* Modify the anti-trust laws to allow for lenient exemptions for consortium R&D activity in manufacturing technology

“* Change the IR&D recovery rules to allow 100% cost recoupment ongovernment contracts for independent research in manufacturing technology

INDUSTRY

“* Increase independent R&D investment in manufacturing technology

” Consolidate resources and reduce risk by forming industry consortiums to conduct primary research in manufacturing technology requirements

CAPITAL INVESTMENT GOVERNMENT

* Revive and modify the IMIP program to focus on criteria which addresses the problem of the 90’s — a declining business base

“* Work with the financial industry to provide low-cost government-backed loans to industry for capital investments

“* Change current tax laws to allow for a 100% investment tax credit for capital equipment investments

“* Change the current government accounting rules to allow for shorter depreciation Schedules.

INDUSTRY

“* Fence a substantial portion of investment budgets for capital expenditures in advanced manufacturing technology

“* Refocus current return on investment criteria to long-term health of the corporation vice short-term returns

CONCLUSION

To live well, a nation must produce well — no truer words were ever written when it comes to the future security of this nation. We have the resources, technically and financially, to ensure that no enemy physically threatens our shores.

However, to ensure that those resources are employed effectively, the federal government and industry must work in partnership to establish the institutional and organizational means in education, research and development, and capital investment to remain a “manufacturing superpower.”

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During World War II we were the “Arsenal of Democracy”. Today our industrial base is dwindling. losing large numbers of manufacturers of defense critical goods. Some went out of business, some were absorbed in mergers, and others stopped doing business with the Department of Defense. In addition, many industry segments of concern to our national defense have moved offshore. This continued deterioration of the Defense Industrial Base is diminishing the credibility of our deterrent.”

Manufacturing Technology -The Key to the Defense Industrial Base -The American Defense Preparedness Association October 1989.

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Current Links

Business Week, Boeing vs. Airbus: A 40-Year Rivalry

First A320 assembled in China performs maiden flight – 18 May 2009

Video – Chinese Maiden Flight

Sen. Richard Shelby Video – EADS contract, UPI, 4/13/09

EADS would consider splitting DoD contract – AP, Apr 20, 2009

Background – Related Links

Northrop Grumman wins USAF AIMS contract – UPI, March. 4, 2008

Thompson Files: Why Northrop and EADS won – UPI, March. 4, 2008

Tanker Contract Economic Stimulus for Europe? – Channel 5, April 17, 2008

Air Force deal on tanker plane is questioned – Washington Times, June 16, 2008

Boeing Wins Tanker Contract Protest – Fox Business, June 18, 2008

GAO Decision – Matter of: The Boeing Company, Date: June 18, 2008

File: B-311344; B-311344.3; B-311344.4; B-311344.6; B-311344.7; B-311344.8; B-311344.10; B-311344.11, Date: June 18, 2008

Updated Links:

Video First test flight of 2nd China-made ARJ21-700 jet

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