Navy Buys In Bulk To Save Money, Build The Fleet

There has been renewed attention of late in defense circles with the subject of Pentagon spending reforms. The combination of increasing threats and declining budgets has given a new impetus to the subject. There is a sense that this might be the moment with the White House, Congress and the Department of Defense all appear to be moving in the same direction. The Chairman of the House Armed Services Committee, Mac Thornberry (R-TX), has put out an initial set of proposed acquisition fixes, focusing largely on reducing burdensome oversight requirements. The Pentagon continues to tweak its Better Buying Power initiative. Some observers have placed a lot of hope in the Pentagon “Dream Team” of newly-installed Secretary of Defense, Ashton Carter, Deputy Secretary of Defense, Robert Work, and Under Secretary of Defense, Frank Kendall, to lead a vigorous reform effort. Secretary Carter has engendered some excitement with his thoughts on how to reform the defense department’s personnel policies, thereby reducing exploding manpower costs.

One of the best ways for the Pentagon to save money while simultaneously modernizing the military is to expand the use of well-proven policies and programs. For example, the department could make greater use of Performance-Based Logistics (PBL) contracts in the sustainment of weapons systems and platforms. Properly structured PBL contracts can ensure high levels of platform or system availability while simultaneously saving money. Having first looked at ending its decade-long PBL contract for the C-17 and replacing it with a more traditional organic base sustainment arrangement, the Air Force decided to “reup” for another decade with Boeing and Pratt & Whitney.

The Navy has long used the technique of acquiring ships and submarines in groups, or blocks, as a way of saving money. Block buys allow for multiple sources of savings. Long-lead items and expensive components can be purchased in economical quantities. The supply chain can be managed to ensure the optimum flow of materials and parts. Building a number of ships or submarines allows the workforce to move down the learning curve, improving output and reducing mistakes. Companies are able to justify investing in equipment and training to reduce costs when they see the prospects for long-term returns on their expenditures. In addition, with a block buy, the platform’s design is frozen, thereby limiting what can be very costly engineering changes.

The block buy approach has been raised to a fine art in the Virginia-class attack submarine (SSN) program. Together with the Navy, the two companies that build the submarine, General Dynamics and Huntington Ingalls Industries, have squeezed thousands of man hours out of production, as well as lowering the cost by $400 million per boat and bringing them in by up to six months ahead of schedule. These feats have been accomplished while continuously evolving the platform’s design and improving its capabilities with each successive block. The program has been so successful at reducing costs that the Navy is moving from procuring one SSN a year to planning for two-a-year.

The Navy has just announced that it will acquire nine more SSNs as part of its Block V procurement, beginning in 2019. This block will see the introduction of the Virginia Payload Module, a special mid-body segment that will house four very large tubes that can carry Tomahawk cruise missiles, undersea unmanned vehicles or new weapons.

The Navy also employed the block buy approach with its procurement of the Littoral Combat Ship. It contracted with Lockheed Martin and Austal USA to buy both variants of the ship in groups of ten ships each.

It took a similar approach with the Arleigh Burke destroyer through what is termed a multi-year procurement. After restarting production of the Arleigh Burkes, the Navy initiated a 10 ship multi-year procurement in 2013 of the enhanced Flight IIA variant, splitting the award between Huntington Ingalls Industries and General Dynamics. This approach allowed for many of the same savings as occurs with a block buy.

Now the Navy plans to do another multi-year, this time for the more advanced Flight III variant of the destroyer. A key feature of the Flight III is its new Air and Missile Defense Radar which, along with the Standard Missile 3 and 6, will provide the Fleet with vastly improved air and missile defenses.

The Navy and the other services have done multi-year procurements for other systems, including the V-22, CH-47 and H-60 helicopters. Block buys and multi-year procurements can save between 5% and 15% of projected costs of traditional annual procurements. On programs costing billions of dollars, these are significant savings. With defense resources becoming increasingly scarce, greater use of techniques such as PBLs, block buys and multi-year procurements make a lot of sense.