With the Right Incentives Defense Companies Can Give DoD A Better Deal

Two of the biggest shopping days of the Christmas season, Black Friday and Cyber Monday, are based on a simple economic proposition: with the right incentives both buyers and sellers can optimize their interests. For the seller it is revenues and profits and for the seller it is a lower price and the ability to access a greater range of goods and services. Most often the mechanism for achieving both sets of interests is through increased volumes of sales. If a seller can achieve high sales volumes he can get a better deal from producers, who are able to reduce the costs of their materials and labor while increasing revenues and profits, and in turn offer a lower price to the buyer.

The same principles should drive defense acquisitions but rarely do. You might think that the reason for this is because the Department of Defense (DoD) buys in such small quantities, but this is not entirely true. Defense companies have the capability of optimizing their production lines and supply chains so as to reduce costs and improve the price to the government even when the total buy is in the dozens or at most hundreds. For example, according to the F-35 Program Executive Officer, Lt. Gen. Christopher C. Bogdan, optimization of the fighter’s production throughput could reduce the average cost by as much as 20 percent. When DoD keeps to a predictable and economically reasonable production rate this also incentivizes the companies to invest their own resources in ways of reducing the costs of production.

Multi-year procurement contracts for platforms such as the V-22 Osprey, the MH-60R helicopter, the DDG 51 destroyer and the Littoral Combat Ship allow the manufacturers to acquire materials in greater bulk and move their work force farther down the learning curve, thereby reducing the costs of production. The Virginia-class SSN program has achieved significant reductions in material costs and labor inputs by using a contracting mechanism called block buys. This allows the builders to freeze the design, buy materials and major components (e.g., nuclear reactors) in economical quantities and improve labor productivity. Multi-year procurements and block buys also save DoD money indirectly by reducing the administrative costs associated with more frequent competitions.

A second way private companies can give the Pentagon a price break while making more money is through the use of modern logistics and transportation methods that optimize the use of physical assets and workers. This is what UPS and FedEx do every day. U.S. Transportation Command achieved major cost reductions and improvements in services through its Defense Transportation Coordination Initiative. A private contractor, Menlo Worldwide Government Services, LLC, provides shipment planning, optimization, the movement of materials and overall transportation resource management for defense material shipments moving into and among DoD facilities in the continental United States.

Manufacturers can both increase their profit and provide customers a better bargain by improving the quality and reliability of their products while holding prices relatively steady. Car manufacturers learned this lesson decades ago and now commonly offer ten year/100,000 mile warranties on power trains. Commercial aircraft engine manufacturers are moving in this direction as well. DoD contracts based on the principles of Performance-Based Logistics can increase returns for the private companies involved while offering lower costs to the government.

No one who shops at Walmart, Target or Costco cares how much profit these retailers or their suppliers make so long as they are getting a bargain. DoD needs to acquire the common sense of the average American shopper and create the incentives that will help industry to reduce the price of defense goods and services.