April 1, 1996
t isn't often taxpayers, Defense contractors and Pentagon officials can cheer about the same news, but that's what happened last December when Defense Secretary William Perry announced plans to simplify Defense contracts.
Under the "single process initiative" announced by Perry, Defense contractors will be able to eliminate obsolete specifications on existing contracts and adopt common commercial specifications and manufacturing practices where appropriate. In theory, contractors will be able to lower their costs by eliminating expensive and unnecessary specifications, the Defense Department will save money, and taxpayers will be the ultimate winners. Call it trickle-down savings.
Pentagon officials acknowledge contractor transition costs might offset short-term savings, but they expect big financial rewards in the long run.
"It initially will be difficult for companies because it means a whole new approach to business," says Colleen Preston, deputy undersecretary of Defense for acquisition reform. "They will be bearing a lot more risk because we will no longer be dictating every last detail, but the results will be greater efficiency."
"In order to make the shift, companies will have to be willing to put in an up-front investment. This has been our biggest roadblock. The Defense Department isn't offering any money but is providing training materials so that companies holding existing contracts can make the shift to commercial standards within 19 months," Preston says.
The jury is out on the amount of savings the new policy will accrue, but both government officials and contractors are hailing the policy as a winner for everyone.
"We're looking at this as very good news," says Nick Kuzemka, director of acquisition management for Lockheed Martin, the largest Defense contractor. "We obviously are extremely dedicated to doing whatever we can to lower the cost of our products."
"There will be some up-front nonrecurring costs. One will be sitting down and doing the initial evaluations to determine what it is we can do to do things better," Kuzemka says. He anticipates the biggest savings to the government will be in reduced overhead costs, once contractor facilities have moved to common practices.
The problem many companies now face is that current contracts require different specifications and work processes for similar operations. For example, one contractor facility is required to use eight different soldering specifications for similar operations. Five of those are for the government and three are for commercial operations, says Paul Kaminski, undersecretary of Defense for acquisition and technology.
"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 processes 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," Kaminski says.
He cites a Coopers & Lybrand study conducted for DoD that showed added costs imposed by the department on major contractors. For example, one military quality standard-MilQ 98-58A-used by the Defense Department, accounted for 1.7 percent of the cost of items purchased by the department. "That's a pretty significant number if you look at the overall cost, say, on a procurement budget of about $40 billion per year," Kaminski says.
The study also found material management and accounting systems imposed by the government to be major cost contributors, adding about six-tenths of a percent to the department's tab, Kaminski says. 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 contract requirements. "This adds to obsolescence and also deterioration problems, and it creates inefficiencies," Kaminski says.
Until now, most procurement reforms have targeted future contracts for savings. With new Defense purchases at a low, the opportunity for savings has been limited. For the first time, significant savings may be realized on existing contracts.
"Because it is generally not efficient to operate multiple, government-unique management and manufacturing systems within a given facility, there is an urgent need to shift to facilitywide common systems on existing contracts," Perry wrote in a memorandum to top Defense officials.
The Defense Department is trying to implement the policy as quickly and simply as possible. By using a "block change" approach to modify all contracts at a given facility, the department will avoid the costly and time-consuming process of separately renegotiating Defense contracts.
There is one caveat, however, which makes some industry officials cautious. In a memorandum to Defense officials, Kaminski said contracting officers are to try to renegotiate contracts where moving to common practices will result in significant savings to the contractor on long-term, fixed-price contracts. Defense officials believe savings from the new policy should be passed on to the government.
Dick Powers, director of financial administration for the Aerospace Industries Association, says renegotiating such contracts would bog down much needed reform and could even deter implementation.
"We do have some concerns but we think we can work our way through them," says Kuzemka. Still, he says, "By driving down costs, this is a win-win [policy] for the government, for industry and for taxpayers. Next year and the year after that this will really start driving home."
April 1, 1996