By Katherine McIntire Peters
June 1, 1996
ave you heard about the C-17? It's tough to attend a Defense Department briefing these days without hearing a plug for the Air Force's newest transport plane, the C-17 Globemaster III built by McDonnell Douglas. So tough that Air Force Secretary Sheila Widnall promised not to talk about it at a recent meeting with reporters.
That wasn't always the case. By 1993, Defense officials were loath to discuss the program, which, after more than a decade of development, was more than $1 billion over budget and a year behind schedule and hadn't produced a single plane that met the contract standards.
The badly managed program derailed the careers of three Air Force generals and threatened to bankrupt McDonnell Douglas before then-Defense Secretary Les Aspin put the program on probation in December 1993. Aspin threatened cancellation if the Air Force and McDonnell Douglas, the largest defense contractor at the time, couldn't put things right within two years.
With a $15 billion taxpayer commitment and the future of McDonnell Douglas and tens of thousands of jobs at stake, both sides had tremendous incentive to fix the C-17. Now, two and a half years later, the program is cited as a model of acquisition reform. The C-17 has aced performance tests, costs are dropping and planes are being delivered early. The transformation has been so significant, Congress approved a $17 billion multiyear contract to purchase 80 more planes beyond the 40 already under contract. It will be the largest multiyear defense contract ever awarded.
The salvation of the C-17 is a testament to the power of improved procurement operations at the Defense Department. Since 1993, the program has been born again and Defense and industry officials are singing the praises of acquisition reform.
Even President Clinton has joined the chorus: "After the first C-17s rolled off the production line, there were genuine concerns about cost overruns and scheduling delays. But you turned the program around," he told employees of McDonnell Douglas in Long Beach, Calif., during a February campaign stop. "We've had airlifters that could carry very heavy loads over long hauls, and we've had airlifters that could land on the most primitive airfields in the worst weather conditions. But we have never had a plane that could do both things until the C-17."
The plane that Clinton calls the "best moving van in the world" is a critical component of the Administration's national security plan. As U.S. troops based overseas have been restationed in the United States, it is imperative the Defense Department be able to quickly move troops and equipment anywhere in the world. The department's current, aging airlift force is quickly becoming inadequate for what Pentagon planners predict will be future requirements to ferry troops and materiel into remote areas.
It is a sign of the confidence the Pentagon now has in the C-17 that Clinton rode one into Bosnia when he visited U.S. troops there. In fact, the C-17 was a star performer in Operation Joint Endeavor, sending troops and supplies into Bosnia. It was the only aircraft capable of flying outsized cargo, such as cranes and other heavy equipment, onto small, underdeveloped airfields. While C-17s flew only 18 percent of the relief missions in Bosnia, they delivered 30 percent of the supplies because of the planes' huge cargo capacity and ability to land on short runways.
To appreciate how far the program has come in the last two years, it helps to understand how far it had fallen since 1981, when the Pentagon awarded McDonnell Douglas a contract to develop the transport plane that would carry the military into the 21st century.
The C-17 was unquestionably important to both the military and McDonnell Douglas. In addition to providing a much-needed new airlifter, it was a boon to the St. Louis-based defense contractor, promising about $40 billion in business over 20 years.
But the euphoria in St. Louis was short-lived. After intense lobbying by Lockheed, Congress backed away from the program. In 1982, the Pentagon announced it would purchase 50 upgraded C-5 cargo jets (produced by Lockheed) for $7.4 billion. The announcement was a blow to McDonnell Douglas and Defense officials, who were convinced the military needed a new airlifter able to land on short, unimproved runways, something the 1960s-era C-5 could not do even if it was updated.
While McDonnell Douglas continued to design the C-17, with no guarantee the plane would ever be funded for production, some of the company's best engineers and toolmakers left to take other jobs or were laid off.
In 1985, when Congress renewed its commitment to the C-17, McDonnell Douglas had lost precious momentum on the program and found itself scrambling to find experienced engineers.
From Windfall to Free Fall
The 1980s proved a turbulent time for McDonnell Douglas. Quick growth followed by an economic downturn left the company-and the C-17 program-in turmoil by the end of the decade.
"By 1988 there was a general feeling that the program was in trouble," says McDonnell Douglas' Jay Kappmeier, who at the time worked as a logistician on the project. "There were a number of things wrong. We were behind schedule and over cost and our relationship with [the Air Force] was deteriorating."
The first airplanes off the assembly line in 1992 had software problems, fuel leaks and wings that broke during structural testing.
Originally, the Pentagon planned to buy 210 planes, but changing military lift requirements and escalating costs caused Defense officials to downgrade the planned purchase to 120 aircraft. In their 1991 budget request to Congress, Defense officials estimated program costs to purchase 210 aircraft would be $41.8 billion. But by 1994, even with the reduced buy of 120 aircraft, Defense officials were estimating program costs at $43 billion.
Personnel turmoil at McDonnell Douglas exacerbated the problems. The company's agreement with its union gave senior workers on commercial contracts the right to replace more junior workers on government contracts, a practice called bumping. By 1992, 1,448 workers-42 percent of the C-17 assembly work force-were displaced through bumping.
During the first three-quarters of 1993, the number of displaced McDonnell Douglas workers climbed to 1,567. More than three-quarters of the C-17 assembly workforce was new to the program since January 1992, according to the congressional testimony of Assistant Comptroller General Frank Conahan in 1994.
In addition, scrap, rework and repair costs had climbed to about $44 million in 1993, adding an extra $7.3 million to the cost of producing each aircraft. The amount of rework and repair McDonnell Douglas employees were doing was equivalent to producing an extra six planes a year, Conahan said.
While McDonnell Douglas was beginning to deliver planes within 30 days of the contract delivery date, as required by the contract, the planes had increasing amounts of unfinished work that had to be corrected after the Air Force accepted them. For instance, the ninth plane delivered to the Air Force in 1993 (the last of five delivered that year) had loose screws, missing fasteners and a cargo ramp that would not unlock and open.
"C-17 reliability data show that a large variety of different failures have occurred with no one particular item driving the low reliability numbers. This means the contractor will have to find corrective solutions for a substantial number of failures to improve reliability. In other words, there is no simple fix," Conahan said.
By March of that year, the flight test program had slipped by 13 months and was likely to slip some more. And the C-17 still could not meet payload and range specifications stipulated in the contract.
Just when it seemed like things couldn't get much worse, Defense Department Inspector General Derek Vander Schaaf released a scathing report that said Air Force leaders had funneled nearly $500 million to McDonnell Douglas, which was experiencing a debilitating cash crunch.
Vander Schaaf alleged the Air Force improperly paid McDonnell Douglas for work that was not done. The payments were possibly illegal, he said. While the Air Force denied any wrongdoing in a rebuttal to the IG report, in April 1993 Aspin fired Maj. Gen. Michael Butchko, the former C-17 program manager, and issued career-ending letters to two other Air Force generals. Another Air Force civilian procurement official was barred from doing further acquisition work.
In mid-1993, about the time things hit bottom, Kappmeier was promoted to a management position at McDonnell Douglas. The press was reporting on mismanagement at the company and poor supervision by the Air Force. Because McDonnell Douglas was being penalized for delivering the planes late, there was tremendous pressure to keep the production line rolling despite problems with the aircraft. "For the schedule's sake, sometimes things moved along when they should have stopped," Kappmeier says. "We were doing a lot of rework at the end of the line and while it wasn't a total failure, there were problems in the details of the design as well as the workmanship." Morale hit an all-time low.
By December, Aspin had had enough. He put new Pentagon leadership at the helm of the program and issued a "take it or leave it" deal to McDonnell Douglas. Under what became known as the omnibus agreement, the Air Force agreed to pay the contractor $348 million to settle claims against the government and McDonnell Douglas dropped an additional $1.25 billion in claims; the Air Force also dropped claims against McDonnell Douglas for missing production deadlines and agreed to revise the delivery schedule and some program specifications. Aspin halted the contract to produce 40 aircraft and gave the Air Force and McDonnell Douglas two years to get the program on track in terms of production, reliability and improved management and manufacturing.
In the meantime, the Pentagon began to explore alternative airlift programs.
"The C-17 is late. It's over ceiling price. And it has serious operational deficiencies," Aspin said when he announced the decision. "The prospect of cancellation was very tempting, but cancellation would have meant new spending to start up a brand new program that ultimately might be more expensive for the taxpayers. [Instead,] we've settled on a flexible program that gives us the opportunity to fix the C-17 but does not hold us hostage to the C-17."
McDonnell Douglas accepted the offer.
Such was the situation Maj. Gen. Ron Kadish inherited when he became the C-17 program officer in 1993. Kadish didn't waste time lamenting it. There wasn't time to waste, he says.
"We had a [deadline before the Defense Acquisition Board] in November 1995 and we worked everything to be successful [by then]," Kadish says. Their mutual interest in fixing the program was so compelling that the Air Force and McDonnell Douglas improved their working relationship almost immediately.
According to Kadish, a new acquisition strategy, new leadership and commitment from the highest levels at the Pentagon and McDonnell Douglas began to turn the program around. "This was a massive effort. It points to the power of the acquisition reform initiative. I don't think you can point to any one thing. It's an environment created by leadership, exploited through the acquisition strategy where a lot of people have to play, including Congress, and focus on getting something that's in the best interests of the country. It takes hard work," Kadish says.
The strategy, developed by the Air Force and McDonnell Douglas, established a new management system for the program and redistributed authority. Specifications deemed unnecessary were modified or dropped, and a "should cost" review resulted in a comprehensive plan to bring down production costs.
Among the major initiatives were reduction of overhead staffing, assembly labor hours and direct support labor hours; development of more efficient manufacturing processes and use of commercial practices. Such initiatives were written into subsequent contracts.
Program managers were able to reduce the number of military specifications and standards from 243 to 30 in the 1995 production contract and down to 8 in this year's contract. The military specifications were replaced with commercial practices that saved money and cut staff hours.
In addition, management changes enabled McDonnell Douglas to cut its inspection staff by 50 percent and the Air Force to cut its inspection staff by 60 percent. Because management was improved, and not just cut, defects decreased by 76 percent.
Perhaps the single most important change to the program after the omnibus agreement was signed was a shift in focus for both McDonnell Douglas and the Air Force. Instead of obsessing on the letter of the law, program managers began to focus on the intent of the contract. The acrimony between the Air Force and McDonnell Douglas had become so great before the omnibus agreement that lawyers on both sides were reviewing all decisions made, making it nearly impossible to resolve disputes and fix problems. "We took the lawyers out of managing the program and we put people in charge who could actually solve the problems," Kadish says.
When Don Kozlowski was asked to take over the C-17 program at McDonnell Douglas in December 1993 he did a little investigative work before he accepted. He was no stranger to Defense aircraft programs. Since Kozlowski joined McDonnell Douglas in 1959, he had risen to become vice president and general manager of the company's F/A-18 C/D Hornet fighter jet program. His only break from the company had been in 1976, when he served as the Air Force's director of offensive air support mission analysis, for which he was awarded the Meritorious Civilian Service Medal.
"I wanted to know three things," he says. "Did we have a decent product? Did we have qualified people to build the product? Can the company perform? I snuck around and confirmed we had a very good product. I talked to a lot of people and they were qualified. The pilots loved [the C-17] and the government wanted it. We just weren't performing. The program was late, management systems were in disarray, there were parts shortages and we were running late on deliveries. It was very much in trouble," he says of the situation he walked into. But Kozlowski believed it could be fixed.
One of the first things he did was set priorities to make decision-making easier for employees. "Fundamentally it was very simple," he says. "Quality was No. 1, meeting the schedule was No. 2 and keeping costs down was No. 3. For many years cost had been paramount on everyone's platter."
The fixed-price development contract McDonnell Douglas was operating under before 1993 had proved a major stumbling block to the C-17. "The fixed-price syndrome says you will perform for that price no matter what. If you start fighting, lawyers intervene and everything goes into a tailspin. There's no mechanism for problem solving. We'd say that's not in the contract and the government would say it is," Kozlowski says. Because there's no such thing as a perfect contract, problems are inevitable.
One of the most significant management changes Kozlowski and Kadish made was to establish integrated product teams responsible for various functional areas of production of the C-17. The teams include Air Force representatives and McDonnell Douglas employees responsible for all aspects of production from design to inspection.
The teams have provided a mechanism for the Air Force and McDonnell Douglas to deal with problems as they arise, before they have time to fester and grow.
As a result, "problems bubble up faster and they are resolved faster," says Kappmeier, now the general manager for the support systems team. "Before the teams were formed, when a problem arose it was slow to be recognized." The previous stovepipe management system, where various departments were responsible for separate aspects of the aircraft, often required high-ranking managers to resolve what actually were simple problems.
For example, Kappmeier says, under the former management system, if he received data that was incorrect or late, he would write a memo describing the problem, which would then be passed up the chain of management until it reached someone with the authority to solve it. Now, problems are discovered early by the teams.
"Once the teams formed, there was a feeling among all of us that we have to have a quality product before it goes to the next step. Problems were solved at a lower level instead of passing them back and forth. We started talking instead of writing memos. Not only did the organization charts change, the whole culture changed," Kappmeier says, including the relationship between McDonnell Douglas management and its union employees, who also had a great stake in the program's success.
Giving the integrated product teams and employees the authority to carry out their responsibilities was a fundamental shift in management, Kozlowski says. He tried to instill a sense of program ownership in the workers. "This was their choice to fix the program and they had to commit to fix it," he says.
"When you empower people at any level, management has to be in a position to release authority and power to the people who are doing the work. And the people doing the work must accept the power," Koz-lowski says.
Whenever possible, decision-making and problem-solving was pushed to the shop-floor level. "In the past, things were in such disarry [an employee] couldn't make a decision without writing a letter or making a phone call," Kozlowski says.
Ready for Takeoff
The C-17 passed a significant hurdle in August 1995 when it successfully completed an intensive 30-day reliability, maintainability and availability evaluation. For a month, 48 air crews flew 12 C-17s on more than 500 sorties, hauling more than 5,600 tons of cargo. The aircraft showed an impressive 99 percent departure reliability rating.
The tests proved the performance of the C-17, and last November a Defense Acquisition Board met to consider the future of the program. After considering the military's airlift need, alternative programs and the improved performance of the C-17, the board recommended Congress commit to purchasing an additional 80 C-17s for $18 billion over the next seven years.
By committing to all 80 planes now, McDonnell Douglas saves money with its suppliers, thereby cutting program costs. Under the multiyear contract, the Air Force estimates the flyaway cost of the remaining 80 C-17s will drop from $183 million each to $173 million, for a total savings of about $900 million. While General Accounting Office reviewers believe this estimate is high, Congress is satisfied with the estimates.
When announcing the Defense Acquisition Board's recommendation, Paul Kaminski, undersecretary of Defense for acquisition, said the Pentagon had learned important management lessons from its experience with the C-17.
He praised the integrated product teams, something the Defense Department has pledged to use on future programs.
Why did the program veer so far off course before the Pentagon and McDonnell Douglas changed direction?
"I don't know," Kozlowski says. "There has to be a willingness by both parties to sit down and discuss how you get out of this. The omnibus agreement laid the foundation for that."
Kappmeier says he really knew things had changed when he took a call from a McDonnell Douglas technical representative working in Bosnia in support of the C-17. He mistook the employee for an Air Force officer. "Before, you'd always know right away who was a company guy and who was in the Air Force.
Kappmeier is not cocky about the program's turnaround. "With this business," he warns, "you are never out of the woods."
By Katherine McIntire Peters
June 1, 1996