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Reducing Total Ownership Cost (R-TOC)

andValue Engineering (VE)

Dr. Danny L. ReedInstitute for Defense Analyses

June 8, 2006

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R-TOC Genesis

• Initiated in 1999 by the USD(AT&L) to address:– O&S cost growth at expense of force modernization and

readiness– O&S budget constraints limit programs to near-term, critical

solutions only– R-TOC program seeks to seed O&S cost avoidance

solutions that have broader impact– Thirty Pilot Programs

AgingEquipmentRising

O&S Cost

Less $ forModernization

Declining FutureReadiness

DEATH SPIRALFixed Top Line

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Significant FY05 O&S Cost Avoidances from R-TOC Pilots

• FY05 cost avoidances exceeded $2.1B

• Projected life cycle cost avoidances will exceed $76B

R-TOC Pilot ProgramsReported FY05 & Life Cycle Savings/Benefits

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Rep

ort

ed S

avin

gs/

Avo

idan

ces

FY05 % Savings

LCC % Savings

FY05 Goal

Pro

gram

Dro

pped

Pro

gram

Dro

pped

Pro

gram

Can

celle

d

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R-TOC Program Strongly Supported by USD(AT&L) and Services

• R-TOC PE was created using funds ($25M) provided by the Services in PBD 707

• PBD 707: USD(AT&L) and the Services agreed to move 1/3 each from the Services accounts to the OSD account each year through the FYDP to fund the R-TOC PE

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USD(AT&L) FY 2010 R-TOC Goal

• USD(AT&L) Goal: “Maximize cost avoidance on total defense systems FY2010 O&S costs from an FY2004 baseline, by offsetting 30% of predicted inflation.”– Goal extends to all defense systems on program-by-

program basis– 15 Special Interest Programs (SIPs) designated lead

programs to “show the way” towards achieving goal– SIPs are monitored through semi-annual reports and

quarterly R-TOC Forums– Services will include this goal in their reviews

• Ultimately expand to all defense systems

PE will provide critical funds to help achieve this goal

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Army• Bradley A3 Upgrades• UH-60M – Upgrade• Stryker • UAVS• Guardrail

Air Force• Global Hawk • Engines (2)• F-16

Navy• H-1 Upgrades• V-22 • F/A-18E/F • H-60• ASE• Common Ship

Joint• F-35 (JSF)

R-TOC Special Interest Programs (SIPs)

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Status of R-TOC

• Reduction in Total Ownership Cost (R-TOC) program initiated in 1999 by the USD(AT&L) to address:– O&S cost growth places limits on force modernization / readiness– O&S budget constraints limit programs to near-term problems– R-TOC program seeks to seed O&S cost-avoidance solutions

• R-TOC Program has successfully demonstrated cost avoidance

• Program Element Budget Actions– “zeroed” in FY05 budget – no projects to show at that time– No Congressional “Marks” for FY 2006 budget – Funded

• OSD has:– Continued proactive steps to institutionalize O&S cost avoidance

in all defense systems– Created Special Interest Programs (SIPs)– Combined R-TOC and VE under same DOD leadership

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Programs Contributing to R-TOC

• Lean Enterprise Value• Six Sigma• Supply Chain Management • DoD Manufacturing Technology (ManTech)• Value Engineering

– FAR provisions offer contractual incentives– Methodology offers approach to partner with industry

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Value Engineering is an R-TOC Best Practice

• VE provides:– Cost reduction (VEPs and VECPs)– Product or process improvement

• Higher quality• Reduced cycle time

– Better means and materials for maintenance• Increased reliability• Greater safety• Less environmental impact

VE Goal: Lower the government’s costs for goods and services & provide cost effective solutions to problems in design, development, fielding, support, & disposal

VE Goal: Lower the government’s costs for goods and services & provide cost effective solutions to problems in design, development, fielding, support, & disposal

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• DoD VE Strategic Plan signed by USD(AT&L) – Improve the value proposition of defense systems– Align industry and government value propositions– Increase VE expertise

• Strategic Plan– Establishes a goal of cost savings and avoidances of

1.5% of TOA by FY06 for all the Services and other DoD Agencies

– At least 500 people will have completed VE continuous learning module by FY06

– 90% of VECPs should be fully processed within 180 days by FY06

– VECP Community of Practice (CoP)

DOD VE Strategic PlanDOD VE Strategic Plan

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DOD VE Savings & Cost Avoidance$M

Over $29B

0

500

1,000

1,500

2,000

2,500

3,000

3,500

83 85 87 89 91 93 95 97 99 01 03 05Fiscal Year

TOTAL

(VEP)

(VECP)Over $30B

$M

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VECP CoP Home Page

ContractorSummitsVECP;

MaintainsInterest

In Process

ContractorMarkets

PreliminaryIdea

To Govt

ContractorDetermines &

MarketsProposalStrategy

ContractorGenerates

Idea

SubcontractorSuggests

Improvements

GovtExpressesTechnicalInterest

GovtEncourages

VECPs

GovtProcesses &Contractually

Approves VECP

GovtExpressesSupportfor VECP

VECP CoP Home Page

Govt Pays Settlement

ContractorDelivers

VECP Unit(s)

Contractor BeginsVECP Implementation;

Records ChangeConfiguration

Reject

GovtDefinitizes

VECP

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ContractorGenerates

Idea

SubcontractorSuggests

Improvements

GovtEncourages

VECPs

Idea Generation

To Selling VECP

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• Provides A Source Of Profit Not Available Under Other Provisions Of The Contract

• Provides For Reimbursement Of Development Cost On Approved VECPs

• May Provide Usable Technology On Other Product Lines• May Provide A Competitive Edge On The Item In

Production• Positive Working Environment

– Challenging / Skill Enhancement Work– Improves Competitiveness– Empowerment

VECPs Benefit ContractorsVECPs Benefit Contractors

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• Upgraded technology (eliminate obsolescence)• Improved system performance• Increase in system readiness• Reduced logistics footprint• Savings on the contract• Reduced operation and support (O&S) costs• Better insight and improved working relationship with

contractor

Potential Benefits to Government From VECPs

Potential Benefits to Government From VECPs

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SUMMARY

• R-TOC and VE are alive and well in the DOD• R-TOC/VE info website: http://rtoc.ida.org or

http://ve.ida.org • VE Strategic Plan approved and being worked• Annual DoD VE Awards Ceremony • Three VE documents in-work: 1) VE Contractor’s

Guide, 2) VECP Contracting Guide, and 3) VE Handbook

• The VECP CoP exists now on the DAU CoP website– https://acc.dau.mil/vecp

• VE – Needs support from contractors - VECPs • R-TOC is driving towards institutionalization of O&S

cost reductions across all programs with a defined USD(AT&L) FY 2010 goal and with an R-TOC PE

• R-TOC / VE Contact: Danny Reed: dreed@ida.org