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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: [email protected]