The government and the private sector must work together to overcome the challenges and opportunities facing the United States’ shipbuilding industry, including managing costs and increasing productivity. Senior leadership in the U.S. Coast Guard and the U.S. Navy have underscored the importance of strengthening communication between government and industry as a significant factor in overcoming these challenges.
The Coast Guard and the Navy both have been under pressure to better manage shipbuilding costs and performance, while at the same time Congress and other stakeholders have warned of declining capacity and productivity in the U.S. shipbuilding industrial base. Such was the context for a frank discussion about the challenges of achieving the right balance between government and industry partnership and leadership.
“There have been some difficult decisions for the Coast Guard and for the nation to consider,” Blore on April 4 told an audience at the Navy League of the U.S. Sea, Air, Space Expo 2007 in Washington. “For example, the requirements generation, planning and cost estimation for the Deepwater program [including its major platforms, such as the National Security Cutter (NSC)] were accomplished prior to 9/11. When the Coast Guard came to award the contract in 2002, the service faced a decision: to go forward and make changes later, or to wait for a new set of requirements?”
Since awarding the contract, the Coast Guard and its industry partner, Integrated Coast Guard Systems –a joint venture of Lockheed Martin and Northrop Grumman– have made 11 major design changes to the NSC. Blore cited requirements and design changes as the top cost drivers in the post-9/11 Integrated Deepwater System (IDS) program.
While of a different order of magnitude than those of the Navy’s shipbuilding program, the costs of Deepwater cutters also have been the source of some concern for Congress and for the Coast Guard. According to Blore, the IDS program’s total shipbuilding investment may be divided into four broad categories, including $3.5 billion for eight National Security Cutters (NSCs); $7.5 billion for 25 Offshore Patrol Cutters (OPCs); $4 billion for 46 Fast Response Cutters (FRCs); and approximately $1 billion for miscellaneous shipboard systems and capabilities, including Command, Control, Communication, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR).
Allison F. Stiller, Deputy Assistant Secretary of the Navy for Ships, told the Expo audience, “In order to control costs, we [the government] have to be able to manage the configuration of ship designs and shipboard equipment. [Additionally,] we have to leverage ‘Lean’ [a commercial process improvement methodology focused on speed and efficiency] and other process improvements, as well as bolstering our quality acceptance procedures.”
Northrop Grumman Ship Systems President, Philip A. Teel, added that flexible, customizable production process improvements were important to managing costs. However, complexity and variation –including variances between classes and numbers of ships produced at the same yard– along with relatively small production runs, work against the broader application of commercial process improvements (such as ‘Lean’) to naval shipbuilding.
According to Teel, another factor limiting the applicability of commercial process improvements in naval shipbuilding is that approximately 55 percent of the cost of a ship is resident in the development and integration of its combat systems, which often are provided to the shipbuilder as government furnished equipment, and therefore are affected by management efficiencies introduced at the shipyard.
Nevertheless, the importance of implementing some methodologies for controlling cost and improving productivity in U.S. shipbuilding is underscored by a brief look at the statistical picture of the industry.
In May 2005, the Defense Department completed a shipbuilding industrial base study, finding that “large technology gaps exist in some U.S. shipyards [compared with global competition], and shipbuilding designs need to be optimized for state-of-the-art military vessels.”
The DoD study cited causes for a perceived decline in capability and productivity in the U.S. shipbuilding industrial base, including lack of competition –owing to the consolidation of ownership over the nation’s six large, private shipyards– a dearth of skilled labor, and rising costs. Today, the U.S. shipbuilding industry employs approximately 350,000 people at six major shipyards, owned by Northrop Grumman and General Dynamics. The six major shipyards are Ingalls, Avondale, Newport News, Electric Boat and the National Steel and Shipbuilding Company.
According to the American Shipbuilding Association, since 1991 the six major shipyards have cut their engineering and production work force by 24,000 jobs, and another 120,000 jobs have been lost in the supplier base. The ASA has estimated that the major shipyards will further reduce their workforces by a total of 13,000 jobs through 2009.
According to the Maritime Administration, the total number of building and repair positions at U.S. shipyards declined from 210 positions in 1976, to 126 positions in 2004. Deliveries from U.S. shipyards also have declined, from delivery of 25 merchant ships and 12 naval ships in 1977, to just two merchant ships and seven naval ships in 2004.
The rising cost of production –including both labor and materials– is an important factor in the three-decade-long contraction of the nation’s shipbuilding industry. However, Blore noted that perhaps more emphasis should be placed on cost certainty. He argued that the most severe criticism the Coast Guard has faced has been over change in its program costs.
“Cost control is an important issue, but I would argue that cost certainty is as important,” Blore said. “I can manage a program that projects a predictable rate of cost growth over time. Unpredictability is much tougher to work with. It is much more difficult to manage the program when the government and industry agree that a product will cost a certain amount, and in the next budget cycle it turns out to cost much more.”
Communication may be one key to ensuring some degree of cost certainty. According to Teel, there should be developed a more mature process for sharing cost expectations and forecasting between government and industry.
“We have had a fairly immature process [of communication]; we need to be able to have a realistic dialogue –early on, between the government and those who will build the ships– about what the costs will be,” Teel said.
Besides cost, another issue Blore addressed to the Expo panel audience was the challenge of developing a nuanced approach to performance based acquisition. One criticism leveled at the Coast Guard during recent congressional oversight hearings was whether the service had exercised enough control over the performance of its suppliers.
“We need to be able to take a best-value assessment as we look at each of our contracts,” Blore said. “The majority of the government’s leverage exists before a contract is let; after that, [leverage] begins to tip away. … There is no magic formula. The government must be able to achieve the right balance between contracts that are worded firmly enough to enable program oversight and execution, but perhaps broadly worded enough not to stifle innovation.”
With regard to the NSC contracting strategy, the performance based contract was signed before performance specifications were written in, a “painful and potentially costly process,” Blore added. “Nevertheless, a performance based contracting vehicle itself is not always a wrong choice, nor is the issue about pointing to industry to take sole blame and solve all subsequent problems. The NSC design as it stands is a good faith response to the original expectations that the Coast Guard communicated to industry,” Blore said, underscoring the importance of having effective and comprehensive communication up front in a given program.
As lessons are accumulated through Coast Guard and Navy shipbuilding programs, the services’ leadership will continue to make use of both specification-based and performance-based contracts, where each vehicle is appropriate to a given program.
“That means that the government will have a huge responsibility to establish specifications, ensuring some flexibility for innovation, but not allowing radical changes in mid-stream,” Blore said.
As the Coast Guard takes a more pro-active approach to system design and integration in the IDS program another important issue will be standardization. In the same way that commercial technologies have helped open the architectures and drive down the costs of other naval and military programs, there is likely to be increased demand for the use of external rules and standards bodies, such as the American Bureau of Shipping (ABS), to set the foundation for standardization in shipbuilding.
With the government retaining some level of control as final arbiter of the standards, both the Navy and the Coast Guard are working with ABS to develop and codify a modern set of naval shipbuilding standards that will be applicable to warship and cutter designs. In the absence of an International Maritime Organization (IMO) for naval shipbuilding, the government hopes that ABS standardization will help to improve processes and quality assurance by improving one of the important bases for communication between government and industry.
Blore described a “certain amount of art” in acquisition citing differences of opinion in third-party oversight as one potential source of confusion. Using ABS standards, particularly if these can be developed in concert with the other naval services, will go a long way toward improving communication.
Another step toward improving communication will be the ability of the Coast Guard to more effectively articulate its own core competencies, as distinct from those of other stakeholders in the naval shipbuilding arena.
“The Coast Guard recognizes its competencies –particularly in the development and articulation of mission requirements that are specific to the way the service will design and employ its cutters, as distinct from the way a naval combatant is designed and used.” Blore said. “We’ve learned a lot of lessons during the first five years of Deepwater shipbuilding, and are working hard to ensure those lessons don’t get lost as we move forward.”
Within the Coast Guard, other significant changes will influence the processes and execution of IDS projects such as the NSC. For example, the service is in the process of consolidating its acquisition enterprise to create a new organization with one policy, one governance and one set of individuals performing acquisition management.
Between 2007 and 2009, the new Coast Guard Acquisition Directorate will bring together current acquisition, technology and personnel directorates and offices, including the Integrated Deepwater System (IDS) program. Program and project management will be more closely aligned with the Coast Guard technical authority, and with other stakeholders in platform and system development. The Coast Guard Acquisition Directorate will begin transitional capability on April 1, 2007; initial operational capability on July 13, 2007; and full operational capability during 2009.