Total Ownership Cost Reduction—

A Secretary of Defense Imperative

by Lieutenant Colonel Randy A. Mathews

Secretary of Defense William S. Cohen announced in 1997 that reducing total ownership costs for our defense systems not only made good sense but was the only way that the Department of Defense (DOD) would be able to afford to sustain and modernize its weapon systems in the near future. He charged the Defense Systems Affordability Council (DSAC), the successor to the Defense Manufacturing Council, with identifying, tracking, and reducing total ownership cost for our weapon systems. The DSAC chartered a number of subgroups to investigate and report on promising methods of accounting for ownership costs, identifying total ownership cost-reduction tools, providing incentives to management and industry, and empowering managers at all levels to find and fix cost drivers.

As anyone who has ever owned a pet knows, the cost of acquiring the critter is quickly overshadowed by the cost of food, veterinarian visits, toys, and maintenance products. Defense systems, while not cute, cuddly, or even fun, follow the same rationale: approximately 81 percent of the total ownership cost of a system is incurred after the item has been delivered to the user. The project manager is responsible for the research, development, acquisition, and fielding of any given system. However, once supplied to the user in the field, a system is used, maintained, modified, and disposed of by a variety of individual organizations. Each of these organizations, from the Army Materiel Command to an individual company, battery, or unit, has responsibility for a slice of the total ownership cost.

Total Ownership Cost

The term "total ownership cost" (TOC) raises a bit of confusion in many quarters. We all know what we paid when we purchased our last car. Once we drove off the dealer's lot, we assumed responsibility for additional ownership costs: gas, oil, car washes, steering wheel covers, wax, tires, and so on. If we add to the purchase price those costs associated with daily operation, maintenance, and insurance, we begin to get a feel for total ownership costs.

A memorandum from the Under Secretary of Defense for Acquisition and Technology on 8 October 1997 defines TOC in defense terms as "the sum of all financial resources necessary to organize, equip, sustain, and operate military forces sufficient to meet national goals in compliance with all laws, all policies applicable to DOD, all standards in effect for readiness, safety, and quality of life, and all other official measures of performance for DOD and its components." TOC is more comprehensive than life-cycle cost (LCC). LCC is all directly identifiable costs for developing, producing, fielding, operating, supporting, and disposing of a specific system or product line. It is a subset of DOD TOC and is estimated at various points in a system's life cycle. The verb "estimated" is used here rather than "calculated," because the DOD still is working to capture all the costs associated with a particular system but has not implemented a comprehensive system to capture or aggregate these costs. For the purpose of this article, TOC should be considered synonymous with LCC, as a more manageable entity for our defense managers.

The Army and TOC Reduction

The Chief of Staff of the Army and the Army Acquisition Executive (AAE) identified the reduction of operations and support (O&S) costs as a high priority that is vital to achieving our modernization goals. Reducing TOC is key not only to reducing fiscal demands on the operational commander but also to generating savings that can be reinvested in support of Force XXI modernization objectives. The importance that Army leaders place on TOC reduction is documented in an 18 May 1998 memorandum, signed by the Chief of Staff of the Army and the AAE, and reinforced to the acquisition community by its inclusion in performance evaluations for both military and civilian program, project, product, and item managers and Army Training and Doctrine Command systems managers. The Army has been successful in reducing acquisition program costs in earlier efforts—a cost-reduction and reinvestment initiative garnered in excess of 10 percent savings of programmed modernization funding, which was redistributed to high-priority Army needs.

Examples of two current TOC efforts are the M1A1 Abrams Integrated Management (AIM) XXI program and conversion of RC-12N aircraft to the RC-12P configuration. The AIM XXI joins Anniston Army Depot, Alabama, with General Dynamics Land Systems to establish a comprehensive sustainment management program by standardizing and returning the M1A1 fleet to zero miles, "like new" condition. Economic analysis showed that O&S costs were reduced by as much as 50 percent while improving availability and maintainability and producing cost-avoidance modification opportunities. The RC-12N to RC-12P TOC reduction initiative was approved for funding in Program Objective Memorandum (POM) 0005, requiring an investment of $16 million in fiscal year (FY) 2000. The projected savings over the life of the program are $65.7 million.

Logistics TOC Efforts

Thus far, our discussion has been of "acquisition" and very little of "logistics." As noted earlier, "pure" acquisition ends when the system is fielded—when only 19 percent of the life cycle cost has been spent. It is in the domain of the traditional logisticians that the greatest gains in reducing total ownership costs can be made. While aggressive acquisition reform measures have been successful in trimming our "up-front" systems costs, they have not been enough. The Revolution in Military Affairs was intended to broaden our thinking, to look beyond our current historical horizon. The Revolution in Military Affairs has spawned a number of efforts, including the Revolution in Military Logistics (RML), which have the potential to lower TOC. Two of the three RML domains, technology application and acquisition agility and force sustainment, speak directly to the TOC reduction goals.

Logistics initiatives that have direct TOC reduction impact include fleet management, the supply management Army operations and support cost reductions (SMA OSCR), and integrated sustainment maintenance (ISM). In the area of fleet management, for example, the estimates for LCC savings for the M109 family of vehicles indicate an expected 20- to 30-percent savings over traditional organic logistics support, with a parallel increase in readiness. SMA OSCR shows the potential for saving $275 million over FY's 1998 to 2003. OPTEMPO savings from ISM are estimated at approximately $140 million over the same years. Leveraging savings in the O&S phase of a system's life cycle provides the greatest opportunity for saving, as 81 percent of the system cost is in this phase.

A Coordinated Effort

The Army has recognized the need to integrate acquisition and logistics efforts for TOC reduction. An overarching integrated process team (OIPT), co-chaired by the Assistant Secretaries of the Army for Research, Development, and Acquisition and for Installations, Logistics, and Environment is being chartered to coordinate all Army TOC reduction efforts, reduce duplication, provide leadership for TOC issues in the Army, and serve as a single Army voice to the Office of the Secretary of Defense. This OIPT will oversee the activities of working-level IPT's, which are composed of acquisition, logistics, and resource managers. Early fruit of this cooperative effort includes the Modernization Through Spares (MTS) program. In that program, performance-based specifications drive procurement of spares that capitalize on state-of-the-art commercial products, processes, and practices to improve readiness, reduce sustainment costs, and extend a system's useful life. Acquisition and logistics managers at all levels must continue to work together to achieve the Army's TOC reduction goal.

The Road Ahead

TOC reduction is not a fad program. It is a policy that must be integrated into every action we take, every decision we make, and every dollar programmed or spent on a system. The Army is making dramatic changes as it reshapes itself for the future. We have reduced the number of divisions, and restructured them to be more lethal yet less manpower-intensive. We have moved the field soldier and command structure into the information age and provided battlefield awareness and control capabilities without precedent. These major changes must be matched by our commitment to support and sustain the force within the fiscal reality of reduced Federal defense spending. We must mirror these physical and organizational changes with new paradigms for systems life-cycle management.

Ongoing Army initiatives exemplifying this thinking include establishing a disciplined process to identify and fund investment initiatives in each POM; having program executive officers and program managers identify their top 10 cost drivers and develop plans to produce and track O&S savings; developing and enforcing sustainment cost management annexes for each acquisition program; instituting paperless contracting; reducing acquisition cycle time; and conducting a study of competitive sourcing and privatization.

Acquisition and logistics managers have made progress in identifying areas in which total ownership costs can be reduced. The "low-hanging fruit" has been harvested. Collectively, we now must find innovative ways to maintain the momentum of the TOC reduction effort.

Conclusion

The Army's leaders are committed to meeting the Secretary of Defense's challenge for TOC reduction. We have our best team on the case—you and me. It is up to each of us to look within and without our areas of responsibility and find opportunities to preserve readiness and reduce the financial burden on the commander in the field. Chinese warrior and philosopher Sun Tzu made a good point 2,400 years ago when he said: "Opportunities multiply when they are seized." We must now capitalize on the ongoing TOC reduction efforts and make them multiply. ALOG

Lieutenant Colonel Randy A. Mathews is the senior military analyst in the Acquisition Policy Directorate, Office of the Assistant Secretary of the Army for Research, Development, and Acquisition.