reforming the marketplacefmagdoff/employment jan.12.11/the... · toyota and still known as the...

By Chester Richards

THE CENTER FOR DEFENSE INFORMATION

REFORMING THE MARKETPLACETHE INDUSTRIAL COMPONENT OF NATIONAL DEFENSE

Chester W. Richards

© 2001© 2001© 2001© 2001© 2001CENTER FOR DEFENSE INFORMACENTER FOR DEFENSE INFORMACENTER FOR DEFENSE INFORMACENTER FOR DEFENSE INFORMACENTER FOR DEFENSE INFORMATIONTIONTIONTIONTION1779 Massachusetts Avenue, NWWashington, DC 20036-2109(202) 332.0600 � Fax (202) 462.4559www.cdi.org

Cover images (L - R):F-22s; Toyota; Michael Dell

The goal of the Center for Defense Information’s Military Reform Project is to regenerate vigorousdebate over the uses, strategy, doctrine, and forces of the U.S. military, and to address the deepinstitutional problems currently vexing the military. Its products are being designed as tools for theexpression of a wide range of analysis and views. Interested parties are invited to contact the projectfor further information: www.cdi.org/mrp, Marcus Corbin, [email protected], 202-797-5282.

To encourage the intellectual freedom of the staff, the Center for Defense Information does nothold organizational positions on public policy issues. The views expressed in CDI publications arethose of the authors.

THE CENTER FOR DEFENSE INFORMATION, JANUARY 2001

Chester W. Richards

REFORMING THE MARKETPLACETHE INDUSTRIAL COMPONENT OF NATIONAL DEFENSE

About the Author ii

I I I I I Introduction 1Topology of the defense industry 2Industry view 2

II II II II II Evolution of the Military-Industrial (-Congressional) Complex 3Implications 4Technology 5People � Managing high tech skills 6Competitive environment 7

III III III III III Survival Strategies for the World of Defense 9Specialize in defense 9Look like the customer 9Front-loading 10Political engineering 11The �Revolving Door� 12

IVIVIVIVIV The Commercial Environment is Different 13A synopsis of lean production 14What lean production is 15

VVVVV Strategic Effect of Lean Production 16Prerequisites 17

VI VI VI VI VI Why Lean Production is Unlikely to Work in Defense 18

VIIVIIVIIVIIVII What Can Be Done 19Keep more competition 20Foster new entrants 21Keep competition open longer 22

VIII VIII VIII VIII VIII Summary: Competition Can Probably be Restored 23Investigate whether there are ways to close the revolving door 24Ultimately, industry will mirror weapon systems 24

Endnotes 26

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CONTENTS CONTENTS CONTENTS CONTENTS CONTENTS

ABOUT THE A ABOUT THE A ABOUT THE A ABOUT THE A ABOUT THE AUTHORUTHORUTHORUTHORUTHOR

CHET RICHARDS began his career as an action officer for air-to-air programs contributing to forceeffectiveness analyses in the Office of the Secretary of Defense (OSD). He drafted the issue paperthat led to procurement of the F-16 and F-18, and wrote computer simulations for comparing alter-native force options. For the Royal Saudi Air Force, he performed regional analyses, advised onprocurement alternatives, and established the Systems Analysis Group.

Richards has also worked strategy issues at Northrop Grumman and Lockheed Martin, shifting hisfocus from what makes an effective military force to what makes an effective commercial com-petitor. He wrote the article on time-based competition that appeared in the Handbook of BusinessStrategy, and has lectured and conducted seminars for numerous commercial and military organi-zations.

Dr. Richards holds a Ph.D. in mathematics from the University of Mississippi and recently retiredas a colonel in the Air Force Reserve, where he was the Reserve Air Attache to Saudi Arabia. He iscurrently co-owner of Kettle Creek Corporation, which creates and operates such web sites asModern Business Strategy, http://www.belisarius.com, and Defense and the National Interest, http://www.d-n-i.net.

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If you were designing the F-22 today, there’s no way it would look the wayit does - we know so much more about electronics and stealth aerody-namics now.

-Col. John Warden, USAF, Ret.1

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I.I.I.I.I. INTRODUCTION INTRODUCTION INTRODUCTION INTRODUCTION INTRODUCTION

Why should weapon systems take a human gen-eration to develop? Why should each newweapon double or triple the cost of its predeces-sor? Why do we find it so difficult to change orstop programs once they get started, regardlessof what has happened elsewhere in the world?Just to bring the F-22 program in under congres-sional cost ceilings, contractors must identify andsuccessfully implement cost reductions that aregreater on a per-unit basis than the total cost ofthe aircraft it replaces.2 And even if the U.S. AirForce tactical air modernization plan is executedperfectly – no cost increases and Congress provides100 percent of the planned funding every year –the average age of all U.S.A.F. aircraft will increaseroughly 60 percent over the next 15 years.3

These questions are especially difficult whencompared to the non-defense sector, where prod-uct development cycles are accelerating, costsare stable or even coming down, and competi-tors introduce new models and cancel old oneswith ruthless efficiency.

The simple answer is that the commercial sectorhas adopted fundamentally new ways of design-ing and building things. Although the specificsdiffer from industry to industry, they all fall un-der the name “lean production,” and are basedon a coherent set of principles first codified byToyota and still known as the Toyota ProductionSystem. When applied properly, lean productiondelivers significant improvements in cost, qual-ity, and delivery span simultaneously, and it isthe only production system in the history of mod

ern industry to do so.

The larger question, then, is whether lean pro-duction can prove the salvation of the defensesector. If we could reduce the cost of new weap-ons by 25 percent (instead of doubling them),cut their design and delivery spans by 50 per-cent, and reduce defects by an order of magni-tude or more, we could provide our forces witha stream of effective weapons incorporating in-novative technologies while the threats they aredesigned to counter still exist.4

This paper will examine the possibility of mak-ing improvements of this magnitude in the pro-duction of defense equipment. It will not ques-tion whether we should be producing any par-ticular weapon system, other than to note thatthe political forces that select and fund weaponsystems also shape the manufacturing strategiesthat defense contractors can employ. This is, infact, a major theme of this paper. It begins witha look at the current status of the defense indus-try and how it evolved into its present state. Next,it examines the strategies individual companiesuse to survive and prosper in the unique defensemarketplace and some of the consequences fordefense planning as a whole. Then, it exploreslean production and examines whether it couldwork its magic in the production of weapon sys-tems. Finally, it closes with recommendations forchanges that could propel the evolution of thedefense procurement system towards somethingmore efficient, if not actually “lean,” and thatdo not strain political credibility.

Center for Defense Information

FMC, and because three of the largest programsin the defense budget – the F/A-18E/F, F-22, andJoint Strike Fighter (JSF), accounting for some$400 billion – are built by these companies.

Topology of the defense industry

In 1993, there were 21 companies thatcould be classified as “major defense con-tractors.” Today there are five (LockheedMartin, Boeing, Raytheon, Litton, andNorthrop Grumman). In aerospace, we aredown to two major primes, Boeing andLockheed Martin, from seven as recentlyas 1980, although Northrop Grumman stillhopes to retain the capability of biddingas prime on selected major programs.5 Ina sense, this attrition in major contractors

is not surprising. The end of the Cold War pro-duced a glut of military equipment and severelyreduced the need for new purchases of currentweapons, such as M1 tanks and F-15 fighters.New weapons, like the Lockheed Martin F-22that will replace the F-15, would not be readyfor procurement until 2001 at the earliest. As ofthe writing of this paper, there is only one majoraircraft program still to be decided, the JointStrike Fighter (JSF), and its first operational air-craft will not be delivered until FY 2008, if theprogram stays on the current schedule. The re-sult has been a “procurement holiday,” with verylittle money flowing to prime contractors.

This situation spelled death for a number of his-toric names in military aviation, which foundthemselves with no market for their existingproducts and little possibility of creating new pro-grams. Grumman, for example, had ruled Navyaviation since the days of the F4F Wildcat andisland hopping in the Pacific.6 The end of theCold War and redefinition of Navy missionsmeant that there was no need for new F-14s orA-6s, or even for new aircraft to replace them.

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In 1993, therewere 21 compa-nies that couldbe classified as�major defensecontractors.� To-day there arefive.

The paper will focus on the defense aerospacesector because primes like Boeing and LockheedMartin are better known to most readers than

The F/A-18 performed both these roles wellenough for battle against non-Soviet enemies.The small remaining market for E-2C electronicsurveillance aircraft (five in the 2001 budget)would not sustain Grumman, and Northrop ab-sorbed that line when it bought the company.

Similarly, such hallowed names as Republic (F-105), North American Rockwell (F-100, B-1),General Dynamics (F-111, F-16), and McDonnellDouglas (F-4, F-15) were absorbed by formerrivals or disappeared entirely.

When the Department of Defense was encour-aging contractors to combine, the stated goal wasefficiency, reflecting the belief that fewer com-panies meant more efficient use of resources andso lower prices to the government. There is con-siderable debate over whether this has in factbeen achieved.7

The reason for this perhaps counterintuitive re-sult lies in two other factors that emerged as thenumber of players decreased: the increased po-litical influence of the remaining players and theeffects of an economic system trending towardsmonopoly. This paper examines both of these insome detail.

Industry view

One might think that consolidation, with theelimination of competition, has ensured the pros-perity of the two survivors. Boeing has been ableto use its large commercial aircraft business toprotect itself from reliance on military contracts.For Lockheed Martin, much more reliant on de-fense, the result has been a disaster, at least fromthe standpoint of the company’s market valua-tion. From November 1998 to April 2000, thecompany’s stock dropped some 65 percent, at atime when the Dow was rising 26 percent. Sev-eral top officers of the company retired muchearlier than they had expected. The company’srecovery since then more reflects merger subsi-dies, and a 40 percent increase (1999 to 2005) in

Reforming the Marketplace: The Industrial Component of National Defense

nology, and the abrupt end of the Cold War. Pro-posed fixes to the problems fall into the sameleague - one more set of stimuli that impel a mi-nor evolutionary shift, after which the processwill proceed in ways that are no more predict-able than they were in 1950.

Until the end of World War II, most of the itemsneeded by militaries were similar to those re-quired by civilians: clothing, small arms, wag-ons, tents, and other needs of ordinary life in theoutdoors. There was no “defense” industry assuch. Commercial companies, much like themilitia members themselves, “converted” pro-duction to wartime use and then “reconverted”back to civilian production with the signing ofthe peace treaty.9 Lockheed’s statement of mis-sion from the late 1930s, for example, called forit to be the world’s premier designer and manu-facturer of commercial airliners, and to rapidlyconvert to wartime production should the needarise.

For those few items with no civilian value,mainly cannon and warships, the governmentmaintained arsenals.

At the start of the Korean War, there was a fun-damental change. As the Cold War placed thenation on a permanent war footing, the systemof “minutemen” militia and convertible compa-nies was replaced by a standing army of dubiousconstitutionality10 and a “military-industrialcomplex” to supply its increasingly specializedneeds. The Department of War had just been re-placed with the more permanent-sounding “De-partment of Defense,” which also included thepreviously independent departments of the Navyand Air Force. Only the Coast Guard escapedincorporation into the new, unified DoD.

This new defense establishment, born of andwedded to competition with the Soviet Union,required increasingly specialized weapons. Asthe arms race progressed, these weapons beganto look less and less like their counterparts inthe commercial world, if indeed there were any

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the defense procurement budget, than an improv-ing ability to operate more competitively.8

As this illustrates, life in the defense economy isnot a guarantee of profitability or even survival.As the prime contractors view the world, theyare trapped in a sector where there is very littlecommercial market for their products, wheretechnology lags behind their civilian counterparts(especially in information technology) so that hir-ing or retaining top talent is extremely difficult,where the opportunity to create new productscomes once in a career, where one election orpolitical appointment can cancel out years ofhard work, where the customer can specify howwork is to be done to a degree unprecedentedelsewhere (although the maze of regulations iseasing somewhat), where cost savings must bereturned to the government rather than (as ev-erywhere else in the economy) be added to thebottom line, and where they are routinely vili-fied as rapacious, ethically-challenged merchantsof death. It is easy to see how defense contrac-tors might develop a siege mentality.

If the current system is not delivering affordable,effective weapons in reasonable time and at jus-tifiable cost, and if the major participants areunhappy with it, how could it be changed?

II. EVII. EVII. EVII. EVII. EVOLOLOLOLOLUTION OF THEUTION OF THEUTION OF THEUTION OF THEUTION OF THEMILITMILITMILITMILITMILITARARARARARYYYYY-INDUSTRIAL-INDUSTRIAL-INDUSTRIAL-INDUSTRIAL-INDUSTRIAL

(-(-(-(-(-CONGRESSIONAL) COMPLEXCONGRESSIONAL) COMPLEXCONGRESSIONAL) COMPLEXCONGRESSIONAL) COMPLEXCONGRESSIONAL) COMPLEX

It is important, when considering solutions to theproblems of escalating weapons costs andlengthy development cycles, to keep in mind thatnobody designed the current Military-Industrial(-Congressional) Complex (MICC) this way. Itevolved in fits and starts in response to stimulisuch as the Cold War arms race with the SovietUnion, unprecedented government involvementin private industry, rapid development of tech-


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...(the) DefenseProduction Act of1950... gave thegovernment anunprecedenteddegree of controlover private in-dustry...

counterparts. True, the harbinger of the jet age,the Boeing 707, was developed in tandem withly not relevant to the customer – he or she hadthe ability to choose among competitors, so dis-cipline of the marketplace helped to ensure thatthe best deal was in fact a good deal.

The difference between cost-plus and fixed priceis profound. In the marketplace, cost reductionshould be a constant activity since it preservesstrategic options. In a declining market, for ex-ample, low costs allow a producer to reduceprices, if necessary, and still make a profit. If, onthe other hand, demand for the product is high,and customers are willing to pay a premium forit, then low costs add to the company’s margins,which can be used to prepare for the future (forexample, to pay off debt, build up reserves, andinvest in R&D), or reward itself by raising sala-ries and paying bonuses and dividends. All elsebeing anything like equal, lower costs are alwaysgood.

Unfortunately, this is not the case in the cost-plus world. Here the goal is not to lower costs,but to justify them. The more cost a contractorcan convince the government to accept, the morepeople it can hire, the more executive positionsit can create, and perversely, the more profit itcan make, since profits are generally negotiatedas a percentage of the allowable costs. Programssurvive not just on the marketplace virtues ofcost, quality, and delivery span, but also on theability of organizations to play political “powergames,” such as front-loading and political en-gineering.

Implications

As the Cold War progressed and defense com-panies adapted to the cost-plus environment, theybegan to diverge from their commercial coun-terparts in ways that proved impossible to re-verse. In fact, the whole concept of “defense re-

the KC-135 tanker (both derive from the Dash-80 prototype), but there were no commercialsales of the next two military airlifters, the C-141 and C-5. The Air Force’s next major tanker/transport, the KC-10, was converted the otherway, from commercial to military.

And there was clearly no commercial need forair defense missiles, like the Nike Ajax and Her-

cules, or ballistic missiles, or nuclear war-heads, or missile-launching submarines, orsophisticated fire control systems fortanks, or electronic warfare, or indeed forthe great bulk of military-oriented researchand development (R&D).

To provide these weapons, Congress ex-panded the arsenal system to include com-mercial companies via the “Defense Pro-duction Act of 1950” (Public Law 81-774,signed Sept. 8, 1950). The act gave thegovernment an unprecedented degree ofcontrol over private industry, if it were

deemed to be in the interest of national security.Title I, for example, gave the president of theUnited States authority to require that defense-related contracts be accepted and performed,even ahead of a company’s existing commercialbusiness. Other sections allowed the governmentto control wages and prices, allocate scarce re-sources (including consumer and real estatecredit), and purchase strategic raw materials.

Congress and DoD also levied requirements ondefense contracts, and so on defense contractors,that were not required of commercial items ortheir producers. One of these was to further thedifference between the defense and commercialmarketplaces perhaps beyond repair, the shift inemphasis required by “cost-plus” contracting. Onits surface, reimbursing costs incurred perform-ing government contracts only seems fair. Theproblem is that the commercial world doesn’twork that way. Whereas the government willspend tens of thousands of hours negotiating withthe sole source what a submarine or missileshould cost, a consumer will simply go out into

the marketplace and make the best deal. WhetherToyota happened to make or lose money is real


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In the market-place, cost re-duction shouldbe a constantactivity since itpreserves strate-gic options.

conversion” became moot, not only in this coun-try but even in our former adversary, the SovietUnion. In both societies, the results of such at-tempts were, in the words of former LockheedMartin Chairman Norm Augustine, “unblem-ished by success.”

Among the many reasons why, three stand out:technology, people, and most important, the lackof a competitive marketplace.

Technology

As mentioned previously, defense technologybegan to look different from civilian technologyin many areas. In the last five years, U.S. civilR&D spending has greatly outpaced defense, andeven U.S. government non-defense spending,increasing from roughly equal to some 75 per-cent greater than the sum of all U.S. governmentresearch funding.11

Although there were “spin-offs,” a company thatspecialized in developing products for defenseoften found little demand for its products andservices on the outside. The hallmark of the F-22 fighter, for example, low radar observability(stealth), would not appear to be of much usefor a civilian airspace crowded with commer-cial airliners. And even where military technol-ogy had civilian application, defense contractorscould rarely produce products suitably priced forthe commercial world.

One might expect that this divergence would leadto a military sector vastly more advanced thanits commercial counterpart, that defense tech-nology, manufacturing techniques, software de-velopment and integration, and computer tech-nology would be significantly more advancedand, classification levels permitting, would bedriving the national economy with spin-offs.

One graphic illustration that this is not the case isthe growing movement towards using “commer-cial off the shelf” (COTS) software and compo-

nents where available. DoD now recognizes thatwhere commercial products are available, they aregenerally superior to, and practically alwayscheaper than, the same products specially devel-oped for military use.12The reason of course, isthat the burgeoning marketplace brutally selectsout companies that are slower or less efficient increating products that meet customer needs.

For example, consider the software for theF-22. Lockheed Martin has been develop-ing this highly specialized and critical com-ponent since 1991, when Windows 3.1 wasthe standard personal computer operatingsystem. In the years since, Microsoft hasbrought out Windows 95, Win NT, Win95OSR2, Win 98, Win 98 SE, Windows 2000,and Windows ME. When finally com-pleted, the F-22’s software suite will be lessthan one-tenth the size of Windows 2000.

This is not to imply that the software needed tooperate a supersonic jet fighter and all of itsweapons is comparable to the operating systemfor a personal computer. Obviously, the word“crash” has different meanings in the two situa-tions. But it vividly shows the difference in thetwo sectors as marketplaces. The basic architec-ture, systems engineering, programming, andeven hardware configuration of the F-22 are ap-proaching 10 years old, new by DoD standardsbut several generations behind what is happen-ing outside. It is hard to believe that Microsoftwill find much to spin-off.

The largest difference, however, between defenseand commercial technologies in the early 21st

Century lies not in exotica, such as stealth coat-ings, but in production. This statement may sur-prise many readers, who see articles on advancedmanufacturing technologies in the various jour-nals and magazines that cover defense, and whosuppose that low-rate production (which char-acterizes defense at this time) would have al-lowed contractors to remove the last traces ofwaste from the line.


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The largest dif-ference... be-tween defenseand commer-cial technolo-gies in the early21st Century isnot in exotica,such as stealthcoatings, but inproduction.

One indication that the defense industry is notusing the latest commercial production technolo-gies is that costs in the defense sector continueto escalate faster than the economy as a whole.The technology of defense production resemblesits 1950s forebears much more than it does anadvanced lean production line from the electron-ics or automobile industry. Aerospace produc-tion lines, particularly for large items of equip-

ment, are still largely push-type mass pro-duction systems, where a centralizedscheduling department issues shop ordersto the floor, and there is limited incentiveor opportunity for the people doing thework to improve or more important, toeliminate it.

It is very difficult, even in highly competi-tive industries, to change the basic systemunderlying a mature production line. Somedefense production lines are older than thepeople working them (the F-16 went intoproduction in 1976; the C-130 in 1954).The people working in the system knowit, are comfortable with it, and understandhow to circumvent the problems that itcauses. Managers, similarly, have limited

inspiration to make radical changes, since theyrose to their positions through the current sys-tem and so it must be fundamentally sound.13

As long as the system delivers the product, andthe customer is willing to absorb cost increases(there is rarely any competitive supplier for ma-jor defense systems), the prudent path is to makeimprovements at the margin and not take riskswith high potential, but potentially high risk,transformations.

All defense contractors have improved specificprocesses (such as incorporating high-speed ma-chining) and some have adopted techniques fromlean production (such as cellular manufacturing).In the areas where such improvements have beenmade, costs have often been reduced, and theseare the data that appear in articles and press re-leases. However, these should be regarded as is-lands of improvement in a sea of traditional prac-

tices that continue to increase the costs of de-fense production.14 When faced with a real needto cut costs, defense primes revert to the sameslash and burn tactics they have always used, an-nouncing outsourcing and massive layoffs, de-spite cover articles in the trade press touting theirlean accomplishments.15

People – Managing high tech skills

As the commercial economy continues to ex-pand, while defense remains static, defense con-tractors are finding it increasingly difficult torecruit and retain talent. Nowhere is this moreevident than in information technology. It is dif-ficult for the old, hierarchical defense compa-nies to compete with the get-rich-quick atmo-sphere of the IT world, with its relaxed workingenvironments and campus-like surroundings.Even the government, which competes for thesame pool as defense contractors and can offer amuch more stable career path, is experiencinghiring and retention problems. The Pentagon,which still has nearly 300,000 civilian employ-ees working in some aspect of procurement (thatnumber is not a misprint), could lose some 50percent to retirement starting in 2005.

There is no data that a shortage of technical per-sonnel per se has delayed any major aerospaceprogram. However, if a company must subcon-tract to a high-tech firm rather than hire the em-ployees directly, it will likely raise costs, sincethe prime will add its own overhead and profitsto the cost of the subcontractor.

On the other hand, a firm that specializes in ITor some esoteric technology may well do a bet-ter job of managing these functions. From theprime’s standpoint, the problem shifts from man-aging employees, an area where they have de-cades of experience, to working more as peerswith companies in fields where the primes maynot only lack deep expertise but be unable to evenhire people capable of managing IT experts. Asthe cost of weapon systems increasingly migrates


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It is difficult forthe old, hierar-chical defensecompanies tocompete with theget-rich-quick at-mosphere of theIT world.

to these technologies and away from bendingmetal, traditional primes will face growing chal-lenges and could even increasingly occupy sec-ondary roles.

Competitive environment

The problems of technology and people are se-vere challenges to the defense industry. They canbe (and to some extent are) ameliorated throughsuch devices as more partnering with IT and pro-fessional services companies (keeping less of thiswork in-house), virtual organizations that canincorporate cutting-edge organizations and indi-viduals for specific projects, and a generally morerelaxed attitude towards such 19th century relicsas the time clock.

However, these devices will not protect the in-dustry from the major difference between de-fense and commercial marketplaces. That dif-ference is the diluting of competition as the num-ber of potential bidders shrank and, perhaps evenmore pertinent, the nearly universal practice ofgranting a contractor monopoly status very earlyin a program’s development cycle.

Some may not see this lack of competition as aproblem. Even with a single prime (e.g., if therewere a single “U.S. Aerospace and Defense Cor-poration,” which is the route the Europeans havetaken), the government could simply decide whatit needs, then place orders with that company todevelop and build it. Presumably this wouldmaximize efficiency, since the wasteful effectsof competition (such as discarding losing designsand prototypes) would be eliminated. It is a mys-tery why socialism, for that is the system justdescribed, having been thoroughly discredited inthe commercial world, should be seen as the sal-vation of the military procurement world.

The benefits of competition have been spelledout from the founding of the republic (The Wealthof Nations was published in 1776), and includeinnovation in the creation and incorporation ofnew technologies as well as a self-correcting

mechanism for determining prices. These arewell known in the commercial world.16 When aconsumer goes to buy a car, for example, he orshe can trade-off features, quality, style, deliv-ery times, service, reputation, and prices from avariety of brands and dealers. If a particular brandlets its lines become dated, or experiences qual-ity problems, or lets its costs get too high, thenconsumers will begin to go elsewhere. If it hap-pens often enough, the company goes outof business. Similarly, if someone has abetter idea for a product or service, themarketplace is there to test that idea and,if successful, reward it. Although themechanism may be imperfect due to lim-ited availability of capital and large cor-porations with predatory legal depart-ments, it does work. Dell can become num-ber one, and Digital can disappear.

This mechanism for innovation is lost un-der a legal monopoly (whether owned bythe state itself, as in pure socialism, or byprivate investors, as with a public utility). In fact,it is the policy of the major primes not to under-take significant R&D efforts unless they are fullyreimbursed by the government under some formof cost-plus contract.

Competition has another benefit that is more dif-ficult to quantify: the customer not only gets acheaper product but often a better one, as datashow that the marketplace tends to reward higherquality, and even enables producers of such goodsand services to charge higher prices. Themarket’s implicit pricing mechanism performsthe task of determining the worth of quality orinnovation, or any other property offered by com-petitors.

Unlike in monopolies or other non-market set-tings, market pricing mechanisms are self-cor-recting because there is no central decision au-thority to mandate what will be offered, how itwill be built, and what the price will be. Themarket simply selects out inferior brands anddealers. Many economists argue that the market


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...it is increas-ingly difficult toanswer thequestion, �Whatshould a weap-on system cost?�

cannot work under central direction, that pricesare an emergent property of millions of consum-ers making their choices from among tens orhundreds of competitors offering a changing ar-ray of features and quality at whatever prices theycan get the market to pay.17If these economistsare correct, then the defense sector, with centraldirection from its one customer and with at mostfour aerospace primes, cannot be or ever become

a true marketplace.

For this reason, it is increasingly difficultto answer the question, “What should aweapon system cost?” Without a marketto offer alternatives, the answer can onlybe determined through negotiation be-tween the government and the (single)supplier of the weapon system in question.Furthermore, without other competitors topropose lower priced or more advanced

alternatives, there is little reason for the (single)supplier to do the hard work needed to substan-tially reduce costs, improve quality, or developrisky but potentially useful innovations.

Some have raised the objection that the UnitedStates has in fact preserved competition, at leastas far as it is possible to do so, in the defensesector. The F-22, for example, was the result ofa competition that initially involved seven aero-space primes and was decided by a fly-off be-tween the Northrop YF-23 and the Lockheed YF-22.

There are at least two limitations to this type ofcompetition, however. First, prototypes often beara superficial resemblance to the final productionmodels, which is why there is typically a five toseven year engineering and manufacturing devel-opment (EMD) phase following down-select fora major weapons program.

But perhaps more important, the vast majorityof programs – and all the large ones – becomemonopolies once a prime contractor is selectedfor EMD. In the case of the F-22, the selectionoccurred in 1992. All the innovation that the

Northrop-Grumman team could have contributedor that competition would have spurred inLockheed Martin has been lost to the AdvancedTactical Fighter, which is scheduled to reach ini-tial operational capability as the F-22 in 2005.Many will assert that, given the cost and uniquenature of major weapons programs, monopoliesat EMD are inevitable. This question will be re-visited in the Recommendations. The point fornow is that, without a marketplace to offer alter-natives, pricing in the defense sector will divergefrom comparable civilian items.

For example, in 1990, prices for a LockheedMartin C-130H and a Boeing 737-400 on the in-ternational market were roughly the same, whichis not surprising since they are approximately thesame takeoff gross weight (155,000 lb) and usevirtually identical manufacturing technologies.By 1998, both companies had introduced newmodels, the C-130J and the Next Generation 737family, respectively. Although the prices of bothaircraft had increased, Lockheed Martin had letC-130 costs balloon to where it was approxi-mately twice the price for which Boeing wasselling the 737-700.18

One key strategic difference was that Boeing waslocked in a vicious competition, not only withthe Airbus A320 series for single-aisle sales, butalso with the emerging genre of regional jets.Because price is a driving factor in airline pur-chase decisions, Boeing could either control itscosts or watch its profit margins, and then rev-enues, disappear. Lockheed Martin, on the otherhand, knew that early in the 21st century, the AirForce would have to replace its Vietnam-era C-130Es and that the C-130J would be the onlygame in town. This strategy appears to be work-ing. Lockheed Martin has even been able to usebureaucratic leverage or “power games” (to bedescribed in the next section), such as threaten-ing to add overhead costs to the F-22 program,to move up Air Force funding for the C-130J.

Ironically, international customers often havemore choices than their domestic counterparts,


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...internationalcustomers oftenhave more choi-ces than theirdomestic coun-terparts, thusp r e s e r v i n gsomething of amarketplace.

thus preserving something of a marketplace.Lockheed Martin’s success in obtaining gov-ernment funding of the C-130J at higher priceshas created openings for competitors. There are,for the first time in 40 years, two non-U.S.C-130 category programs. The An-70 is in pro-duction for the Russian and Ukrainian Air Forcesand promises to sell well to traditional buyers ofRussian equipment. It may also capture marketshare among price-sensitive countries that tradi-tionally buy C-130s.

At the other end of the tactical spectrum, theAirbus A400M now has more than 200 orders,and has defeated the C-130J in sales to the UnitedKingdom and Italy. It will end the C-130 marketin Western Europe, and also compete well in theinternational marketplace for customers who needa larger, faster, and longer-range aircraft than theC-130J and can pay the marginal difference inprice.

At the very high end of the category, the C-17, atless than $200 million, is now a legitimate com-petitor to the C-130 on a procurement-dollar-per-ton basis, since it carries four times the payloadat three times the price, at around 150 knotsfaster, and can carry outsize equipment that willnot fit in a C-130 at all. This can be a devastat-ing argument, especially for countries that havean inventory of C-130s, as the recent British ac-quisition of C-17s demonstrated.19

In summary, the moral is that companies thatoptimize to play the defense procurement gamewill find themselves increasingly handicappedin either commercial or international market-places.


III. SURVIVIII. SURVIVIII. SURVIVIII. SURVIVIII. SURVIVAL STRAAL STRAAL STRAAL STRAAL STRATEGIES FORTEGIES FORTEGIES FORTEGIES FORTEGIES FORTHE WORLD OF DEFENSETHE WORLD OF DEFENSETHE WORLD OF DEFENSETHE WORLD OF DEFENSETHE WORLD OF DEFENSE

Specialize in defense

Since defense technologies, production methodsand rates, and competitive environment continueto diverge from the commercial sector,companies have to choose between thetwo. The primary defense industry survivalstrategy is to make a virtue of necessityand adapt totally to the defense environ-ment. The defense procurement budget isstill a $60 billion per year funding streamthat is not going to go away, and it doeshave its unique attributes. Stealth, for ex-ample, may have limited usefulness on theoutside, but within defense it is requiredfor any new combat aircraft.

Raytheon, the number three defense con-tractor, has been selling its non-defenseunits to pay off a $10 billion debt that has con-tributed to a 50 percent decline in its stock mar-ket share price. It has now apparently made thedecision to focus on defense even more. Thecompany recently engaged an investment bank-ing house to help it divest its aircraft company,which primarily makes civilian turboprop andsmall jets for the commuter airline and businessaviation sectors. This divestiture is expected tobring in $4 billion (about 20 percent ofRaytheon’s expected 1999 sales).20

Companies in the defense sector may complainabout excessive regulation and worry abouthighly specialized technologies, but these doconstitute barriers to entry. Defense contractorsmust maintain legal staffs that understand thethousands of pages of Federal Acquisition Regu-lations (FARs) and the even more complex worldof DoD requirements. Commercial companies,without such infrastructure, will find it difficultto play.

Look like the customer

A basic strategy – once a company or businessunit has decided to forgo the commercial worldand specialize in defense – is to organize itselfto mirror the customer as closely as possible, gen-erally as a well-structured bureaucratic hierar-chy. In the minds of its participants, especiallyat the higher levels, the company is defined by

the latest set of organization charts and jobdescriptions, and this is often how formalbriefings to outsiders begin. Defense con-tractors even talk about their chains ofcommand, commission “task forces” and“tiger teams,” and compile volumes ofinternal regulations. Many still maintaina rigid division between enlisted (hourly)and officers (managers and salaried pro-fessionals). Their offices, like those in any

headquarters, are allocated strictly according tocorporate rank. Their counterparts in the defenseprocurement community can feel comfortablewith such a structure.

In a practical sense, it does make it easy for cus-tomer personnel to navigate the contractor’s sys-tem and find the appropriate people. It also helpsmembers of the customer community understandwhere they might fit into the corporate structurewhen and if they leave government service, atopic that will be explored in detail under “TheRevolving Door.”

Front-loading

Because defense systems typically involve con-siderable R&D, and so technical and operationalrisk, it is impossible to know years in advanceexactly how much time and money it will taketo get them to the field. In the primal strugglefor funding, few ideas for programs will ever seethe light of production. Any admission of uncer-tainty may be seized upon by a program’s com-petitors and opponents to force early termina-tion so that they may feast upon its fiscal car-cass. Over the years, programs (that is, the pro-

1010101010

gram sponsors in DoD and Congress and theircounterparts in the participating companies havedeveloped tactics to improve their chances forsurvival, many of which involve some type of“front-loading.”21

The basic idea in front-loading is to downplay thelikely adverse consequences of future decisionsin order to obtain permission (and funding) to pro-ceed. Invariably, front loaders make the lowestcost estimate for developing and building theweapon that approval authorities will find accept-able. Note that this may or may not have anythingto do with what the bidder actually believes it willtake to bring the program to fruition.

Complex projects that push the state of the art inseveral areas are easier to front load than straight-forward applications of proven (“mature”) tech-nology. Such projects are inherently more un-certain, yet they can also promise great leaps ineffectiveness.22 Program proponents can drapethemselves in the flag, painting those who ob-ject as betraying U.S. troops in combat: “…when-ever a man or woman jumps in to one of ourcockpits, I want them to realize they have theworld’s best. And if they have to engage, theywill win 100 percent of the time.”23 It is nevernoted that under this assumption it is the hard-ware, not the man or woman, who is doing theengaging.

Perhaps the classic case of front-loading in re-cent times is the F-22, which was originallypromised to the American taxpayer for $35 mil-lion per copy (1982 dollars), and at the time ofthis writing, is nudging up against its congres-sionally-mandated cap of around $200 million.24

At this stage, it would be appropriate to mentionthat accomplished practitioners of front-loadingdo not lie. For one thing, knowingly making afalse statement to Congress or one’s military su-periors is, technically, against the law. In this dayof immortal e-mail, it would be imprudent, aswell as unnecessary, to take such risks. The un-certainty inherent in defense R&D allows even

The defense pro-curement budgetis...a $60 billionper year fundingstream...


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moderately creative generals and executivesample room for front-loading. Simply producethe copious analysis to show that performancewill (almost) certainly come in at the high endof the range, and cost will (almost) certainlycurve down to the low end, with an impressivedegree of confidence. One can play the samegame with schedule, technology maturation,threat, allied alternatives, whatever, all limitedonly by the imagination.

Once the program is approved, however, it isprudent for the original proponents to distancethemselves from the front-loaded estimates asrapidly as decorum permits, since it is highly un-likely that all of the optimistic assumptions be-hind them will come true. Because estimates al-ways admit to some uncertainty (but not toomuch, otherwise program opponents would haveseized upon this weakness to delay the programor cancel it entirely), this reality can be used tosalvage credibility just long enough to employthe much more powerful and effective tool ofpolitical engineering, which will be describednext.

Front-loading, of course, is not limited to DoDprograms. The space shuttle program has justreached 100 flights as this is written. Accordingto its original justification, it should be makingits 1000th. The idea is not even limited to gov-ernment procurement. The basic idea behindfront-loading is to promise something – eventhough it likely cannot be delivered – in order tomake the sale. In the commercial world,chipmakers may announce new processors withhigher megahertz ratings to keep customers fromjumping to a rival but then only ship limitedquantities while manufacturing processes ma-ture. Perhaps even more egregious is the prac-tice of vaporware, where a software maker, toforestall sales of a rival’s product, will announcea new package months, or even years, before itis actually ready to ship.

The point is that games to influence buying de-cision are not unique to the defense sector. The

critical difference is that in the commercial sec-tor, there is a marketplace to discipline compa-nies that consistently fail to deliver on their prom-ises. In the defense sector, there is a very limitedconcept of marketplace, and given the willingparticipation of players up to and including Con-gress, limited discipline also.

Political engineering

Since weapons purchases in peacetime arepolitical decisions, they reflect the politi-cal geometry of the times. This haschanged radically since the mid-1980s, sothat the interests of the defense industryare now concentrated in five or so gigan-tic corporations rather than diffused amongmore than 20. When Lockheed Martin, forexample, lobbies on behalf of one of its pro-grams, it speaks with the force of 145,000employees, $1 million in PAC money, un-told tens of millions in various forms oflobbying, and plants or vendors in practi-cally every congressional district in the UnitedStates.25Thus, for 92 members of the Senate, avote for the F-22 puts money and jobs into theirstates, and reaps the resulting political rewards.

These contracts did not appear in 46 states byaccident. The tactic of spreading the defensewealth in order to preserve political support iscalled “political engineering,” and it is as im-portant to the survival of the program as designengineering is to the survival of the system inthe field. There is nothing illegal about politicalengineering. In fact, given the way our politicalsystem currently works, any defense contractorthat did not employ it would put its programs inserious jeopardy. One does not have to be a sys-tems engineer, however, to appreciate the risksof sending U.S. troops weapons funded for theirpolitical, rather than their military, effectiveness.

As with front-loading, the more expensive andcomplex a program is, the easier it is to politi-cally engineer. Such programs require more ven-

The space shut-tle program hasjust reached100 flights...according to itsoriginal justifi-cation, it shouldbe making its1000th.


1212121212

dors and subcontractors, and so can be spread tomore congressional districts, than either simpleralternatives or modifications to existing pro-grams.26

One result of political engineering is that it hasbecome extremely difficult to cancel programsthat are no longer needed or that experience se-rious technical problems during development. A

well thought-out political engineeringcampaign can cushion a program from theinevitable shocks of failed tests, scheduleslips, cost overruns, performance short-falls, and threat changes that plague pro-grams as they make their way, decade bydecade, through the real world. So withthe possible exception of programs fundedby Major Program 11 (for Special Opera-tions), all of the major systems now in de-velopment were originally conceived todefeat the next generation of weaponsfrom the Soviet Union.

There is a more nefarious aspect, however, tocontractors’ attempts to influence the demandsfor their products. In at least one case, there isstrong evidence to suggest that U.S. foreignpolicy decisions reflect to some degree the needfor contractors to maintain their production lev-els. In a Sept. 21, 2000 hearing by the HouseInternational Relations Subcommittee on theWestern Hemisphere, Clinton administration of-ficials were grilled not on the disturbing impli-cations of involving U.S. military personnel inLatin America, but on why Sikorsky had not yetreceived its contract – and its price – for 18 newBlack Hawk helicopters.27

This is certainly not the first time that contrac-tors have tried to highlight the foreign policy ad-vantages of buying their equipment. The sale anddelivery of 79 F-14 aircraft to Iran represents amost striking example. At the time, these werethe most advanced fighters in the world, and U.S.pilots might well have had to confront those sameaircraft had military actions followed the fall ofthe Shah. The United States may be creating a

similar situation in the Middle East by continu-ing sales of the latest variants of F-15s and F-16sto marginally stable monarchies. There is cer-tainly nothing illegal about contractors arguingtheir case. However, the risk today is that thepower of the individual surviving contractors isso great it can have an unprecedented influenceon overall foreign policy.

Political influence and engineering affects effi-ciency in a subtle way. Companies and programsthat are protected from the consequences of theirdecisions naturally tend to become inefficient.When protected from strong competitive pres-sures, companies simply find it more comfort-able to continue in their old, inefficient ways.

As this paper has shown, front-loading favorsgreater technological complexity as does politi-cal engineering. So replacing monument pro-grams with a larger number of smaller, more agileprojects might be appealing, as Air Force Col.John Warden and others have argued, but with-out fundamental change in the MICC, it is notgoing to happen.28 Under the current system,defense procurement will continue to evolve to-wards a small number of technically complexprograms – typically one per service per genera-tion – because these are easier to launch andeasier to defend politically. Under the currentU.S. system, it is irrelevant that such programsare also more likely to experience problems andoverruns, be more difficult for troops in the fieldto maintain, and are almost guaranteed to beobsolete or irrelevant, or, at the very least, nogreat improvement over their predecessors, bythe time they finally reach the using forces.29

The “Revolving Door”

The final power game is both the most perni-cious and, since it involves Constitutional rightsof individuals, the most difficult to control. Thisis the practice of senior military officers, DoDcivilians, and to a lesser extent congressionalstaffers leaving government service to take po-

...the power ofthe individualsurviving con-tractors... canhave an unprec-edented influ-ence on overallforeign policy.


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sitions with defense contractors. There is noth-ing illegal about this practice. In fact, the infu-sion of expertise from the buyers and users tothe developers and builders is undoubtedly ben-eficial.

The problem, of course, is that this is a legal wayfor companies to reward serving members of thegovernment for “desirable” behavior. A colonelretiring in 2001 with 26 or more years of ser-vice, for example, will draw around $57,000 peryear in retirement pay. If he or she accepts a se-nior position with a defense contractor, takehome pay could triple, while still retaining themedical and other benefits of military retirement.This is more temptation than mortals should berequired to bear.

Undoubtedly, the vast majority of governmentemployees, both military and civilian, would berightly offended at the suggestion that they wouldmake decisions contrary to the national interestin the hope of receiving employment after theyleave. (It is generally illegal to recruit governmentemployees before they have submitted their pa-perwork to separate or retire, at which point theyshould be transferred to other duties). There are,however, gray areas – depending on how close eachside wishes to push the ethical limits – within whichcompany and employee can signal their intentions.This can be facilitated when the company repre-sentative is a former colleague and all communi-cation is verbal. Where there is a will, and largeamounts of money are involved, there are ways. Inany case, the government employee can be quitesure that a history of playing hardball with a con-tractor will not lead to favorable consideration whentime comes to change careers.

Industry consolidation has aggravated this situ-ation. When there were half a dozen or moreprimes and more than 20 major players, onecould take the risk of offending one of them andstill preserve options for working in industry.With just two primes and five majors, and with eacha subcontractor to the others, options are more lim-ited: one either plays the game or changes careers

completely after retirement or separation.

There is something terribly wrong with an orga-nization that takes disciplinary action against agovernment employee who accepts a $50 dinnerfrom a contractor, then holds a gala retirementparty for that same employee as he leaves for hisnew $100,000 per year position with that samecontractor.

IVIVIVIVIV..... THE COMMERCIAL THE COMMERCIAL THE COMMERCIAL THE COMMERCIAL THE COMMERCIALENVIRONMENT IS DIFFERENTENVIRONMENT IS DIFFERENTENVIRONMENT IS DIFFERENTENVIRONMENT IS DIFFERENTENVIRONMENT IS DIFFERENT

The previous sections have described techniquesthat defense contractors and others have devel-oped to influence their customer. Companies inthe commercial world also try to influence theircustomers, of course, but brute force techniqueslike front-loading, political engineering, and le-gal extortion, as with the revolving door, havelimited applicability in a marketplace of millionsof customers.

The most effective commercial techniqueis called “shaping the marketplace;” thatis, helping define what customers find de-sirable. Companies do this by introducinga stream of innovative products and ser-vices at various levels of quality and per-formance, keeping costs (not necessarilyprices) under those of the competition, as-sessing the effects on the marketplace, andlearning from what they find. Data suggestthat companies that can shape the market-place reap higher profits than passive re-sponders.30

The primary technique that has proven effectivein fostering innovation, reducing costs, and im-proving quality in the commercial manufactur-ing world is called “lean production.” The de-gree of improvement can be remarkable: costsreduced 40 percent, delivery spans cut in half(or more), new models introduced twice as fast,and defects cut by 90 percent.31 In commercial


...lean produc-tion is provingdifficult to applyin the commer-cial world andwill likely proveeven more diffi-cult to imple-ment in defense.

1414141414

competition, a lean manufacturer will invariablycapture market share from all of its conventionalcompetitors and generally drives the weaker onesout of business.32

Surely lean production would be the cure forescalating costs and lengthening R&D cycles inthe defense sector as well. This may yet turn outto be the case, but despite its undeniable ben-

efits, lean production is proving difficultto apply in the commercial world and willlikely prove even more difficult to imple-ment in defense.33

To understand this paradox, as well as toillustrate a fundamental difference be-tween the commercial and defense sectors,it is useful to review some of the basic con-cepts of lean production and then discusshow, and to what extent, lean concepts canapply to defense programs.

A synopsis of lean production

Before lean production (which will be describedshortly), U.S. production management textstaught that to improve quality meant increasingcosts. It was logical: end-item quality was im-proved by buying higher quality (and so moreexpensive) components, by inspecting more of-ten during assembly, and by repairing or replac-ing the defects these inspections caught. The moreone inspected and fixed, the higher the quality.One could even quantify these relationships, sothat to reduce defects X percent, one would haveto raise costs Y percent. Marketing departmentsdetermined how much customers would pay forimproved quality. Armed with this information,managers could draw cost curves and demandcurves. Where they crossed defined how muchquality would be “inspected in.”

Under this orientation, it did not pay to make ahigher quality product since customers would notrecognize, and would not pay for, the additionalcosts of quality. This was business strategy re-

duced to the level of freshman calculus.

For about 30 to 35 years this paradigm held sway,and would probably be widely accepted still to-day if it were not for the perturbations sufferedby the automobile industry from the twin oilshocks of the 1970s. The quadrupling of oil pricesbetween 1973 and 1979 caused a sizable num-ber of Americans to consider buying cars fromJapan. These had been available in the UnitedStates since the 1950s, but since they weresmaller and generally slower than their gas-guz-zling domestic competitors, Japanese brands hadbeen unable to move out of their niche market.

As the oil crisis continued, and an increasingnumber of Americans bought cars from Hondaand Toyota, they discovered a very strange thing.Not only were they generally less expensive thancomparable models from GM, Ford, andChrysler, they were of vastly higher quality. Theyhad an order of magnitude fewer defects, as Con-sumer Reports regularly informed its readers, butwere not the tinny, loud, and rough running ve-hicles that many Americans associated withcheap imports. In the intervening years, Detroitand Japan had switched places in the hierarchyof quality. American companies, locked into tra-ditional mass production paradigms, could onlycut costs by lowering quality. Compared to Ve-gas, Chevettes, Pintos, K-Cars, and worst of all,X-cars (from GM), a Honda or Toyota ran like aSwiss watch.

U.S. manufacturers cried “Foul!” It was demon-strably impossible for the Japanese to sell suchhigh quality cars in the United States for pricesless than their domestic competitors (whose of-ferings could charitably be described as junk).Amidst the political maneuvering for punitivetariffs (unpopular with too many voters) andimport ceilings (enacted “voluntarily,” but whichmerely added to Japanese profit margins andaccelerated their long-intended move into U.S.-based manufacturing), the auto industry spon-sored a study by MIT to prove once and for allthat the Japanese were not playing fair. The re-

Unlike traditionalproduction sys-tems, which aredesigned to beas idiot-proof aspossible, a leansystem is �frag-ile�...


1515151515

sults were reported in a series of articles in themid-80s and in the best selling book, The Ma-chine that Changed the World.

The International Motor Vehicle Project (IMVP)measured inputs and outputs of various manu-facturing plants around the world, includingJapanese plants in both Japan and the UnitedStates, and reported its results in terms of man-hours (not costs, since these depended on wagescales and exchange rates). Results were normal-ized to account for variations in size of vehiclesand the amount of subcontracting (more of whichwould tend to understate labor hours). Man-hourswere inclusive, including hours spent inspectingand fixing as well as those used in manufactur-ing. So if the Japanese were inspecting in morequality, it would have run up their labor hours.

The results were devastating to U.S. automakers.The Japanese were building cars with one-tenththe defects and were doing it with up to 25 per-cent fewer labor hours than comparable GM,Ford, or Chrysler plants in the United States.Japanese plants in the United States, however,were only slightly less productive than their on-shore counterparts, which undercut the myth ofsome unique attribute of Japanese culture. Couldthe answer be robotics? This was unlikely, sincespending on factory automation in Japaneseplants was no higher than in U.S. factories andwas actually less than in the average GM plant.Unions? It turned out that one of the best plantsin the United States was the New United MotorsManufacturing Inc. (NUMMI) plant in Fremont,CA, which was jointly owned and operated byGM and Toyota. As a condition of its approval,NUMMI kept in place the United Auto Workersworkforce inherited from GM’s Fremont plantand which GM had used as an excuse for clos-ing the factory in the first place.

What lean production is

The answer was that Toyota and a limited num-ber of other Japanese manufacturers had evolved

a new way of making things. This is a key pointthat is often misunderstood. The Toyota Produc-tion System (TPS) – lean production – is not sim-ply an improved version of traditional mass pro-duction as practiced in the United States and else-where since the advent of the Industrial Revolu-tion, and improved by countless industrial engi-neers, including Henry Ford and Frederick Tay-lor. One will not arrive at the TPS by startingwith, say, a GM plant from circa 1980 and just“removing all the waste.” The TPS represents afundamentally different way of approaching theproblem of producing large numbers of previ-ously designed items.

The technology of lean production is well un-derstood and can be quantified. Briefly put, it isa pull-type production system (often simplisti-cally described as “just-in-time”) with no bufferstock to cushion any lapses in quality. It relieson the active participation of its employees tofix problems as they arise and to constantly im-prove the system over time. This last point is key.Unlike traditional production systems, which aredesigned to be as idiot-proof as possible, a leansystem is “fragile,” and requires the people op-erating it to stay engaged and think about whatthey are doing. Because it requires participantsto manage their own immediate operations,rather than simply following predeterminedrules, it demonstrates many of the attributes of a“complex adaptive system.”34

(There are many other subtleties. For example,there is the lexicon of lean production – kanban,kaizen, pokeyoke, jidoka, heijunka and the like.Unlike zero defects platitudes, these are specificand well-defined practices. To avoid misunder-standing and simplistic descriptions, interestedreaders should consult the writings of the Japa-nese themselves, particularly the Toyota vice-president, Taiichi Ohno, who deserves perhapsthe lion’s share of credit for spurring its evolu-tion; Shigeo Shingo, an industrial engineer whoworked for Taiichi Ohno and codified many ofthe principles of the TPS; and Yosihiro Monden,a writer who spent many years studying the sys-


1616161616

tem at Toyota and describing it for outsiders.35Forthe technology of the TPS, there is an excellentand thorough description at the web site of theProduction Systems Design Laboratory at MIT,http://www.psd.mit.edu).

VVVVV. STRA. STRA. STRA. STRA. STRATEGIC EFFECTTEGIC EFFECTTEGIC EFFECTTEGIC EFFECTTEGIC EFFECTOF LEAN PRODUCTIONOF LEAN PRODUCTIONOF LEAN PRODUCTIONOF LEAN PRODUCTIONOF LEAN PRODUCTION

Lean production systems achieve their greatercompetitive advantage because they can ma-nipulate time. The founders of the system arevery clear on this point:

“Why not just build more inventory?” is the con-ventional answer to delivery span questions.Faced with a lean competitor inventory does notwork. It runs up costs but, more importantly, it is

impossible to know beforehand what cus-tomers will buy. Inventory-based compa-nies are constantly having fire sales toclean out unwanted or obsolete merchan-dise, which does little for their reputationsas quality suppliers. The classic case inrecent times is probably Dell, a build-to-order pioneer in personal computers, ver-sus Compaq. Not only has Dell surpassedCompaq in PC sales but its profitabilityoften exceeds twice Compaq’s.

People who have studied time-based systemsagree. In fact, one of the most comprehensivebooks on the subject, by George Stalk and TomHout, was entitled Competing Against Time.36

There are two reasons time works as a competi-tive weapon. First, by “making things fast,” asIndiana Professor Robert Shemmener entitled a

well-known article,37 the TPS reaps the addedbenefits of lower cost and higher quality (again,in contradiction to traditional manufacturing,which needed more time and higher costs in or-der to improve quality).

But the more important effects of time-basedstrategy lie in its ability to engage in shaping andbeing shaped by the marketplace, as noted above.A slight digression may help illustrate this point.Time has long been recognized as a competitiveweapon by military strategists, as is well docu-mented in works from Sun Tzu (c. 400 B.C.) tothe writings of the contemporary American strat-egist, Col. John R. Boyd. By operating at whatBoyd called a faster observe, orient, decide, act(OODA) tempo than an opponent, one could at-tack the other side’s cohesion and ability to makeeffective battlefield decisions. Sun Tzu hadcalled this idea “shaping your opponent.” Often,even a much smaller, more agile (as faster OODAtempo began to be called) force could unhingeand defeat a larger, more ponderous adversaryusing a new doctrine called “maneuver warfare.”Boyd’s briefings contained many examples, andhis concepts were adopted by the Marine Corpsand to lesser degrees by the Army and AirForce.38

In the business world, time can also be an effec-tive weapon. As Stalk and Hout concluded, a firmthat can inject new offerings into the marketplacemore quickly than its competitors, learn morerapidly from the market’s reactions, and producenew products and services before its competi-tors, will gain the ability to “shape the market-place” – in this case, defining what customersfind desirable and establishing the prices theyare willing to pay. Stalk and Hout provided manyexamples and even described the OODA loopmodel. Time-based competition is truly the busi-ness analog of maneuver warfare, which shouldnot be too surprising since Boyd’s research restson the same Zen canon, most famously Sun Tzuand Miyamoto Musashi, that formed part of thecultural heritage of the founders of the TPS.39

T i m e - b a s e dcompetition istruly the busi-ness analog ofmanuever war-fare...


The Toyota Production System is based on theidea of constantly decreasing the time betweenwhen a customer orders a car and when we de-liver.

– Toyota Motor Corp., “Toyota Production System,” 1992.

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For manufacturers, lean production simply pro-vides the best way created so far to operate atvery high decision-cycle (OODA loop) speed.

Prerequisites

Despite its undeniable advantages, and thousandsof pages of descriptions, the TPS is proving ex-tremely difficult to implement. Probably less than10 percent of U.S. workers are employed by com-panies that have achieved enough to make a no-ticeable difference.40

Taiichi Ohno himself, who advised companieson implementing the TPS after he retired fromToyota, noticed this and offered the suggestionthat: “companies that are doing even moderatelywell never adopt the TPS. Such companies be-come very selective in the measures they wishto adopt.”41 The deeper reason, Ohno believed,was that even a modest degree of success retardedthe “revolution of consciousness” (a Zen phraseOhno used often) needed before the TPS couldbe successfully adopted. People pay lip serviceto change, and even implement bits and pieces,but the fundamental system never changes.42

In Japan, commercial competition is a surrogatefor war. The sararimen (from the English “sal-ary men” meaning white-collar workers) regardthemselves as modern-day samurai and compa-nies there view their competitors as “stealing therice out of their children’s mouths.” The goal istotal dominance of the competition and even itsdestruction, if possible.43 This is the environmentthat spawned lean production, and still providesthe motivation and discipline necessary to sus-tain it.

The second prerequisite needed for successfuladoption of the TPS appears to be a highly com-petitive marketplace, and in particular one thatrewards the simultaneous attributes of the TPS:lower cost, higher quality, and accelerated de-livery span.

A third prerequisite appears to be a company“culture” that rewards the type of initiative andfosters the degree of self-organization needed tooperate the system over the long run. In particu-lar, a company must find some way to harvestthe savings that lean production provides – thatis, to eliminate positions where work is no longerneeded – without fomenting a backlash thatwould quickly bring the system to a halt. Simplyput, a functioning implementation of the TPS hasinstitutionalized a way to reward people at alllevels of the company for working themselvesout of their own jobs. The existence, or vastlymore often non-existence, of such a system isthe easiest way to tell whether a company hasactually implemented the TPS or is just usingthe buzzwords.

A last prerequisite appears to be more fortuitous:a chief executive who comprehends the data onthe TPS, believes that it is the key to survival forhis or her company, and designs an organizationcommitted to its implementation. This is prob-ably the single hardest requirement to satisfy.Names like Jack Welch at General Electric, HerbKelleher at Southwest Airlines, and Michael Dellhave become business icons precisely becausethey are among the very few who have success-fully implemented time-based competitive sys-tems.44 In fact, the greatest danger to implement-ing lean production may be a CEO who says thathe or she is committed to lean production, andspends money installing some of the technology(such as cellular manufacturing and single pieceflow), but does not make the people/culturalchanges to make it work.

In summary, drawing from the cases where leanproduction has been successfully implemented,the prerequisites appear to be:

• a deep and widely shared sense of ur-gency;

• a market environment that is amenableto shaping through rapid decision-cyclespeed and compressed delivery spans;

• a culture capable of changing to one that


1818181818

can support lean production; and• a knowledgeable CEO with the motiva-

tion and leadership skills to catalyze theneeded changes.

Without such company and marketplace charac-teristics, a company would probably be bettersuited to seek other strategies for competition,or to merge or become acquired while the op-eration still has market value. It is precisely be-cause they and their marketplace lack these char-acteristics that companies specializing in defensefind it much more difficult to employ the TPSthan do commercial enterprises. In fact, the at-trition among defense contractors since 1990 hasapproached levels once only found in real wars.And survivors in the defense sector have evolvedalternative competitive tools, in particular the de-fense power games noted above.

VI. WHY LEAN PRODUCTION ISVI. WHY LEAN PRODUCTION ISVI. WHY LEAN PRODUCTION ISVI. WHY LEAN PRODUCTION ISVI. WHY LEAN PRODUCTION ISUNLIKELUNLIKELUNLIKELUNLIKELUNLIKELY TY TY TY TY TO WORK IN DEFENSEO WORK IN DEFENSEO WORK IN DEFENSEO WORK IN DEFENSEO WORK IN DEFENSE

There are several reasons why defense prime con-tractors find it more difficult than most to imple-ment true lean production (and thereby realizethe benefits in cost, quality, and cycle time).45

The primary theoretical reason is that strategiessuch as mirroring the buyer’s organization, spe-cializing in unique technologies, operating be-hind bureaucratic barriers (e.g., the Federal Ac-quisition Regulations – FARs), and most espe-cially, engaging in political engineering all actto give the company an aura of protection andease the sense of urgency. A company that un-derstands it can influence the political system tobuy its products sees no need to undertakechanges to its comfortable lifestyle that lean pro-duction requires. There will be no revolution inconsciousness in such an organization.

The second prerequisite is a marketplace that

values what lean production delivers, in particu-lar, compression of delivery spans without hold-ing inventory. As noted in the literature, this in-cludes most if not all the true marketplaces (mul-tiple customers and suppliers) in the world. However, given the way the Pentagon develops andprocures new defense systems, there does notappear to be any great competitive advantage incompressing delivery spans. Military equipmentis already built to order (companies generallydon’t keep inventories of tanks or fighters), andmoney is allocated by Congress by fiscal year.Contracts provide for progress payments to off-set costs of paying for components and labor asconstruction proceeds. Although there might bea small cost-of-money advantage to completingan item in six months rather than 12 (i.e., to off-set the amounts not covered by progress pay-ments), there does not appear to be any way thata shorter delivery span would take market shareaway from a competitor – the primary advan-tage in the commercial world.

The other advantages of a lean system – higherquality and lower cost – would certainly be ad-vantageous for the buying service. But viewedfrom the standpoint of a contractor, these losemuch of their appeal. It would be difficult toconvince any defense prime that it will sell ad-ditional units by decreasing the defect rate 15percent. Contractors are already supposed to bedoing all in their power to produce “quality”products, so even offering such a deal could beregarded as unethical.

What about reducing costs? From thecontractor’s standpoint, this was an obvious non-starter during the cost-plus era since it wouldhave led directly to lower profits. In this modernera of more “commercial practices,” that is,fixed-price procurement, the idea would havemore appeal. But there are drawbacks. Makingsignificant cost reductions invariably involves re-ducing the workforce. Over time, a lean systemoperating in a static market would slowly shrink,thereby losing its ability to both employ politi-cal engineering and exploit the revolving door.


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The degradation in the effectiveness of politicalengineering is especially vexing since it is largelyplayed with vendors and subcontractors. A mod-ern weapons program typically derives 60 per-cent or more of its costs from outside the primecontractor. A lean production facility has notice-ably fewer vendors and subs than a traditionalmass manufacturer, and it establishes long-termrelationships with them. These relationships callfor the vendors and subs to likewise adopt leanproduction (thereby reducing their politicalclout). Worse, to reduce possible delays in trans-portation, it encourages them to locate near themain plant, i.e., in the same congressional dis-trict, which limits the opportunities for politicalengineering.

In the commercial world, lean competitors of-ten expand their market shares and so reap thebenefits of higher sales and lower costs, whichproduce substantial increases in profitability andoften an overall growth in employment, althoughper-unit people costs will continue to decline.This advantage is rarely available to defense con-tractors, since the number of units bought is de-termined (at least in theory) by military require-ments to defeat some postulated combination ofthreats. Thus, if the Air Force needs a wing of F-16s, it is unlikely that Boeing will be able tocapture that business by lowering the cost ofthe F/A-18.

At one point in the late 1980s, Lockheed offeredto build an additional 50 C-5B aircraft at a firmfixed price less than half what the U.S.A.F. waspaying for C-17s, and deliver them before thefirst C-17 would become available. The offer wasturned down, even though the Air Force had (andstill has) a huge shortfall in its airlift capability,and each C-5B can carry 60 percent more cargothan a C-17. In the commercial world, lower costand shorter delivery span would likely have beendecisive advantages.

In other words, the idea of capturing market sharethrough lean production is largely untenable inthe defense world. Lockheed Martin owns 100

percent of the marketplace for F-16s, Boeing hasa similar market share for F-15s and F/A-18s,and so on. These programs were monopolies fromthe moment they entered EMD. From the compa-nies’ standpoint, attempting to adopt lean produc-tion would risk the operation of their existing lines,upset their labor and management structures, de-crease their ability to play the power games thatactually sell product for them, and quite likely notincrease their sales by a single unit.

Adoption of the techniques that lean pro-ducers use, typically those that can begrafted into most any existing system –cellular manufacturing is the most com-mon – will lower some costs and couldprovide advantages in competition for an-nual buys. However, lean production ulti-mately rests on time compression, andthere is little evidence that the defense market-place can be shaped by shorter production or de-velopment spans. Lean techniques, in otherwords, may provide useful tactics for a specificprocurement competition, but lean production isnot a viable strategy for defense contractors.Such companies would be far better advised toemploy practices that have proven effective, par-ticularly front-loading and political engineering,even though these work against implementationof lean production, and increase the cost and de-velopment spans of defense hardware.46

VII. WHAVII. WHAVII. WHAVII. WHAVII. WHAT CAN BE DONET CAN BE DONET CAN BE DONET CAN BE DONET CAN BE DONE

It is important, when considering ways to im-prove the development and production of majorweapon systems, to keep in mind several themesthat have been covered earlier:

1) The strongest influences on the current sys-tem, that is, the factors that most account for thestability of the present MICC, are:

a) lack of market forces to spur innova-


Over time, alean system op-erating in a staticmarket wouldslowly shrink...

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tion and control costs; and equally impor-tant;

b) the fact that we fund major weaponsprograms as much on their political util-ity (via the power games) as for their ef-fectiveness on the battlefield.

2) The current U.S. military-industrial-congressional complex has evolved since passageof the Defense Production Act in 1950 intothe system in place today. Nobody delib-erately designed it to be this way.

3) Companies that did not evolve alongwith the system did not survive.

4) For many reasons, but primarily theneed to play power games and the lack of

competition after EMD, defense contractors willfind it impossible in most cases to install truelean production, so they will not be able to showthe same degree of improvement in cost, qual-ity, and delivery span as in the commercial world.

Ameliorating these problems will requirechanges throughout the military- industrial-con-gressional complex. Rarely should the industrialcomponent shoulder the entire blame. Politicalengineering works, for example, because it ben-efits members of Congress. One may argue thatmilitary spending has less overall economic ben-efit than other uses of that money – such as fund-ing local infrastructure, paying down the nationaldebt, or returning it to the taxpayers – but for amember of Congress facing reelection, the place-ment of jobs in his or her district is difficult toturn down, and loss of a program, even one witharguable military utility, could prove embarrass-ing.

Little is known about how to influence the evo-lution of very complex systems. In the commer-cial world, the marketplace appears to be themost effective mechanism for fostering evolu-tion in the direction of better products and ser-vices for the consumer. In the defense sector,

market forces are limited, but it may still be pos-sible to inject them to a larger degree than is thecase today, especially if the government estab-lishes clear policies to do so. That is, when mak-ing decisions, the policy should be to move to-wards the direction of increased competition andmarket forces, rather than directly towards someother goal such as “efficiency,” regardless of howdesirable that goal might appear.

Keep more competition

For any particular program, having a large num-ber of competitors does not appear to be the mostimportant factor, although this is an area thatcould benefit from careful research. In the retailmarketplace, for example, the answer does ap-pear to be “the more the better.” Japan, for ex-ample, during its period of greatest inroad intothe United States, harbored nine companies thatexported automobiles to the United States.47

The commercial marketplace, however, repre-sents an aggregate of millions of customers andso can benefit from a multiplicity of competi-tors. In the defense marketplace, there is onlyone primary customer capable of paying for thedevelopment of major weapon systems. In thisenvironment, it is important to keep two realcompetitors. But more than two, while it cannothurt, may not significantly improve program per-formance. Even in the commercial airliner mar-ket, which has perhaps a dozen major custom-ers, the ferocious competition between justBoeing and Airbus has kept prices in the seg-ments where they compete from going up fasterthan general inflation.

There have also been some spectacular successesin defense. In the mid 1970s, for example, theAir Force kept two competitors producing am-munition for the GAU-8 tank-killing gun on theA-10. The annual buy from each competitor de-pended on the prices quoted. At the start of thecompetition, rounds cost $84 each, and analysissuggested that allowing for normal cost growth,


In the defensemarketplace... itis important tokeep two realcompetitors.

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rounds should average around $100. Within fiveyears, however, costs had fallen to $9 each, andthis was at a time when the cost for all otherammunition was indeed rising.48

Size does have one unfortunate drawback. Aswith other organisms, the larger ones need to befed more. In the aerospace business, the indus-try has announced that the nearly $400 billioncurrently planned for new fighters (F/A-18E/F,F-22, and JSF) simply isn’t enough. Industry rep-resentatives are now complaining that if DoDdoesn’t start planning now for another major pro-gram right on the heels of JSF, “a huge part ofour industry will die.”49 The Aerospace Indus-tries Association has stated that the Americantaxpayer owes them an additional $14 billion thisyear alone, which they have suggested the in-coming Bush administration add to the 2001 DoDbudget.50

Foster new entrants

A more important factor in shaping the evolu-tion of the defense industry is preserving the pos-sibility of new entrants to the defense market-place. For any form of evolution to work, theremust be a field of alternatives from which to se-lect. In evolutionary biology this is expressed inFischer’s Law: the rate of adaptive change is pro-portional to the genetic variation present. If wewant the defense industry to evolve into some-thing different than it is, we must reinforce in-centives for new companies to form, perhapsvirtually, for established companies in other sec-tors to enter the defense marketplace, and forpoor performers to be selected out. This mecha-nism cannot work in the current defense envi-ronment where each of the two major primes istoo big to fail. If either did, the country wouldbe down to one – a pure monopoly – and themajor subcontractors on the losing team,Northrop for example, would lose significantrevenue that might allow them to return to primestatus.51

Although it is unlikely that a totally brand newaircraft, armored vehicle, or ship building com-pany will form over the next few years, new en-trants could come from companies in relatedcommercial fields. In addition to NorthropGrumman and Raytheon Aircraft, for example,Textron (Cessna and Bell Helicopter) and Gen-eral Dynamics (Gulfstream) both retain a signifi-cant design capability and could bid as prime oncertain weapon system programs, espe-cially if teamed with experienced partners,such as an allied aerospace company. Theycould also serve as a second source forweapon systems where such an arrange-ment is feasible.

There is no reason why competitors forprime contracts should be limited to thehardware manufacturers. For the MC-130H Combat Talon II, for example, sincethe bulk of the effort involved integrating com-plex systems into a proven airframe, the systemprime contractor was IBM in Owego, NY. In thefuture, there is no reason why systems integra-tors such as SAIC, CSC, or EDS could not bethe prime contractor for a variety of major weap-ons systems, buying the platforms from whoeverprovided the best value.

One recent change that should be reexamined isthe government’s practice of choosing not thebest system, but the management team in whichgovernment officials have the most faith.52 Thispolicy, when strictly observed, makes new en-trants virtually impossible. Ironically, by the timethe selected weapon is ready for full scale pro-duction (often in five to ten years), the originalmanagement team that was the basis of selec-tion has long been transferred or retired.

One might also surmise that the governmentwould feel more comfortable with companieswhose management structures mirror its own,and which have made skillful use of the revolv-ing door, than with the type of “Kill the compe-tition!” samurai culture that seems to be the mostsuccessful in implementing lean production.


...we must rein-force incentivesfor new compa-nies to form,perhaps virtu-ally...

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The notion of new entrants is not as far fetchedas it may sound. Until its design was selected asone of the two finalists for the Advanced Tacti-cal Fighter (ATF), Lockheed had been out of thefighter business for more than 30 years.McDonnell Douglas, which had built the twoprevious Air Force fighters, was on the team thateventually lost.

Keep competition open longer

It does no good to have a vigorous compe-tition up to EMD and then revert to mo-nopoly status for spending the real money.All this practice (which characterizes themajority of U.S. weapon programs) doesis reward the more convincing front-loader. At the minimum, competitionshould be maintained up to the point wherethe government and the contractors are

comfortable with commercial-type (i.e., fixed-price/guaranteed performance) contracts. Thispoint is certainly through EMD and perhaps evento initial operating capability.

However, given the magnitude of savings thatcompetition often produces, most weapon sys-tems would benefit from preserving it through-out the life of the program. As noted previously,these benefits often include costs reduced by 25percent, defect rates by 90 percent, and muchmore rapid incorporation of new features, tech-nologies, and upgrades. It does not take a verylarge production run for these advantages to am-ortize the cost of developing a competitor sys-tem. The more rapid delivery of effective andsupportable combat systems to troops in the fieldcould be considered a bonus.

The argument against preserving competition thislong is cost: if the United States can barely af-ford the $20 billion to develop one advanced tac-tical fighter, the F-22, how could it possibly af-ford $40 billion to develop two? Part of the an-swer is that with competition, developmentwould likely be much more efficient and so the

total bill for two would certainly be less than$40 billion.

The other part of the answer is that in a competi-tive environment, companies have an incentiveto reduce production costs. Although it is im-possible to say beforehand how much savingscould result from competition, cost reductionsof 20 percent to 25 percent are not unusual inthe commercial world. However, since produc-tion costs over the life of a program typicallyamount to five or more times R&D costs, only a25 percent reduction in production costs wouldbe needed to offset the additional burden of de-veloping a second weapon system, depending onhow many units are finally bought and how mucheffect competition has on reducing the bill forthe other aircraft.53

This magnitude of reduction has been seen inthose few cases where a military item is compa-rable to a commercial product. In the C-130/Boeing 737 case noted above, the $4 billion (200aircraft at a delta of $20 million each) of costgrowth in the military aircraft compared to itscommercial counterpart would have more thanpaid for developing an entirely new aircraft thatbetter met the needs of the modern world.54 Thisaircraft could have competed with the C-130Jfor the tactical airlift mission buy every year.

While it is too late to develop a second advancedtactical fighter, there is no legitimate reason forchoosing a single contractor for a program aslarge as the JSF. The annual buy could be di-vided between the competitors based on perfor-mance, delivery span, and cost. This should betrue competition, not a partitioning of the pro-gram into two smaller monopolies. GivingBoeing, for example, sole rights to the Navy vari-ant and Lockheed Martin the U.S.A.F. and U.S.Marine Corps versions eliminates competitionjust as surely as awarding the entire program toone or the other. Modern logistics management(a type of “enterprise resource planning,” orERP) systems can overcome the obstacles ofadding one more type of weapon to the fleet, as


...most weaponsystems wouldbenefit from pre-serving (compe-tition) through-out the life of theprogram.

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they are routinely doing for airlines.

If a weapons program reaches the point wherethere can be no competing source for the samecapability, this is probably a clear signal that itshould not be bought at all. Under these condi-tions, it cannot be fielded in any quantity thatwould have decisive effect on the battlefield, itwill prove impossible to contain cost and require-ments growth, and the pressure to keep it alivewill overwhelm our political system. Once op-erational, the regional commanders in chief willbe required to employ it in some role, and willhave to change tactics and strategy to ensure thatnone of the golden BBs are lost. Ultimately, itwill suck in such enormous resources that thePentagon will not be able to procure enough sys-tems with real warfighting utility, or even tomaintain adequately the forces it now has. Allthese effects can be seen today with the B-2 andwill be seen again with the F-22.

If the United States cannot afford two compet-ing systems, it certainly cannot afford one.

VIII. SUMMARVIII. SUMMARVIII. SUMMARVIII. SUMMARVIII. SUMMARYYYYY: COMPETITION: COMPETITION: COMPETITION: COMPETITION: COMPETITIONCAN PROBABLCAN PROBABLCAN PROBABLCAN PROBABLCAN PROBABLY BE RESTY BE RESTY BE RESTY BE RESTY BE RESTOREDOREDOREDOREDORED

Lean production works in marketplaces that canbe shaped by shorter development and produc-tion spans, lower costs, and higher quality. Whilethese would be valuable to military as well ascommercial customers, the reality is that politi-cal factors, such as front-loading and politicalengineering, have far more effect. This is not toimply that the techniques of lean production areirrelevant for defense programs, just that theycannot be implemented to the same degree as inthe highly competitive and less political com-mercial sector. During a program’s life, the longerthat competition is preserved, and the moreweight that the three factors of time, cost, andquality carry in deciding the winner, the more

useful lean techniques will prove in reducing thecost of that system.

The arguments in the immediately preceding sec-tions outline a difficult process, but one that doesnot threaten the underlying political realities ofdefense acquisition. That is, the Pentagon couldkeep Boeing and Lockheed Martin in competi-tion for periodic JSF buys using existing contrac-tual types and the current planning, programming,and budgeting system (PPBS) and congressionalauthorization and allocation processes. If fact, itmight even prove easier, since neither of theprimes would have to lose a program permanently.

For other programs, if more competition is de-sired, the government could offer incentives forsystems integrators or near-primes to make theinvestments required to enter the market. Suchincentives could include expanded tax credits forbid and proposal efforts, and relaxation of “BuyAmerica” policies so that U.S. systems integra-tors could more easily team with offshore manu-facturers.

What we do not know is whether we can restoreenough competition to simulate a commercialmarketplace and so create an environment con-ducive to true lean production. From those fewinstances where it has been seriously tried, sucha possibility seems reasonable, although weshould expect the details to vary from programto program. Unlike the real marketplace, how-ever, it will be difficult to eliminate one of thetwo competitors, for then the program wouldreturn to the true monopoly status that most largeprograms enjoy today. That is, competitors willstill be protected from elimination, which is thepenalty extracted by the real marketplace for fall-ing behind the competition in cost, quality, ordelivery span. The less energetic competitor mayalso try to use power games to convert from realcompetition to a gentleman’s version, wherenobody gets hurt and certainly nobody gets elimi-nated.

This recalls to mind the other requirement for


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employing lean production – and thereby signifi-cantly reducing cost, defect rate, and develop-ment span: a market that rewards improvementin these areas. The present U.S. political system,as noted in the sections on power games, rewardsother attributes much more strongly. Fixing theseproblems would require significant changes inlaw and perhaps even in the Constitution itself.

As covered earlier, the three most com-mon power games are front-loading (to getprograms started), political engineering (tokeep them funded, independent of chang-ing requirements), and the revolving door(to weaken the resolve of government em-ployees to make difficult decisions). Sincefront-loading hides in the legitimate un-certainty inherent in any new program, andsince political engineering dwells at theheart of the U.S. representative democraticsystem, these two power tools will likelyalways be available in some form. Theyare simply too difficult to attack directly.55

It might be possible, however, to reduce the mostpernicious effects of the revolving door.

Investigate whether there are ways toclose the revolving door

We need to find some way to close, or at leastslow, the revolving door. As noted previously,this gets into an area of individual liberties andruns into the problem of defining “defense con-tractor.” But the fact is that so long as large de-fense contractors can influence the actions ofgovernment officials through the hope or expec-tation of lucrative future employment, then theUnited States truly is basing its national securityaround the convenience of the contractors, notthe troops in the field or the people.

In the earlier discussion of this subject, it wassuggested that restoring competition, especiallykeeping the number of competitors well abovetwo, might dilute the influence of contractors on

buyers. Others have suggested an outright banon employment, although that would require abureaucracy to write the rules and interpret them.Who, for example, is a defense contractor? Arewe talking just primes? Are consultants included?Could a company that does not meet the defini-tion of “defense contractor” today become onein the future? If so, do the ex-government em-ployees who work for it have to leave?

Any action to reduce the influence of contrac-tors on government employees would requireCongress to write legislation that gives unam-biguous answers to questions such as these. Once“defense contractor” is defined, Congress couldrequire ex-government employees to waive theirgovernment pensions, or impose a significantwaiting period before such an employee couldbe hired either directly, as a consultant, or througha third party.56

Of course, the problem would be simple if therewere only one defense prime contractor – a U.S.Aerospace and Defense Company – and formergovernment employees could simply be forbid-den to work for it, even indirectly. Although itmight be possible politically to create such acompany, and might not even be that difficult ifCongress voted enough money to ease the birthpangs, the U.S. government should not be soquick to forgo forever the benefits of innovationand competition.

Ultimately, industry will mirror weaponsystems

To be realistic, as long as the services insist onweapons to counter Cold War-era threats, thegovernment will be buying ever more complexand expensive aircraft, ships, and fighting ve-hicles. Developing and building such behemothswill probably require contractors in its own im-age, that is, organizations capable of managingmulti-year, multi-billion dollar contracts. Suchorganizations will employ the same tools of lob-bying, front-loading, and political engineering

...the problem offostering com-petition and newentrants may besimplified if theweapons them-selves are sim-plified.


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available to all companies whose primary cus-tomer is the government.

Although some may point to Airbus as an ex-ample of how a relatively small, virtual organi-zation can carry out enormous projects, the factis that all the technical work was performed byits underlying national aerospace companies,which were monopolies for all practical purposesin their own countries. Three of those compa-nies, in France, Spain, and Germany, have con-solidated into the European Aeronautic Defenceand Space Company (EADS). Airbus itself is inthe process of transforming into an integratedcompany, owned by EADS and BAE Systems,“destined to consolidate the Airbus resources andknow-how in the locations around Europe into asingle entity.”57 One should note that there werenot two competing Airbuses in Europe.

So the problem of fostering competition and newentrants may be simplified if the weapons them-selves are simplified. If, in fact, the world ismoving towards an asymmetric “fourth genera-tion of warfare,” as typified by Vietnam, Soma-lia, the recent Middle East (excluding DesertStorm), terrorism, and counter-narcotics, thenperhaps the era of the mega-prime will naturallycome to an end.58


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1 Col. Warden was the Director of Project CHECKMATEat HQ USAF in late 1990 and was one of the chief archi-tects of the airpower campaign in the Gulf War. He is alsothe creator of the strategic airpower doctrine known as“parallel war.”

2 Programmed cost reductions, that is, from the originalbid and not including learning curve effects, must average$62 million per aircraft. Average unit cost of the F-15Ewas $46 million. See NSIAD-00-178, “Recent F-22 CostEstimates Exceeded Congressional Limitation,” dated Au-gust 2000. Available on the GAO web site.

3 F. C. Spinney, Defense Death Spiral, available on http://www.d-n-i.net.

4 Although less studied than the production system, theToyota Development System delivers results equally as re-markable. Interested readers should consult “The SecondToyota Paradox: How Delaying Decisions Can Make Bet-ter Cars Faster,” by Allen Ward, Jeffrey K. Liker, John J.Cristiano, and Durward K. Sobek II, Sloan ManagementReview, Spring 1995, 43-61.

5 Robert Wall And David A. Fulghum, “Fighting To StayIn the Big League,” Aviation Week and Space Technology,November 20, 2000.

6 For a superb history of Grumman aircraft and their con-tributions to national defense, please visit http://www.grummanpark.org

7 John Diamond, “Analysts, auditors worry about impactof defense mergers,” October 18, 1998, The AssociatedPress. Savings claims from defense restructuring have alsobeen investigated by the GAO. See, for example, “DefenseIndustry: Restructuring Costs Paid, Savings Realized, andMeans to Ensure Benefits,” NSIAD-99-22, 1 Dec 1998.

8 ibid.

9 Herbert L. Fenster, “Reforming The Management Of TheNational Defense: Can The National Defense Afford Con-gress?” Address to the American Bar Association, Friday,February 3, 1989. Available at http://www.d-n-i.net.

10 The Constitution does allow for a standing army butonly permits Congress to fund it for a period of two years.There has been considerable debate over the last 200 yearsover exactly what this means. Until the Cold War, the stand-ing army was so small that constitutional issues could be

largely ignored.

11 Robert Wall, “Fix Technology Program,” Aviation Weekand Space Technology, October 16, 2000.

12 ibid.

13 David C. Gompert and Irving Lachow, “TransformingU.S. Forces: Lessons from the Wider Revolution,” TheRAND Corporation, IP-193, 2000.

14 Anthony L. Velocci, Jr., “Rockwell Collins Granted Au-tonomy,” Aviation Week and Space Technology, Decem-ber 18, 2000. I cannot comment on the accuracy of Collins’claims, which approach those demonstrated in the auto-mobile and other commercial sectors. It should be notedthat Collins’ business is 62 percent commercial, and it maybe easier to mix lines in the component business than it hasproven in aircraft.

15 “Lockheed to Cut 675 More Jobs,” Atlanta Journal andConstitution, January 4, 2001. According to the site man-ager, “The reality is that we cannot meet our cost savingsimperatives and maintain the fabrication operationsin-house.” Fabrication was where most of the Marietta,Georgia plant’s “lean” efforts had been concentrated andwhere it claimed the greatest success. The plant’s lean ac-complishments had merited a cover story less than 18months before the layoffs were announced: “Lean Think-ing Spurs Culture Shift at LMAS,” by Stanley W. Kandebo,Aviation Week and Space Technology, July 12, 1999.

16 The classics in this area, in addition to The Wealth ofNations, certainly include Frederich Hayak’s The FatalConceit and Milton Friedman’s Free to Choose. Both arewidely available.

17 Hayak’s book, subtitled “The Errors of Socialism,” ex-plicitly considers the limitations of non-market economiesand the advantages of the marketplace in evolving moreefficient processes.

18 The actual prices airlines pay for aircraft often differsfrom what Boeing shows on its web site. Depending oncompetitive factors and the size of the buy, discounts of upto 25 percent have been reported. Lockheed Martin’s pricesfor international C-130J customers are author’s estimatesbased on conversations with persons familiar with the glo-bal market for military aircraft.

19 The RAF was the launch customer for the C-130J, or-dering 25 aircraft in 1995 to fill approximately half theirrequirement. For the “second tranch,” however, the RAFrecently selected the A400M, augmented by 4 C-17s in thenear term. Boeing has offered the C-17 at $150 millioneach for buys of 15 per year.

ENDNO ENDNO ENDNO ENDNO ENDNOTESTESTESTESTES


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20 Anne Marie Squeo, “Raytheon Struggles To Find Bid-der To Pay $4 Billion For Aircraft Unit,” The Wall StreetJournal, October 18, 2000.

21 The term “front-loading,” along with its sister “powergame” political engineering, was popularized by Pentagonanalyst Franklin C. (Chuck) Spinney in his seminal briefing“Defense Facts of Life.” Interested readers may obtain thisbriefing, and its updated companion, “Defense Death Spi-ral,” from Defense and the National Interest, http://www.d-n-i.net.

22 For an elaboration, see Defense Power Games, 1990,rev. 1998, by Franklin C. Spinney, originally published bythe Fund for Constitutional Government and available athttp://www.d-n-i.net.

23 This statement was made by Maj. Gen. Claude Bolton,the Program Executive Officer for Fighter and BomberPrograms in the Office of the Assistant Secretary of theAir Force for Acquisition, in an interview with Jane’s De-fense Weekly, August 9, 2000. In this interview, Maj. Gen.Bolton also said that we could not have won the Gulf Warif we had still been flying the F-4 instead of the F-15. Suchsentiments are typical of those who believe that hardware,not people, and certainly not the U.S. Army, Navy, orMarine Corps, win wars.

24 As of the time of this writing, the F-22 program (R&Dand procurement) is estimated to cost $62 billion for 341aircraft, or about $182 million per copy. If the buy were toexceed 341, without changes to the aircraft or further costoverruns, the unit cost would be less. For details on thecost risk to the F-22 program, see any of the recent GAOreports on the subject, for example, NSIAD-00-178 citedabove.

25 According to the Federal Election Commission theLockheed Martin Employees PAC disbursed $1,063,289to political candidates from January 1, 1999 through No-vember 22, 2000.

26 A point developed at length by F. C. Spinney in DefensePower Games.

27 This incredible episode is well documented. See, for ex-ample, Jim Mann, “A Government By The People, For TheMilitary-Industrial Complex,” Los Angeles Times, Septem-ber 27, 2000.

28 Col. Warden (see endnote 1) expressed his preferencesand rationale for smaller but more frequent programs in“Apocryphal Now: The Myth of the Hollow Military,” byGregg Easterbrook, The New Republic, September 11,2000.

29 For a thorough analysis of the merits of the F-22 com-

pared to the F-15, see E. E. Riccioni, “The F-22, Fact vs.Fiction,” available at http://www.pogo.org. Irrelevancestems from the fact that the longer a program takes to de-velop, the more time potential adversaries have to inventways to counter or avoid it.

30 Probably the most comprehensive single reference forthe effects of time-based competition in business is GeorgeStalk and Tom Hout, Competing Against Time, Free Press,1990.

31 The original data that demonstrated the efficacy of theToyota Production System came from the InternationalMotor Vehicle Project performed in the mid-1980s by MIT.These data are summarized in The Machine that Changedthe World, by James P. Womack, Daniel Roos, and DanielJones, Rawson Assoc. 1990, PB Harpercollins 1991 (avail-able through online retailers). Jones and his co-authors wereparticipants in the study.

32 Stalk and Hout, op. cit., describe several case studies ofthe effects of faster decision cycle time. Interested readersmight also consult any publications by Tom Peters begin-ning with Thriving on Chaos.

33 For a recent article in the trade press discussing the dif-ficulty of implementing lean production, see John H.Sheridan, “Growing With Lean,” Industryweek, October2, 2000.

34 The basic idea behind a complex adaptive systems (CAS)approach to management is to recognize that groups ofliving organisms (including homo sapiens) have a tendencyto self-organize. Under proper leadership, groups can of-ten be induced to self-organize in unpredictable ways thatare actually more effective than a top-down hierarchy inaccomplishing the organization’s purposes. Hayak advanceda similar notion about the economy as a whole in The Fa-tal Conceit. There are many web sites that explore thisconcept, although one might begin with the Mecca of theCAS approach, the Santa Fe Institute, http://www.santafe.edu. Interested readers should also spend timewith “Organic Design for Command and Control,” by thelate Col. John R. Boyd, available at http://www.belisarius.com. Boyd addressed the problem of lead-ership in high performance organizations and advancedmany of the ideas later incorporated into the CAS concept.

35 Taiichi Ohno’s book, Toyota Production System, is suc-cinct and highly condensed, in the style of Sun Tzu’s Art ofWar. Like its famous predecessor, it is at essence a distilla-tion of strategy and it should be read the same way as TheArt of War, one sentence at a time, several times. YasuhiroMonden’s book of the same title goes into much more de-tail on the implementation of the system. Shingeo Shingowas a practicing industrial engineer and his books involvethe most detail of all (becoming in places very difficult for


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the non-engineer to follow). All these books are available(as of January 2001) at online retailers.

36 George Stalk and Thomas M. Hout, Competing AgainstTime, Free Press, 1990.

37 Roger W. Schmenner, “The Merit of Making ThingsFast,” Sloan Management Review, Fall 1988.

38 Boyd’s magnum opus, “Patterns of Conflict,” was neverpublished. Excerpts appear at http://www.belisarius.com.The USMC incorporated many of Boyd’s ideas into theirtop-level doctrine publication, MCDP 1, Warfighting,available online at http://www.doctrine.quantico.usmc.mil.

39 Miyamoto Musashi wrote A Book of Five Rings (alsoknown by similar translations) in about 1645. Althoughostensibly a how-to manual for slicing and dicing oppo-nents, Chapters 3 and 4 illustrate some of the most subtleand effective strategic patterns ever devised (which is rea-sonable because in his profession, losers rarely got a sec-ond chance). In particular, Musashi insists on preparing anopponent mentally and morally before risking a decisiveattack. Several translations of Musashi are available.

40 This estimate comes from lean guru GeorgeKoenigsaecker, in Sheridan’s article cited in footnote 30.

41 When Taiichi Ohno left Toyota (was essentially fired, anall too common occurrence among corporate messiahs),he joined the “New Production Research Society” of Ja-pan, which was a type of consulting organization dedicatedto spreading the system he had largely invented. One shouldnote the evident frustration in his comment.

42 A point also noted by Gompert and Lachow of RAND,op. cit.

43 “The Outsider, His Business and His Billions: The NewImperialists, Larry Ellison, Oracle Unto Himself,” Wash-ington Post, October 30, 2000, p. A1. Although almost acaricature of the Japanese sarariman as samurai, it is stillthe dominant business culture in many companies in Japan.

44 General Electric Chairman Jack Welch and his counter-part at Southwest Airlines, Herb Kelleher, explored manyof these ideas in their famous interview for Fortune Maga-zine on January 11, 1999. A summary is available throughthe Fortune web site. Interested readers might also perusethe various Annual Reports on GE’s web site.

45 Two of the founders of the lean movement, James Womakand David Fitzpatrick, characterized lean in aerospace as abuzzword sprayed “one molecule deep over an existingindustry designed for an age now departed.” (“An Indus-try That Can’t Afford Its Future,” Aviation Week and SpaceTechnology, February 22, 1999.)

46 In addition to the work of Mr. Spinney, previously cited,this conclusion was recently upheld by the General Ac-counting Office in “Major Management Challenges andProgram Risks: Department of Defense” (GAO-01-244,January 2001), available at the GAO web site.

47 They were: Honda, Toyota, Nissan, Mitsubishi, Isuzu,Mazda, Daihatsu, Subaru, and Suzuki. Michael Porter con-vincingly advances the “competition stimulates competi-tiveness” argument in The Competitive Advantage of Na-tions, Free Press, 11th printing, June 1998.

48 These data were provided by the program manager, Col.Bob Dilger, USAF, Ret.

49 John M. Donnelly, “Aerospace Boss: Will Disaster Fol-low JSF?” Defense Week, October 16, 2000.

50 Jim Matthews, “AIA Details Proposals for Big DefenseHikes,” Aviationnow.com, January 3, 2001.

51 Robert Wall And David A. Fulghum, “Fighting To StayIn the Big League,” Aviation Week and Space Technology,November 20, 2000. As this was written, NorthropGrumman announced its purchase of Litton Industries.

52 David A. Fulghum, “Skunk Works Pushed To ImproveJSF Effort,” Aviation Week and Space Technology, Octo-ber 2, 2000.

53 The F-22 is something of an anomaly, since its procure-ment budget is only about twice its R&D bill. This largelyreflects the cutback in program size from the original 648to the current (January 2001) 341.

54 The C-130 was designed in the early 1950s for high sor-ties rates, short/unimproved fields, and relatively shortranges to support a highly intense conflict against the So-viet Union in Europe. Today’s missions tend to be muchlonger – United States to Africa or South America, forexample – which would suggest a faster, longer range air-craft with a wider body and heavier payload but still retain-ing the C-130’s ruggedness and short/rough field capabili-ties. The Airbus A400M meets many of these requirements,which suggests that it could capture significant market shareif costs can be controlled. Advances in technology since1950 should also allow rapid development of a competingaircraft by U.S. industry. Boeing reports, for example, thatdevelopment for the 777, which weighs over three times asmuch as the C-130J (MTGW), cost around $4 billion andtook less than 6 years.

55 Changes to our political system are beyond the scope ofa paper on industrial policy. For a set of recommendationsthat could restrict front-loading and political engineeringbut would not require amending the Constitution, see Sec-tion VI, Reform: Back to Fundamentals, in Spinney’s “De-


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fense Power Games.”

56 A suggestion often made by noted defense commentatorand decorated Vietnam veteran, Col.OL David Hackworth.

57 Quoted from the Airbus Website, http://www.airbus.com,on January 31, 2001.

58 There is an excellent section on “fourth generation war-fare,” including the paper that coined the term, at http://www.d-n-i.net.


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