Defense Affordability: As Defense Spending Declines, It’s Time For A New Approach

United States defense spending has increased dramatically over the past decade. Now, however, we are entering a cycle where the US Department of Defense (DoD) main budget may flatten out and not keep pace with inflation. In addition, all services have urgent and competing needs for modernization and recapitalization. As a result, the Pentagon will have to make tough choices about funding levels for programs.

The budget is not the only thing that changes. Defense leaders have renewed their interest in integrating innovative technologies, such as quantum computing, artificial intelligence and hypersonic weapons, into DoD systems and are actively seeking vendors who could help them with these priorities. strategic. (Of course, executives also want to maintain their flagship programs simultaneously.) Defense companies that develop innovative technologies might take some risk as they venture into an untested field, but they may find that their products are in high demand. .

In this changing landscape, how can defense companies prioritize their affordability efforts over the next five to seven years to stay competitive with their peers? A big part of the solution will be to control their costs by adopting a new approach to cost reduction that sets market-supported targets in all areas: external expenses, in-house manufacturing, functional support of programs and indirect costs. This goal setting and cost reduction approach, designed to help deliver products at unit costs that fit customer budgets, applies to all stages of the program lifecycle: supply and proposal, development and production.

Some defense companies may be skeptical of any new cost reduction initiatives, as many of their previous efforts in this area have fallen short, even when they have applied lean principles, committed intense negotiations with suppliers and applied other proven techniques. The new approach may, however, yield better results, as it goes beyond traditional cost levers by focusing on costs in multiple areas (exposure).

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Key activities will include the following:

  • Improve the tendering and proposal process. Typically, defense firms have focused on defining customer needs and determining the price to be won before submitting a bid. To help companies create more competitive offerings, the new approach leverages digital tools and market-backed analytics to identify investment opportunities and strategies that will minimize costs throughout the lifecycle of the business. program.
  • Use analytics to improve development. Analytics has always been a part of development, but defense companies have generally relied on basic models to assess traditional cost drivers. While this method has had some success, it has never given companies a full view of program costs. As a result, defense companies frequently overlook important opportunities, especially those related to improving engineering efficiency, minimizing product defects, and ultimately reducing costs. As part of the new approach, companies apply a multivariate machine learning model to analyze programs. The assessment includes a careful examination of data from the entire company to identify expected and unexpected factors that may cause delays or avoidable defects. In addition to improving program schedules, these scans can help companies identify problems quickly and implement solutions.
  • Management of production costs via a control tower. If individual functions cannot reduce costs to meet customer goals, a defense firm may sacrifice its management reserve or suffer reduced profit margins to meet customer demands for low prices. However, these interim measures are not sustainable in the long term. As an alternative, companies might consider building a Cost Control Tower (CCT), which examines costs across the organization to create a single source of truth, set goals in line with customer requirements, and manage costs. costs between functions. Affordability teams play a central role in TAC, rather than sitting on the sidelines. With the integrated CCT approach, companies can reduce costs while giving customers a clear understanding of their efforts and improving the employee experience.
  • Have a global view of overheads and indirect costs. Defense companies should consider managing these costs, along with the associated productivity issues, throughout the lifecycle of the program. Most of the time, companies have looked at their internal operations and focused only on the present, rather than considering long-term strategies to win future business. A better strategy is to compare internal costs to those of competitors and determine where reductions are needed to remain competitive and drive growth.

In response to slowing defense spending growth, defense companies are paying more attention to cutting costs, but this alone will not produce the desired gains. To remain competitive, they should consider going beyond their usual efforts by implementing a comprehensive and analytical approach that focuses on costs, including overheads and overheads, throughout the lifecycle. from the program. By changing tactics today, defense companies will be better prepared not only to win more deals in the short term, but also to position themselves for even greater growth in the future. We will discuss the elements of our approach in future articles.

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