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Trailing Edge Technology Business Model New

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White paper discusses Giuntini & Co.\'s \'Trailing Edge Technology Business Model\' for use in logistics consulting and military COTS.

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Trailing Edge Technology Business Model New

  1. 1. The Trailing Edge Technology Business Model: A Paradigm Shift for the Acquisition and Product Support of COTS Configured Weapons Systems By Ron Giuntini Principal, Giuntini & Company, Inc. Giuntini & Company, Inc. 1/6 2010
  2. 2. Over the last several years there has been a marked increase in the use of Commercial- Off-The-Shelf (COTS) components in configuring new weapon systems. This initiative has been driven by Commanders in-theatre requiring the rapid fielding of new weapon systems to fight a new type of enemy. The traditional approach of sourcing components that are Developmental Items has been recognized by Program Manager (PM) Offices as being much too lengthy to meet the urgent needs for most new weapon systems; our Special Forces commands have been the most aggressive in using COTS based weapon systems. COTS items have been identified as the solution to field a weapon system quickly and relatively inexpensively. System integration efforts are typically higher for COTS based systems compared to those of Development Item based systems, but due to the materially lower unit costs of COTS items, the overall weapon system is often an attractive value proposition to the PM Office. Note that there is also a macro-issue that is driving greater use of COTS items; the commercial market dwarfs that of the defense community and contractors have been more and more “forced” to look for COTS solutions for their customers. In 1980 US defense costs were approximately 10% of GDP. By 2000 it had dropped to about 3.2% and now is at about 3.8% due to our current conflict in Southwest Asia. It is estimated that in five years, due to the reduction in the current conflict and a continually growing economy, defense expenditures may fall below 3.2%. From all indications, COTS items will come to dominate most US defense weapon system acquisition programs. The majority of PM Offices, working closely with contractors, have been very effective in providing field commanders with COTS based solutions. The PM’s track record in being efficient in dealing with the upgrading of COTS products, as well as in dealing with the product support of a system, has been at a lower level of performance compared to that of acquiring the system. Joint PM Offices have been the most challenged in dealing with these shortcomings. The Congressional passage of the Weapon System Acquisition Reform Act (WSARA) of 2009 is direct result of attempting to address these cost overrun issues. Note that as a result of an abundance of supplemental funds to pay for system acquisition, as well as for paying for a good part of the product support processes employed during the early years of a fielded system, most PM Offices have had little pushback from leadership regarding the often unfavorable variance from planned Total Ownership Cost (TOC); a good fitness report for an O5/O6 is still being primarily driven by the effectiveness of fielding a new weapon system. As supplemental funds begin to decrease in the next one to three years, due to many Giuntini & Company, Inc. 2/6 2010
  3. 3. reasons, many of the acquisition/product support business models crafted by the PM Offices will begin to be severely challenged due to a reduction in the amount of funds that a PM Office is able to utilize to deal with “problems;” system availability levels will decrease and product support costs will increase. Unfortunately, the PM who had crafted the business model for the COTS based system will have long been gone, leaving the current PM and Product Support Manager/ILS Lead in the PM Office to cope with multiple challenges. Vice Admiral Mark Edwards, Deputy of Naval Operations for Communications Networks (N6) in April 2008 stated below his opinion regarding the promise of COTS technology and the reality of the acquisition and product support processes. "Millennium sailors were born with laptops in their hands...but when we get them into the Fleet, the disconnect between what they were promised and what they find will be profoundly disappointing--a veritable bait-and-switch scheme. They will discover that our ‘leading-edge-off-the-shelf’ and ‘state-of-the-art’ technology is at best ancient....” The two-way communication bandwidth of a single BlackBerry is three times greater than the bandwidth of the entire Arleigh Burke destroyer. Looked at another way, the Navy's most modern in-service multi-mission warship has only five percent of the bandwidth we have in our home Internet connection.... By the time it gets to the people who need it, it is already out of date. The important point that the Admiral was making is that our men and women in uniform are often technology savvy for COTS items; it is what they use as consumers on a day-to- day basis. Think PC, think router, think cellular phone and think GPS. Young adults, the majority of military personnel, have been conditioned as consumers to replace their technology every one to two years. When members of our volunteer military see COTS technology, which they know is three to seven years-old, they can easily feel that they have been “betrayed” in not being provided with the latest and greatest technology to fight our enemies. As for Developmental Items, our soldiers have had none or very little experience as a consumer and cannot equate whether an item is in fact state-of-the-art. Note that Al-Qaeda can cruise the internet for new COTS technology, place an order with a credit card and have it delivered via DHL to their country of choice within 48 hours. It is not hard to see why our Warfighters are confused as to understanding why our PM Offices cannot have similar flexibility. To summarize the above, it is the belief of the author that a new business model must be created for the acquisition/product support of COTS based weapon systems; the processes employed in this new business model must be effective and efficient over the life of the weapon system. Below are some of features of this concept, referred to as the Trailing Edge Business Model: • COTS items employed during the manufacturing process would be in a not-new Giuntini & Company, Inc. 3/6 2010
  4. 4. condition: repaired, refurbished, or overhaul conditions resulting from a lease return or warranty return. COTS products lose 75% of their value within 18 months after being produced, thus a $1,000 computer is worth about $250 after 18 months. The strategy proposed is to acquire 18 month old not-new COTS products for $.25 on the dollar of the planned acquisition cost during the production stage and take the “extra”$.75 and use it for future not-new condition upgrades to be performed every 18 months. Below is the series of actions comparing to the legacy approach for managing COTS based systems versus that of a new business model. o Legacy business model 1. Acquisition budget is $1,000 2. Employ $1,000 new condition COTS in production process on 1-1-10. Item was manufactured on 1-1-10 3. On 7-1-14, warfighter is employing a technology that is 4.5 years old, based upon an expenditure of $1,000 o New business model 1. Acquisition budget is $1,000 2. Employ $250 not-new COTS in production process on 1-1-10. Item was manufactured on 7-1-08 3. Employ $250 not-new COTS in upgrade program on 7-1-11. Item was manufactured on 1-1-10 4. Employ $250 not-new COTS in upgrade program on 1-1-13. Item was manufactured on 7-1-11 5. Employ $250 not-new COTS in upgrade program on 7-1-14. Item was manufactured on 1-1-13. The result above is that the warfighter, after 4.5 years of the COTS item being fielded, employs a technology that is 1.5 years old, based upon an expenditure of $1,000. This approach has been embraced by DoD in the past; the Navy has utilized a similar concept for their acquisition of sonar COTS items. • The repair costs of reparable Line Replacement Units (LRUs) employed during the Product Support Stage of the lifecycle of a weapon system would be Giuntini & Company, Inc. 4/6 2010
  5. 5. materially reduced as a result of the acquisition of not-new COTS items versus the repair of COTS items. Below is the series of actions comparing the legacy approach for managing COTS based systems versus that of a new business model. o Legacy business model 1. Impaired reparable LRU has a new condition acquisition value of $1,000 and was manufactured 07-06 2. Normal Beyond Economic Repair (BER) rate, as a percent of acquisition value, is typically 65% or $650 3. Item received requires $400 of repair on 03-10, is repaired and is inducted into an exchange pool of reparable LRUs 4. Repaired item is employed by maintainer on 07-10. 48 month old LRU is now employed on system o New business model 1. Impaired reparable LRU has a new condition acquisition value of $1,000 and was manufactured 07-06 2. Beyond Economic Repair (BER) rate, as a percent of acquisition value, is 25% or $250 3. Item received has an estimated repair cost of $400 on 3-10. Item is classified as BER, not repaired and a not-new item is acquired for $250. The acquired item was manufactured on 9-08 and is inducted into an exchange pool of reparable items. 4. Repaired item is employed by maintainer on 07-10. Twenty-two month old LRU is now employed on system for $250 The new business model also materially reduces Diminishing Manufacturing Sources/Material Shortages (DMS/MS) issues. This new business model requires great attention to the details of execution. It is perfectly positioned to be employed in an outcome-based/PBL construct. It is time that DoD leadership begin to think out-of-box in order to assure that our Warfighters have close to the most advanced technology that is available for COTS items. Giuntini & Company, Inc. 5/6 2010
  6. 6. About Us Giuntini & Company, Inc. is a 20 year-old management consulting, education and research organization focused on assisting military and commercial sectors develop and implement outcome-based product support business models. We are Subject Matter Experts (SMEs) in Product Support financial analysis, Performance Based Logistics (PBL), service parts planning and organizational development. Our mission is to assist our clients to favorably impact the availability level, reliability level, Total Ownership Cost (TOC), support resource footprint and capability level of a product for an end-user. Products for the defense sector include weapon systems of systems, weapon systems, weapon subsystems, non-embedded software and weapon support systems. Products for the commercial sector are referred to as capital goods, equipment, fixed investments, machinery or others. We work closely on the military side with Program Management Offices, Life Cycle Management Commands and Contractors, as well as work with an OEM’s Business Development, Customer/Product Support and Financial organizations on the commercial side. Giuntini & Company, Inc. has assisted in Product Support for General Dynamics, Lockheed Martin, L-3, Flir, DynCorp, Navistar, BAE Systems, Northrop Grumman, ICx, Oshkosh, Rockwell Collins, Bell Helicopter, US Army, USMC, US Navy, FMC Technologies, DRS and many others. Ron Giuntini Principal, Giuntini & Co. 570.523.0992 ron@giuntinicompany.com www.giuntinicompany.com Giuntini & Company, Inc. 6/6 2010