How do you know you're paying what you should be paying for a state-of-the-art, first-of-its-kind product, particularly if it's being produced in a sole-source environment from a proprietary technical data package?
The Product Manager for Guided Precision Munitions and Mortar Systems (GPM2S) faced this question regarding the M1156 Precision Guidance Kit (PGK). Although the product manager employed traditional cost-estimating techniques to develop and update the program office estimate, whether the government was paying the right price remained uncertain because the unit production price was higher than the initial estimate. To answer this question, the product manager employed a bottom-up technique known as "clean-sheeting" to better understand the cost of the PGK and to identify opportunities for cost savings.
Similar to the engineering cost-estimating method, when you build an estimate of what an item will cost based on the price of the subcomponents plus assembly, clean-sheeting serves as an unbiased, versatile tool to assist with these types of strategic decisions. In many cases, actual product costs aren't clear, and suppliers are rarely comfortable revealing all data associated with their manufacturing processes and costs. A clean-sheet provides a cost estimate that develops an optimal "should cost" or "could cost" by modeling both material-related and non-material-related costs in an optimized manufacturing scenario. The assumptions in the model are based on industry standards, world-class processes and competitive pricing to produce the best possible should-cost potential for the design. The model also compares the should-cost to the current cost to identify cost gaps, which can be seen as opportunities for future reductions.
The goal of clean-sheeting is not to uncover the ultimate truth in numbers, nor to provide all information required for an accurate estimate. Instead, clean-sheeting provides cost transparency to help identify material savings, opportunities and profit, as well as new ideas for design and process improvements, such as a different process flow, manufacturing footprint or production technology.
Picatinny Arsenal, New Jersey, is the home of Product Manager GPM2S, a subordinate organization of the Project Manager for Combat Ammunition Systems (PM CAS) in the Program Executive Office (PEO) for Ammunition. PEO Ammunition is responsible for life-cycle management across all ammunition families with a mission of developing, equipping and sustaining lethal armament and protective systems enabling joint warfighter dominance.
After an initial competition, the PGK program selected one prime contractor, which was later awarded a sole-source production contract. PEO Ammunition selected the PGK program for the clean-sheet process, and the information from the clean-sheet informed the full-rate production decision and acquisition strategy; as an expensive product obtained from a sole source, PGK is a good candidate for the ground-up analysis of clean-sheeting to make sure the government is getting its money's worth.
PGK DETAILS
The PGK is a GPS-based trajectory-correcting system with fuzing functions that provides near-precision capability for 155 mm conventional, high-explosive artillery projectiles. It is screwed into the fuze well of the M795 or M549A1 high-explosive projectiles and fired from the M777A2 Lightweight Towed Howitzer or M109A6 Paladin Self-Propelled Howitzer. The fuze can function in proximity or point-detonating mode, with a demonstrated "circular error probable" of less than 30 meters--which means that when rounds are fired, at least half land within 30 meters of the target (See Figure 3.) The PGK possesses a safety feature that will render the projectile inert if it is not going to hit close to its assigned target.
PGK attained urgent material release in March 2013 and was fielded to limited Army field artillery units shortly thereafter. PGK attained full material release in December 2015 and is currently being fielded to all Army field artillery units.
THE CLEAN-SHEET PROCESS
The first step of the clean-sheet process is to visualize the product manufacturing flow. Then the required raw materials and processes are identified. The third step is to allocate resource costs for material, labor and equipment. Finally, overhead costs are added to the model; these include the indirect resources needed to run plants, the amortization of one-off investments in research and development, equipment and tooling, and the effects of currency exchange and taxes. The more detail included in the model, the more useful it is. This creates more opportunities to improve processes and design and provides compelling leverage when negotiating with suppliers.
Obtaining data to perform a clean-sheet analysis can be challenging. Therefore, a well thought-out strategy must be developed early in the effort to obtain a complete set of parts for analysis, gain visibility into major components, contractor cost and pricing data, and build processes. Nondisclosure agreements will ensure that contractors' confidential and proprietary information is protected. Funding must be allocated if a consultant will be used. Various components of the product also may need to be torn down and analyzed in order to determine raw material and manufacturing processes that contribute to unit cost.
Clean-sheeting is an intense process requiring time, resources and subject-matter expertise. To be successful, the government must build an integrated project team to lead and support the clean-sheet effort. This team must have a dedicated government team lead and, at a minimum, consist of financial analysts, engineers and product subject-matter experts. Partnering with a third-party consultant to provide manufacturing and modeling expertise can be beneficial. Participation by the prime contractor is essential to understanding the design and manufacturing process.
OUTPUT YIELDS INSIGHTS
The clean-sheet provides insight on costs at both the component and final assembly levels. Figure 1 shows a gap between the clean-sheet should-cost price and the current price, as well as the various costs included in the clean-sheet price.
Figure 2, dives deeper into details of the cost gaps. With the knowledge obtained from clean-sheeting, the PM has the insight to make better-informed decisions on the program's acquisition strategy, as well as to develop better positions in future negotiations. In addition, the knowledge gained from the clean-sheet process can be leveraged to identify opportunities to comply with Better Buying Power initiatives--including "achieve affordable programs," "achieve dominant capabilities while controlling life cycle costs" and "eliminate unproductive processes and bureaucracy"--and achieve savings for the government.
CLEAN-SHEETING AS A BEST PRACTICE
The best times to conduct a clean-sheet are in the operations and support phase of the acquisition life cycle, and again during low-rate initial production (LRIP). Unlike the parametric and analogy cost-estimating methods typically used early in development, clean-sheeting is specific to a product's design. (Parametric estimating uses historical information; analogous methods are used to estimate project cost when little detail about the project is available.) As such, clean-sheeting cannot be effectively employed until the product's design and manufacturing processes are stable. Implementing the clean-sheet process during LRIP provides great insight for the full-rate production acquisition strategy, identifying cost-saving initiatives and planning for future negotiations. Ideally, the product manager and prime contractor work together to pursue cost-saving opportunities identified through the clean-sheet process. The product manager should consider contract vehicles that create incentives for the contractor to reduce costs in production, such as a fixed-price-incentive, firm contract that shares savings with the contractor. A clean-sheet review during LRIP enables the government to address potential cost savings as early as possible, once the final product design is established and in production.
Clean-sheeting should be considered a best practice to understand and control costs in production. It would be a mistake, however, to conclude that it can be done repeatedly or effectively without a significant organizational commitment.
It is not a rebranding of the existing cost-estimating techniques. Rather, it is a true bottom-up approach that requires in-depth knowledge not only of the product, but also of world-class manufacturing processes, from raw materials to the end product, along with detailed accounting knowledge to properly understand indirect costs throughout the supply chain. The government has most of the subject-matter expertise to do this analysis in the research and development centers, acquisition centers and PEOs. But bringing this capability together in a coordinated, repeatable way is a significant challenge for a PM.
To conduct an accurate clean-sheet, PEOs must be prepared to maintain a dedicated team that will identify, gather, analyze and review the required data from government and contractor records. This team must have the resources and leadership emphasis to work thoroughly and quickly in support of program milestones. Weekly in-process reviews and frequent updates to organization leadership should be conducted to keep the project on track.
A NEGOTIATING TOOL
One of the benefits clean-sheeting provides the government is that it identifies areas of opportunity for cost-saving initiatives and can be used to develop strategies for future procurements. Clean-sheeting provides insight into the best possible could-cost for a given design, which can serve as a cost target for the government-contractor team to work toward. Another benefit is the ability to modify assumptions within the model and explore the effects of different production scenarios.
Armed with the clean-sheet analysis, Product Manager GPM2S is preparing for the next negotiation with the prime contractor. By sharing the component clean-sheets with the contractor, Product Manager GPM2S is confident that the cost of sub-vendor component parts can be lowered and that the negotiations should yield cost savings. Looking further in the future, PEO Ammunition is discussing whether to continue working with a contractor who specializes in clean-sheeting or bring the capability in house.
CONCLUSION
Upon the completion of a clean-sheet, the government is armed with most of the data required to identify the specific should-cost or could-cost. Although it may not account for all variables, a clean-sheet provides a valuable estimate of the production cost of an item under a specified set of assumptions.
Despite the benefits of clean-sheeting, challenges exist. It is a labor- and time-intensive process, requiring a diverse team of experts with extensive knowledge and resources to conduct the analysis. It also provides an aggressive estimate that initially assumes ideal processes and pricing. For example, initial analysis is based on top-quartile industry standards and market pricing for materials that may not reflect reality or the present state of the situation or program. It assumes mature processes and efficient production volumes, when in reality the processes and teams may be new or inexperienced.
In addition, low production levels and no guarantee of future orders may limit a prime contractor's ability to procure materials in efficient volumes, and not all data required for an accurate clean-sheet is easily accessible or readily available.
Finally, a comprehensive database of manufacturing industry standards is required and needs to be maintained by the clean-sheet contractor, who pulls the information from subscription websites. Most importantly, at the end of the clean-sheet process, it is imperative for the PM and the contractor to analyze and understand the gaps, determine what portion of the gaps can be closed, implement applicable recommended practices and work throughout the supply chain to bring "current cost" closer to "should cost."
For more information, contact Maj. Kenneth B. Fowler at Kenneth.b.fowler4mil@mail.mil.
This article was originally published in the April - June 2016 issue of Army AL&T magazine.
Related Links:
U.S. Army Acquisition Support Center
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