Buying Smarter Saves the Pentagon Money
Anyone who shops at a warehouse store, which is just about everyone, understands that buying in bulk saves money. The same is true for two-for-one sales common at discount stores and in television commercials. It’s simple economics. Because a company covers its fixed costs with the first quantities offered for sale, it is willing to offer a discount for larger purchases. These deals also allow the producer to run production lines at an efficient rate and to get discounts from suppliers by offering larger sales opportunities.
The same is true in defense economics. Buying aircraft, ships, and vehicles in a group or “block” allows for multiple sources of savings. Long lead items and expensive components can be purchased in economical quantities. The supply chain can be managed to ensure the optimum flow of materials and parts. Price breaks can be negotiated from suppliers because they see a long-term steady demand for their products.
Building a number of platforms over a predictable period of time also allows the workforce to move down the learning curve, improving output and reducing mistakes. Companies are able to justify investing in equipment and training to reduce costs when they see the prospects for long-term returns on their expenditures. In addition, with a block buy, the platform’s design is frozen, thereby limiting potentially costly engineering changes.
The most recent example of the power of buying in large numbers over a set period of time is the F-35 Joint Strike Fighter (JSF). According to multiple news sources, Lockheed Martin and the Department of Defense are in the final stages of negotiating a huge multi-year contract to buy some 440 JSFs for the U.S. military and 11 foreign countries.
Because of the advantages associated with this type of contract, the cost for each F-35 is expected to decline, and the savings will be passed on to customers. As a result, the average price for the F-35A, the model being acquired by the U.S. Air Force and most foreign customers, is projected to decline to $85 million each. The last annual contract for the F-35A saw the price dip below $100 million for the first time. The $85 million figure, approximately 15 percent below the prior unit price, is a significant reduction in price and clearly demonstrates the power of buying in a large block.
The Navy has long used the techniques of acquiring submarines, ships, and even aircraft in blocks or through multi-year procurements, as ways of saving money. The block buy approach has been raised to a fine art in the Virginia-class attack submarine (SSN) program. Together with the Navy, the two companies that build the submarine, General Dynamics and Huntington Ingalls Industries, squeezed thousands of man hours out of production, lowered the cost by $400 million per boat and shaved six months off the delivery schedule. The program has been so successful at reducing costs that the Navy is now able to buy two per year for about the same amount of money.
The Navy also employs block buys and multi-year procurements for several classes of warships. It used the block buy approach for the procurement of the Littoral Combat Ship. It contracted with Lockheed Martin and Austal USA to buy both variants of the ship in groups of ten ships each. It took a similar approach with the Arleigh Burke-class Destroyer through a multi-year procurement. After restarting production of the Arleigh Burkes, the Navy initiated a 10 ship multi-year procurement in 2013, splitting the award between Huntington Ingalls Industries and General Dynamics. Now the Navy plans to do another multi-year procurement, this time for the advanced Flight III variant of the destroyer.
One procurement program that could benefit from a block buy is the Ford-Class nuclear-powered aircraft carrier (CVN). Today, the Navy buys aircraft carriers one at a time on a five-year cycle. It actually takes between eight and 11 years to complete one aircraft carrier and deliver it to the Navy. The Navy would like to contract for two aircraft carriers. The nation’s only builder of these massive vessels, Huntington Ingalls, believes that if the Navy were to contract for three CVNs at a time, the overall price could be cut by approximately $1.5 billion. In addition, the time for the production of each ship would be reduced by two years.
Given the Navy’s prior experience with contracting for a variety of ships, submarines and aircraft using a block buy approach, it is reasonable to believe that employing this method for the Ford-Class CVNs would reduce both costs and time. One reason for this is the significant number of very large and complex systems on the new CVNs such as the nuclear reactors, advanced radar, and electromagnetic launcher. Each of these takes years to build. A block buy of three CVNs would allow not only Huntington Ingalls but also the companies that produce major systems to operate more efficiently and give the government a lower price.
It seems increasingly likely that the Pentagon will not receive the hoped-for budget windfall many expected to see with the election of President Donald Trump. Consequently, means must be found to reduce the price of defense goods and services. Block buys and multi-year procurements are proven ways of saving the Pentagon billions of dollars.
Daniel Gouré, Ph.D., is a vice president at the public-policy research think tank Lexington Institute. Goure has a background in the public sector and U.S. federal government, most recently serving as a member of the 2001 Department of Defense Transition Team.