Product Support Financial Value Drivers. 6/10 – Volatility of Product Technology

Nov 04
2012

This post is the sixth of ten entries that will discuss product support financial value drivers for solutions supplied by a commercial or military focused capital good Product Support Enterprise [PSE]. The 10 topics that will be discussed are the following:

  1. # of products employed by end-users
  2. End-user product utilization rate
  3. Product failure
  4. Environment in which end users engage the product
  5. Preventive maintenance processes employed
  6. Volatility of product technology
  7. Regulatory requirements
  8. Chronological age of the product installed base
  9. Life cycle stage of the product
  10. Manufacturer’s warranty coverage

Product Support Financial Value Drivers

The current business model for OEMs is to seek a problem being encountered by an organization and to configure a hardware/software solution that affordably and effectively addresses a resolution to the problem. For example, a warfighter requires, within a 6-month period, a communication system that can access satellite transmissions on-the-move for a period of 20 years. The OEM awarded the contract chooses to employ a suite of bleeding-edge Commercial Off The Shelf [COTS] items and integrates all the pieces into a Design-To-Order solution. Great; the warfighter gets their solution quickly and the OEM can “call it a day.” But now comes the fun part. The Product Support Strategy [PSS] for this COTS-based solution must employ a process that modifies the configuration of the solution based upon future Diminishing Manufacturing Sources Material Shortages [DMSMS] challenges; what is currently bleeding-edge, will most probably have a cold commercial supply chain within 3-4 years.

Understanding how the source-of-design impacts Total Ownership Cost [TOC] is often not fully understood. An OEM’s employment of COTS items enables access to a hot supply chain in which development costs have been amortized by the manufacturer; item acquisition costs can often be 30-50% less than that of a developmental item with the same capabilities. Also note that the reliability of a COTS item can be 3-4 fold higher than that of a developmental item. All-in-all the production costs of a COTS-centric solution is financially attractive, but Product Support life cycle costs can be significant enough to offset the production savings.

For example, if a COTS item is to be modified, due to DMSMS issues every 4 years and there is a planned 20 year product life, that indicates that 4 to 5 modifications will have be performed during the period that the solution is in inventory. Note that upon the insertion of these modifications, capabilities enhancements may occur, but that is strictly a by-product of the activity.

From personal financial analytics experience working on many systems, I have in almost all situations observed that DMSMS-driven modification costs can constitute the number one or two ranked Product Support cost driver. Remember that Product Support constitutes a plurality of TOC, thus modifications to COTS-centric solutions are often within the top ten cost drivers of TOC.

Product Support Financial Value Drivers

Other issues to be considered that will impact financial performance due to technology volatility, is how the modification process will be performed. There are several alternatives (this is not an all inclusive listing), each with their own cost drivers:

  • Block-mod in which all end-items are inducted into the modification process at a depot within a short period of time
  • Block-mod in which all end-items are inducted into the modification process in the field via an exchange program, within a short period of time
  • Modify-as-failed in which reparable items, when inducted in a repair process, will also be modified
  • Modify-bundled-with-other in which an end-item when inducted into a process such as reset, overhaul or other end-item process, the modification will be employed when the end-item has been disassembled; logic is that as long as the end-item is apart, there is no additional labor required for installing the modification.

Each of the above impacts technician labor costs to remove and replace, transportation costs, facility costs, indirect personnel costs and many other costs. Also note that each alternative will impact Materiel Availability [Am].

Any financial analytics of the Product Support life cycle must include a rigorous review of modification expenditures regardless of the “color of money.” Technology volatility provides many challenges, but with insightful life cycle planning unfavorable performance risks can be mitigated.

Hypatia©, a Giuntini & Company financial software tool, provides a highly automated means of calculating the above and other product support financial value drivers, as well as an effortless way of being able to change any utilization assumption and immediately understand its impact upon total ownership costs. Hypatia is also a proven, trusted and highly effective tool for assisting in the development of product support business case analysis.

The “Miracle” of COTS Products

Jul 09
2010

The Department Of Defense and its research organizations have always been touted as working on the “bleeding edge” of a multiple array of technologies. This is often true, leading to more effective (i.e. lethal) mission capabilities, but rarely are these initiatives more efficient (i.e. cost per outcome) in completing a mission.  See Undersecretary Carter’s comments regarding this issue here.

When we move to the COTS product world, the employment of COTS products in the processes of everyday life has resulted in both improvements in effectiveness and efficiency. In a recent article in the Journal of the American Enterprise Institute,  a striking comparison of what could be purchased in 1964 and today with the same purchasing power (price as a % of average salary) was illustrated below based upon an average one month salary.

1964:
 A moderately priced Radio Shack stereo system.

2010:
Panasonic Home Theater System, Insignia 50″ Plasma HDTV, Apple 8GB iPod Touch, Sony 3D Blu-ray Disc Player, Sony 300-CD Changer, Garmin Portable GPS, Sony 14.1-Megapixel Digital Camera, Dell Inspiron Laptop Computer, TiVo High-Definition Digital Video Recorder.

Also note that a personal computer in 1978, the Radio Shack Model 1, with 4K of RAM, a tape recorder as a data storage device, a green screen and little application software cost $600, or equivalent to about $3,000 today.

The above are stunning testimonials as to the value of COTS products and the inevitable greater and greater employment by DoD. Though our enemies have the same access to COTS products, it is the Acquisition corps that has to use their prowess at COTS product integration in developing solutions for the Warfighter. The US is second to none when it comes to integration and our enemies will never be able to duplicate our COTS products integration efforts resulting in our remaining the most efficient and effective military force of all time .

The COTS Wagon Keeps On Rolling…But Is Anyone Watching?

Jul 02
2010

It is inevitable that the Services Acquisition Commands continue to focus on employing COTS products in the design of their new weapons systems and key infrastructure; this is aligned with the focus of Secretary Gates and Undersecretary Carter to reduce costs, but retain the military’s effectiveness.

Below are two recent acquisition initiatives at employing COTS products. I know of no DoD study that annually measuring the COTS content of new weapon systems…if there is none, one should be started.

1. The U.S. Navy’s Space and Naval Warfare Systems Command (SPAWAR) is placing orders under the Common Afloat Local Area Network Infrastructure (CALI). Under the CALI contracts, contractors will provide ships and submarines with Common Computing Environment (CCE) Components, Integrated Logistics Support (ILS), Configuration Management (CM), Test and Evaluation (T&E), Quality Assurance (QA), and Installation Support. Each contractor will deliver a secure, commercial-off-the-shelf (COTS) hardware, software and networking equipment. Each CALI contract has a total potential value of $502 million if all options are exercised. 

2. The Air Force is working on the Common Large Area Display Set (CLADS) acquisition program to replace aging CRTs in the Airborne Warning   And Control System (AWACS) aircraft with one of three flat-screen technologies: active matrix LCD (AMLCD), gas plasma, or a digital micro-mirror device. “The heart and soul of this is COTS, with some heavy ruggedization to operate under depressurization. The prices we`re seeing coming in the door are a third of what the old technology stuff now costs,” Bill Sirmon, a civilian contract negotiator at the Warner Robins Air Logistics Center at Robins Air Force Base, Ga. Aboard the AWACS now are CRTs that operate for about 300 hours between failures; the new products are planned to increase that operating time to 3,000 to 5,000 hours between failures.

Will the DoD Ever Manage Parts More Efficiently?

Jun 27
2010

The estimated current inventory investment by DoD for the organizational level parts employed during the Product Support processes of correct/prevent unplanned weapon system failure is $40 billion. An estimated 35%-50% of this investment is materially excess or obsolete (will never be used). Another issue is that the financial accounting accuracy of these parts would never meet the “smell test” by any private sector auditing firm; people would go to jail for this type of accounting…but that is another story.

GAO has had many studies dealing with the efficiency and effectiveness of the management of parts by the Services; none have been very flattering: Study 1, Study 2, Study 3

DoD accountants are not “bad people;” they do the best with the procedures provided to them. The real issue is that DoD, nor the Federal Government, develops a balance sheet that has any merit; politicians like it that way because accountability for “mistakes” can often be hidden from view…nothing better for a politician than to be opaque!

As more and more parts are COTS, and CLS, coupled with PBL/Outcome-Based Product Support constructs become more common, some of these inventory investment issues will become less glaring.

The Illegal COTS E-Waste Trade

Jun 15
2010

As DoD employs more COTS electronic components, it will face challenges in the future to dispose of these components when performing technology refresh processes. Assuring where these obsolete components find their final resting place will become an important activity for Product Support management, be it the PM Office, the Life Cycle management Command (LCMC) or contractors. There is currently an effort by the US Government and INTERPOL’s Global E-Waste Crime Group, to track these obsolete products to ensure that they are disposed of properly. Criminal organizations are involved in diverting these products and dumping them into illegal waste sites in underdeveloped nations at a fraction of the cost of disposing of them in a developed nation. End Of Life (EOL) management will require serial number tracking and an audit trail all the way to the final disposal process to mitigate the risk of these obsolete products taking a wrong turn and harming the environment, as well as posing dangers to the workers illegally handling these materials.

US Second-To-None For Product Support Prowess

Jun 14
2010

Americans have been bombarded by the Main Stream Media (MSM) touting the demise of US manufacturing base, and in turn the demise of the demand for the resources (parts, maintainers, tech support, and others) employed during the processes of the Product Support stage of the lifecycle of a capital good….but the MSM is a foolish bunch that is clueless regarding our true manufacturing might, and in turn our true Product Support prowess which is second-to-none in the world and will remain so for the foreseeable future.

Here are some facts about the US manufacturing sector from a recent article from Barrons:

“The U.S. economy is the largest and most productive on the planet. With just 4.6% of the global population, the U.S. accounts for roughly one-quarter of global output, generating more output in a year than the next three largest economies (Japan, China and Germany) combined. America’s economy is three times the size of China’s; the per capita income of China is only about 10% of that of the U.S.

The United States is a manufacturing superpower; we’re still in the business of making stuff, despite incessant reports to the contrary. We shouldn’t equate the demise of Detroit with the death of U.S. manufacturing. The U.S. makes more goods in a year than any other country, although America’s share of global manufacturing output was roughly 17.5% in 2008, down from 22.4% in 1990 and about 20.5% in 1980.

Many U.S. manufacturers have held their own the past few decades, even in the face of stiff competition from Japan, Germany and China. China’s share of global manufacturing has increased sharply over the past decades, hitting 17.2% in 2008, close to the U.S. number. However, the Chinese figure includes mining and quarrying, and electricity, gas, and water supply, in addition to manufacturing, and most of China’s gains came at the expense of Japan, South Korea, Mexico and others — not the U.S.

The largest exporter in the world is neither Germany nor China. It’s the U.S., despite annual trade deficits and all the chatter about U.S. companies not making anything the world wants to buy.”

Giuntini & Co. Featured Content on IDGA

Jun 09
2010

Ron Giuntini’s latest industry-shaping white paper, ‘The 20 Elements of an Outcome-Based Product Support Business Model for the Military Sector’ is the current ‘featured content’ on IDGA.org. Check it out to learn about the 20 mandatory points that the DoD requires every model to include. Visit the IDGA at www.idga.org.

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Jun 09
2010

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Counterfeit COTS Parts

Jun 07
2010

With the advent of the increased employment of COTS parts in weapon systems, counterfeit commercial parts infiltrating its supply chain has become a concern for the US military community of Defense contractors, LCMCs, DLA and others. OEMs have historically struggled with the counterfeit issue due to IP concerns and its impact upon losing market share to the suppliers of counterfeit parts. For the military, the primary concern is its impact upon warfighter safety during a mission due to quality issues of the counterfeit part, as well as reliability issues resulting in decreased system availability due to higher failure rates of the counterfeit part. 

DoD is attempting to address the above issues through its Industrial Base Office. Thoughts?

http://www.bis.doc.gov/defenseindustrialbaseprograms/osies/defmarketresearchrpts/final_counterfeit_electronics_report.pdf

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