'~ !*~PYUSING

COMMERCIAL PRACTICES

DTIC IN DOD ACQUISITION

A ELECTEfl A PAGE FROM INDUSTRY'S PLAYBOOK

UPR 191990 

DECEMBER 1989

AD-A220 958

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" "-- REPORT OF THE DEFENSE SYSTEMS MANAGEMENT COLLEGE

1988-89 MILITARY RESEARCH FELLOWS
USING COMMERCIAL PRACTICES

IN DOD ACQUISITION:

A PAGE FROM INDUSTRY'S

PLAYBOOK

Report of the Defense Systems Management College

1988-89 Military Research Fellows

Lieutenant Colonel Bruce D. Sweeny, USA

Commander Charles A. Perkins, USN, SC

Lieutenant Colonel Alan C. Spencer, USAF

December 1989
Views, findings and opinions in this Report are the authors

and should not be construed as official Department of

Defense positions, policies or decisions unless so identified.
PREFACE

"Instead of concentrating on the things that are being done wrong and trying to fix them

with more laws, more regulations, more inspectors, DOD should concentrate on those things

that are done right and use them as models."

(Packard Commission Report, p. 42.)

This report represents the efforts of the first group of military Research Fellows at the Defense Systems

Management College. The 11-month senior Service, college-level fellowship included 3 months at Harvard

Business School's Program for Management Development. Commercial practice was selected as the

research topic area to capitalize on: 1) the apparent interest in having the Department of Defense (DOD)

"do business like business"; 2) contacts and knowledge gained at Harvard; and 3) the strong, functionally diverse DOD acquisition backgrounds of the authors.

This volume is the full zeuearýh reppt which includes the commercial case studies documented during

industr, site visits and the Mobile Subscriber Equipment (MSE) U.S. Army acquisition case study.

A Summary Findings and Recommendations volume has been completed and provided to senior DOD

acquisition leaders.

r . '- Acce''or; For

-" NTIS C..&'l

DrIC ~A8j U i:.J, iu':i:.d QS'IA'fL- LJ f "A" per Bob Ball, -

DSl1C/DSI1C-DRI-P, Ft. Belvoir, VA

22060-5426 By

TELECON 4/18/90 VG

D 0t,.' . 1

I , v, or

A-1I
EXECUTIVE SUMMARY

INTRODUCTION

Using commercial business practices, or "doing (DSB) noted the potential advantages of adopting

business like business," is a recurring theme of the commercial practices in the Department of

defcnse reform debate. The 1972 Commission on Defense and, in broad terms, identified some of

Government Procurement called for the "busi- those practices,

nesslike" operation of federal procurement. The Despite the potential advantages that commercial

1984 Grace Commission sought to apply "private practices offer, however, DOD has yet to implesector management tenets" across the entire ment them on a widespread basis. The exhibit

federal government. More recently, the Packard below shows basic reasons for delay.

Commission and the 1986 Defense Science Board

EXHIBIT 1.

INSTITUTIONAL IMPEDIMENTS TO

THE GOVERNMENT

USING COMMERCIAL PRACTICES

-Contusion over specifically what they are

-Sheer size of public sector

-inherent differences between the public and

private sector

PRIVATE SECTOR PUBLIC SECTOR

Single Constituency: Multiple Constituencies:

"Shareholders. ''Stakeholders"

Singular Focus: Mixed Focus:

"Efficiency" "Efficiency" & "Equity"

Clear Measure No Clear Measure

of Success: of Success.

"Bottom Line"
Some say these differences between the public and Principal methods of investigation were literature

private sectors are so profound that government review and personal interviews. Using facilities

can never "do business like business." Others, afforded by the Defense Systems Management

notably the Packard Commission and the DSB, College (DSMC) and Harvard University, extenrecognize these differences but feel DOD can still sive readings were conducted of topics under the

benefit from lessons of the commercial sector. general heading of good business practice. The

Believing this, we investigated commercial prac- research model we developed as the framework

tices for opportuinities to improve the acquisition for our investigations is shown below.

process in DOD.

EXHIBIT 2.

RESEARCH MODEL

THE UNIVERSE

cqChMIPCAL INDOUSTRY ~ 000

PWAcnc's NW CASES POLICIES

*CLEAR COMMANO CHANNIELS PACKANO ION* SYSTEMS ENO"496PIRSO

S TAS&,1'Y REtIM~S/LOGISTICS MQMT cum *LIMINT90OE"W ~RTEOWAKS /ou

*SMALLH.OMN-O4UuLAY &TAFF$ PROCtS,

COMMUNICATIONS WvrTm u, CONTRACTING MO p00OTOTYvING AND IESTSIO Z ACOMJITOWN PROCUCTIO WMOM? FUNCTIONJY ON FUJNCTIONLM(KM RORM"TS Os. 1#06*

SLECTIEO bO*.ESS-womCN"E

* 5EST VALOE SELECTION VS LOWEST COST 0

526LIFID CONRACT FOM WOAVED

UNDFO00 COCERCtAI COOKSC

*SCtW-ULE 11"IASIS. RESOURFCEs TO HMOL 10COST PFAOOAAM MAKAGERA AUTHORITTY * SIIOULS TArGETS FOR

*OiJIC RESPONSE TO PtLD ESPOWENCE ______ UT( TD

O MAILY PW~uC[O OOCIJMEMTAt" ION112,D

*SMALL SOURC SELECTIO14 TEAMSESUE OF [UCS .PROGAM STASIUTIF

SINPLIER XGLATINSM4PS

FtEaULAT1000

vi
Target commercial practices were investigated for appendices. In addition, we developed a case

clearly successful applications and techniques study to document the experience of one of the

which can be implemented within the authority Defense Enterprise Programs, the Army's Mobile

of the Secretary of Defense, and would have high Subscriber Equipment, because it utilized substanpayoff if established in policy, communicated, im- tial commercial-like acquisition pra.tices.

plemented, and carried into general practice by Case studies were also extracted from the 1985

DOD and the Services. Our selected target prac- DSB Summer Study on Practical Functional Pertices are: 1) program stability (aspects other than formance Requirements. These provided addifunding which remains largely in the domain of tional opportunities to investigate commercial

the Congress), 2) quality sourcing, 3) supplier rela- programs of similar scope and are identified in

tionships, and 4) regulation. Our investigation Figure 3.

drew heavily on our interviews with industry

representatives of the firms identified in Figure 1. FIGURE 3. 1985 DSB

COMMERCIAL

FIGURE 1. RESEARCH CONTACTS CASE STUDIES • Scope

WITH INDUSTRY Case# A B C 0 E

WESTINGHOUSE * 0 GENERAL ELECTRIC •

* GTE - aDOW CHEMICAL • Co. AT&T Boeing SBS IBM MITRE

* TEKTRONIX • PUBLIC SERVICE GAS*

EASTMAN KOQAK * SECTON DICKINSON• Prog. EES-4 767 Comm 360 FAA NatI

ROCKWELL * PACIFIC BELL . Sit A a t Com puter Airat'l

VALENTEC BOEING. Switch Aircraft Savile Computer Airep Sys

MARTIN MARIETTA • - UNITED TECHNOLOGIES •

DIGITAL - GEHL All cases were new product development.

GENERAL DYNAMICS * AT&T

BRITISH AIRWAYS • HP • Time 8 yr$ 4 yrs 34 moe 3 yr. Unk

Interviews; * Commerackl Clae; a DoD Case Funding was not identified In cases by D05.

We developed seven commercial case studies corn- In our findings, specific techniques for managing

prising twelve successful, major, new product and successful major commercial programs are idencapital plant/equipment programs by commercial tified and attributed to these cases. These findings

business entities; the scope of these is shown in and suggested improvements are related to the

Figure 2; the full case studies are provided in the target practices we investigated via Figure 4.

FIGURE 4. RELATIONSHIP OF

FIGURE 2. COMMERCIAL CASE STUDY FOCUS TO FINDINGS

STUDIES DEVELOPED AND RECOMMENDATIONS

Scope Caeof 1 2 3 4 6 S 7 sIuvy F OCU SFINOINGS R eCOMM INOAgO

Co UTC HP Dow Tektronix 0E PaClell BOIS To oo.p,- "I NN0 .Oneett C.111' 0618 @1 p Mel I, • *bl* @1 MS t

Ogwlall.. te~eto e e| Mil l..

PNoj PW4000 Several Sevoral SeawriI S.e*ral Adv FAC- e01i,,tt or IeFanaed uO

Engine D1911 Star Plot-* •icolilly 9.0~ PMIPSOISAR Ntwk * LI" Iwntioltil - I O 60411r WO'e "alt aothorlly avow ft"I 5 tom1

New P,,od. Prod & Plants plant Pit Pilts Prod. Prodv .oltyI so PM/PIO

Plante .............................................. .. .. Q.wlty - 6* I 1V0ti0 l.*ll 111 V. 0•4 

Ouldly I Ir•O "Ut~s .rl~l.b p..osl

Time 4.5yro i-Iiyts Iemoo 1-?yre 3yrg 27mos 18mos . . ...... 6ilAob .0zaoopta

............................. ................

Funds .113 ,1600m 960oM 8ioO•V '1`00M Not "101M molollogo0lo 90.s0tltile oVooreli

teo) Roeleasd "-o

t.g. ii... . .. . .. . . U. .. . .. .lnSed .. ..... .. m•;;,; & 0.. .... P461 0io, ~mn-A04t, ^4I••U•I¢ M11,11111.0

viiC to *tBoy.

not t0 cenirwit

vii
FINDINGS tional departments (e.g., vice presidents of

There are no "gee-whiz" answers! marketing, engineering, manufacturing) and staff

We observed little in the commercial acquisition directorat(.s were responsible for providing

environment new or different from what has resources (the right people and technology) and

always been known as good management prac- assisting the program/project manager (PM) to

tice. Correspondingly, little has not been solve problems; they were not involved with proassociated with DOD policy, identified as a prob- gram oversight and direction.

lem by the Department in the past, or is not be- Finding 3. Program managers are afforded signifiing tried someplace in DUD. Many good ideas cant authority and resource control, and are held

proposed by the Packard Commission and the personally accountable.

Defense Science Board must overcome tremen- Program management authority was assigned to

dous organizational inertia. As a direct result, a clearly-visible acquisition line manager whose

many good business practices, though employed title may be program manager (PM), vice presisomewhere in DOD, are not used widely. The dent (VP) or general manager (GM), but this

Department is like a supertanker--superb at ac- authority was not shared with functional manacomplishing its primary mission but sluggish in gers. Acquisition line managers generally are "capchanging course. tains of their ships," held responsible and accountFinding 1. Active involvement of top corporate able for the success of the project but given the

m sis essential to program succes. authority to make timely decisions and control

managers icritical resources (especially participating

Successful major systems programs in• the com- personnel).

mercial acquisition environment are the product pesonnl)a

of unequivocal top-management approval and Successful commercial programs also depend on

support. In projects reflecting the strategic em- focused decision-making up the line; PMs of maphasib of the company, there is clear linkage to jor systems have and use direct access to top

organization business strategy and direct involve- management to keep the CEO, or surrogate, inment of the Chief Executive Officer (CEO). In- formed and to resolve problems beyond the volvement does not mean micromanagement, but capability of the PM. Senior functional officers

does mean adareness of the project's currnt (e.g., VPs of marketing, engineering, manufac- status, active questioning, and willingness to corn- turing, etc.) are charged with providing support mit organization resources to resolve problems. to line management but not direction of lower- line program management. They provide exTop management leads (e.g., promotes within) perienced, professional personnel to give the PM

selected programs by: 1) communicating the vi- every opportunity to get it done right the first

sion, 2) reviewing programs often, and 3) solv- time.

ing problems beyond the control of lower-line

managers. Once a decision is made to enter Finding 4. Scheduleis first among cost, schedule

engineering development, the CEO commits to

seeing it through. Without exception, we found that schedule was

the driving motivation, thus, the first priority in

Finding 2. Commitment to program success the commercial acquisition environment, once a

crosses organization lines, program is approved for development and/or imIn each company visited, there was a real plementation. This practice is primarily market

organization commitment to the success of ma- driven due to implications of late entry on longjor programs. The commercial marketplace term market share and need to recover investment

severely penalizes companies which do not bring and overhead costs quickly.

new products on line once major resources have Performance features are the next priority. Sufbeen committed (typically, entry into full-scale ficient performance (mission capability, supportor detail engineering). The functional staffs, ability, life-cycle costs and unit costs, etc.) is enoperational and program managers, exhibited sured. But, stretch goals were used, with conshared goals and direction. Managers of func- tingency developments to facilitate trade-offs

viii
should the schedule be jeopardized or develop- FIGURE 5.

ment costs become excessive. Preplanned prod- Competition Cooperation

uct improvement, or evolutionary development,

was the standard approach to pick up desired -1 ri.

technology or features not available at planned FR R sont Pme Mon COOPCRATIVEvtUIws

schedule cutoff points. ,,h a LP 5UPt1 a.,

Funding is the business tool to achieve on-time rAS-LtENOT to coM-W-AT- & MUTUAL

program completion. In all cases a 10 percent buf- m•axrm,, SHORT-TtRM WOWA tO mazimas

fer was provided to the PM or his first-line general * P" G O's

manager to use to stay on schedule and solve

unexpected technical problems.

Finding 5. Price is but one element in the purchase the trend. Dr. W. Edwards Deming, of TQM

decision. fame, says that best value can be realized only

through long-term, sole-source supplier relation- Ownership cost and dependable quality were ships. Similarly. JIT often drives companies

dominant variables in commercial buying deci- toward sole-source arrangements with suppliers.

sions. Purchase price would be traded off for ---

desirable features, uniformity and dependability Commercial companies do not use sole-source on

in required products. Firms tended to have a a wholesale basis. Rather, they apply business

strong technical (engineering) background in the judgment to each situation, forming partnerships

purchase department so they knew the market- with a few suppliers for most items, but reservplace and could understand requirements. ing sole-source arrangements for items of particular importance. Department of Defense con- Companies prefer dealing with a few suppliers, tractors stop short of effective partnering with -

They do not abandon competition, but recognize suppliers, seemingly because they perceive DOD

its limits. Practices like Just-in-Time (JIT) and desires full and open competition in

Material Requirements Planning (MRP) depend subcontracting.

on reliable deliveries of uniform quality from suppliers. Quality is becoming a total company com- Finding 7. Companies adopt uniform adminismitment with access and input to data base in- trative systems.

formation being made available to more organizations in the company. Firms are developing We visited firms doing defense and commercial

systems to factor past performance into their business. Generally, these companies segregated

source-selection decisions and are communicating their business units so commercial and defense

these systems to their suppliers. business was not colocated or comanaged. In cases

where the firm was producing a defense item and

Finding 6. Companies are adopting cooperative a commercial item on the same flour, they

relationships with their suppliers, adopted the defense approach to sourcing, inspecThere is a trend for companies to adopt tion and quality control for all items on the floor.

cooperative relationships with suppliers, away The cost of managing two systems was deemed

from the traditional, competitive way of doing too expensive and confusing to the work force.

business. This new relationship goes by many We found also that relaxing a standard for a given

names (partnering, strategic alliances, co-makers, contract was, in many ways. ineffective. Generalvalue-added partnerships, etc.), but the central ly, if the company had other defense contracts,

elements are common: long-term arrangements it imposed the defense standard requirement on

with a small number of high-quality suppliers; itself so it would not lose certification of its prorelationships characterized by mutual dependence cess. This has a significant policy implication

and open communications. because we may consider waiving certain requireEvery company we visited was using partnering ments for a good contractor expecting cost sayto some degree. Programs like Total Quality ings to be applied to the contract. But, this may

Management (TQM) and Just-in-Time (JIT) fuel not be the case if the contractor has other governix-
ment business which will not be affected or may The Department recently underwent a major acwish to compete for other business for which the quisition reorganization in response to the

waiver or the requirement may not be granted. Packard Commission recommendations. ThereIMPROVEMENTS, INHIBITORS AND fore, we do not attempt to deal with organizaIMPLEMENTATION tion issues but, instead, concentrate on people and

process management issues. Nor, do we propose Our recommendations are similar to those any manpower adjustments. We do sense strongly previous studies; therefore, it is reasonable to ask that most acquisitions professionals can be more

why they have not already been implemented. We effective and the acquisition process more efficient

realize that overcoming irstitutional inertia is a if these commercial management techniques are

major impediment to successful application of institutionalized in DOD.

good ideas across a huge bureaucracy. In this section, we acknowledge certain environmental con- Table 1 identifies specifl_ improvements in acstraints inhibiting ready adoption of our recom- quisition practice, principle environmental inmendations and suggest some implementing steps hibitors and suggested implementing approaches.

we feel can begin overcoming the inertia.

TABLE 1

SUGGESTED

IMPROVEMENTS INHIBITORS IMPLEMENTATION

1. Establish at MS II (MS Ill Institutional willingness to Revise DODD 5000.45

for NDI programs) the relative trade time for added funding or policy/principles.

priorities of program cost, performance.

schedule and performance in the Educate decision-makers and staff

baselines. Historical failure to meet advisors on costs of requiring

schedule objectives promotes perfection and benefits of

-Give the PM/'PEO flexibility excessive requirements. practical trade-offs,

and authority to make trade-offs

within baseline constraints. Institutional aversion to Relates to Recommendations 2-6

budgeting for risk and below.

-Ensure there is maneuver contingency.

room between stretch goals and

practical minimum requirements, Program development and

production phases far exceed

tenure of decision-makers; thus,

decisions are reconsidered by

later decision-makers.

2. Subordinate PPBS funding Institutional aversion to Revise DODD 5000.1, para E.3.

decisions to approved program reducing flexibility in future and flow-down to other

baselines at MS 11 and beyond. budgets. directives/instructions.

-Recognize approval at MS 11 Lack of clear linkage between Build up the number of DEP

as conimitment for life-cycle, essential programs and military programs with milestone

strategy objectives, authorizations.

Tendency of senior military and

civilian leadership to act as

"judges" of programs instead of

ma•agcrs of the system.

X
TABLE 1 (CONTINUED)

SUGGESTELD

IMPRO'v EMENTS INHIBITORS IMPLEMENTATION

--. Reduce the number and level Institutional tendency to Revise DODD 5000.1, para D.3.

cf program decision rnil"-d[ones. overcontrol actions of and flow-down to other

subordinate layers. directives. instructions.

-Only MS 11 need be a DABlevel decision Institutional tendency for

continuous management by

committee.

4. Empower designated system Institutional tendency for Relates to Recommendations 1, 3, 5-6.

acqu~sition managers (i.e.. PM, functional specialists to appeal

PEG and SAE) to make program to staff advocates rather than

decisions within approved compromise in the best interest

baselne constraints without of program as a whole.

interterence trom functi_,nal

statt advo(.ates at higher Lack of sufficient functional

organization.z! levels. expertise in direct support of P-Ns

and PEOs.

5 Strengthen the professional Institutional tendency to Strengthen DODD 5000.52 to

funwional support to program regulate and check vs. make include central career management

managers and reduce the long-term systemic for all functional specialists.

dependency on staff functional improvernen's. oversight et program execution. Historical lack of institutional Discontinue use of DAB

motivators for functional acquisition committees and

-Change tocus of functional speciaiists to remain at S,:rict equivalents to "prepart_

staff managers from involvment operational levels of programs for MS decisions.

in programs to professional organization.

development of acquisition

specialists

6. Ensure that matrixed. Myth that matrix management See Recommendations 1, 4-5.

functional, program support of programs can be effective on a

personnel are dedicated to part-time, indirect consulting Ensure PMs have rating and reward

programs through organizational basis, control over assigned functional

alignment and incentives, specialists.

Lack of institutional trust in

-To the maximum degree PM! PEOs to consider functional Make functional matrix managers

possible, matrixed personnel input which may compromise responsible for oigoing execution

shtuld work full time and be cost, schedule or mission of system introduced in

rated by the PM. performance. Recommendation 5.

Institutional attitude that PMs

should compete against each other

for resources.

7. Develop an on-line Information is not currently Utng the DLA system as a base.

contractor performance history collected or maintained in a link aii DOD contracting officers

file which is available to the DOD-wide system accessible and major ACOs with a data

contracting officer- to the contracting officer. network.

System of evaluation must be

objective and open to review.

Service and agency difference in

the approach to performance

monitoring.

xi
TABLE 1 (CONTINUED)

SUGGES rED

IMPROVEMENTS INHIBITORS IMPLEMENTATION

8. Estabhsh the variable Complicates the source selection Select 25 developmental or

spec;•tcaticon method ot source process for non-systems upgrade contracts as a pilot

selection. procurements, test.

Dependent on good specification

definition with levels of

acceptability.

While no legal or regulatory

restriction, it will be difficult

to overcome institutional

emphasis on acquisition price.

9. Adopt, communicate and Defense contractors react to Adopt, communicate and enforce

enforce a policy of complete what they perceive to be DOD's the policy.

neutrality with regard to desire for full and open

subcontract competition, competition in subcontracting.

including a cessation of data

gathering. This severely restricts effective

partnenng with suppliers and

inhibits full application of TQM

and JIT implementation.

10. Use the contractor's cost DOD's cost reporting system has For all contracts which are not

accounting system and eliminate bccome paper bound, Firm Fixed Pi.ce, use the

any duplicat,, reporting methods. contractors data system for Cost

The current CSCS systen :an schedule and control information.

provide infarmation important This information should be the

to managing a program. same as that which is fed into

the company's financial reports.

The regulatory dilemma, companies

decry the cost of regulation

while exploiting the advantage of

"knowing the system."

11. Waivers of policy and Waivers on individual contracts Disapprove any deviation or

reporting requirements should be are considered ways of bypassing waiver which is not company-wide.

granted for an entire commercial costly elements of standard

activity for an extended period systems.

of time, not on a contrac,1-bycontract basis. Difficulty of startup

implementation and determining

how to react to poor performance

on a single contract.

Contractors performing on

mjtiple government contracts

adopt the standard.

xii
CONTENTS

PREFACE

EXECUTIVE SUMMARY v

CONTENTS xiii J INTRODUCTION 3

ENHANCING PROGRAM STABILI'IY 15

1 The Role of Top Managers 19

2 On-Time Completion 25

3 Program Authority,

Accountability and Resource Control 31

4 DOD Acquisition Policy 37

- What is it?

- How should it be improved?

INNOVATIONS IN THE SOURCING PROCESS 45

5 Quality Sourcing 47

6 Sourcing By DOD Contractors 59

7 Some Regulatory Implications 67

CONCLUSIONS AND SUGGESTED

IMPROVEMENTS 71

APPENDICES: A - United Technologies Corporation Case

B - Hewlett Packard Case

C - Dow Chemical Case

D - General Electric Aircraft Engine Case

E - Tektronix Case

I' Pcifilc Bell Case

G - Becton Dickinson Case

H - Mobile Subscriber Equipment Case

xiii
INTRODUCTION

1z
I

INTRODUCTION

Background It is important at this juncture to better define the

There is a longstanding public debate over how, semantical difference between "commercial prodthe Department of Defense (DOD) acquires it's ucts" and "commercial practices." While the two

weapons; a debate fueled by periodic "break- are closely related and often confused, they are

downs" in DOD's acquisition system. Recent, distinctly different. "Commercial products" are

highly-visible breakdowns have eroded public and off-the-shelf items developed to commercial stancongressional confidence in DOD acquisition to, dards for the commercial marketplace. "Commerperhaps, an all time low; and the defense reform cial practices" is a much broader term, meaning

debate has increased in fervor and pitch. the entire process by which commercial companies conduct their business. In tnie latter case, the focus

One recurring theme of much of that debate is, on the busin ess rather tan on acui

why DO an' simly do usinss ike on the business process rather than on acquiring why can't DOD simply "'do business like the end-product. 2 While DOD's use of commerbusiness?"; in other words, why can t DOD adopt

commercial ways of doing business in buying?

Early thrusts in this direction centered around

recommendations that DOD adopt the use of COMMERCIAL COMMERCIAL

commercial products whenever possible. Some PRODUCTS V. PRACTICES

feel that if DOD would eliminate unnecessary Off.the-sheai Items Commercial ways

specifications, it could purchase readily-available, commercial standards of going about the

off-the-shelf items, and by doing so, enjoy the for commercial full range of

benefits of the commercial marketplace (corn- markets. buoiness a otivitie.

petitive pricing, the latest product development, Emphasis on Empheels on

and rapid availability, to name just a few).

Arguments to this effect go back at least to the 1972 Commission on Government Procurement 1972Comisson n GvernentProureentciai products has been the subject of multiple which acknowledged the merit of buying commer- cies prdctha been the ule

cial products in lieu of items manufactured to studies since the sf972 Commission, the use of

federal specifications. That Commission called for commercial practices suffers from a dearth of

a"...shift in the fundamental (DOD) philosophy focused study. Accordingly, our research emrelative to commercial product procurement...." pasis here will be on the use of commercial pracAlthough the primary emphasis during this period .es by the Department of Defense.

was on the use of commercial products, the 1972 In the decade of the 1980s the defense reform

Commission seemed to have commercial ways of rhetoric has been building to a crescendo, with

doing business in mind as well when they stated, recommendations to "do business like business"

"The system we advocate will enable the executive as an essential element of much of the debate. In

branch to ensure thai procurement operations are 1981, then Deputy Secretary of Defense Frank C.

businesslike and oiB,-rly and that goods and ser- Carlucci introduced a comprehensive reform

vices are acquired ctficiently."I The "busiesslike" package known as the Acquisition Improvement

operations referred to here are the forerunners of Program (although probably better known as the

what later came to be known as "commercial Carlucci Initiatives). This program embodied a

practices." number of recommendations, many of which are

3
based on commercial business models, such as the The Congress apparently shares the belief that

call for more responsibility, authority, and there is potential payoff in DOD's expanded use

accountability for DOD program managers.3 In of commercial practices, enthusiastically embrac1983 President Ronald Reagan was so interested ing the findings of the Packard Commission. More

in the idea of running the government like a recently, Dr. Robert B. Costello, while Under

business that he asked industrialist, J. Peter Grace, Secretary of Defense for Acquisition, identified

to lead a study of how to achieve that objective, commercial practices as an important element in

That study, known as the President's Private Sec- the far-reaching Total Quality Management

tor Survey on Cost Control, or the Grace (TQMt initiative for the Department. At this

Commission, came up with 2,478 specific recom- point, it should be clear that there is a developmendations that would yield projected savings of ing consensus favoring the use of commercial

$424413 over 3 years if implemented government- practices as a solution for some of the seemingly

wide (not lust DOD). In their report the Corn- intractable problems tacing defense procurement.

mission said these savings could be realized by Of course, this should not be viewed as a panacea,

applying "private sector management tenets" but rather a source of good ideas for selective ap- across the broad spectrum of the federal govern- plication within DOD.

ment.4 Similarly, in 1986, the President's Blue Institutional Impediments to Adopting

Ribbon Commission on Defense Management (the Commercial Practices Packard Commission) strongly advocated the use ofckard Commercia prdutsnglyadv ) wosa, then t Given this developing consensus for the use of "oven when ccmmercial products are not suitable commercial practices in DOD, why doesn't DOD

for l)OD's purpose!., it can still use commercial simply adopt them and be done with ith Granted,

buying practices to real advantage."s A 1986 some laws and regulations would have to be

Defense Science Board that was chartered to focus changed, but the lawmakers and regulators as paron the use of commercial products in DOD ties to the consensus should be willing to do so.

stepped outside their charter to reach a similar In reality, however, many of the impediments to

finding. They said, "...although the increased use DOD's adopting commercial practices are not

of commercial equipment (in DOD) is good, the based in laws or regulations, but are rooted

increased use of commercial practices could be deeper, in a more basic, institutional foundation.

even better."' Perhaps the most basic of these reasons is confusion over exactly what commercial practices are.

At the macro level people seem to .ave a reason- FIGURE I-1. "DOING BUSINESS FIGUR E 1-1 ISIN" FIGURE 1-2. INSTITUTIONAL LIKE BUSINESS" IMPEDIMENTS TO THE

"Even when commercial products are GOVERNMENT USING Packard not oultable for DOD's purposes, COMMERCIAL PRACTICES

Commisslon can still use commercial buying 1986 practicos to real advantage."

-Confusion over specificalty what they ere

Defense "...although the increased use of fector -Sheer sie of public Science commercirl equipment (in DOD) Is

9oard good, increased use of commercial -Inherent dlfferences between the public and

1986 practices could be even better." private Rector

Grace ...apply "private secto/ manegement PRIVATE SECTOR PUBLIC SECTOR

CommIssion [ tenets" across the broad spectrum of Single Constituency: Multiple Constltuencies:

1984 the federal government. "Shareholders" .Staeeholdere"

Singular Focus: Mixed Focus:

Commission on We seek to "enable the executive "Efficiency" "Efficlency" & "Equity" Government branch to ensure that DOD procure. Clear Measure No Clear Measure

Proc~urement ment operations are buiineselike." of Muce o Ccess. 1U72 of SuccessI: of Sucessi. "Bottom Line"

4
able understanding of what is meant by "doing for fairness or equity in their expenditure, as well

business like business." They tend to think of less as the need for some level of efficiency. Most

bureaucracy, faster, cheaper development cycles, Americans believe government funds should be

more flexibility in decision-making, and, finally, expended in a forthright, fair, and accountable

greater accountability for results. But these fac- manner. They believe all citizens should have an

tors are really benefits emanating from the ideal- equal chance to compete for a portion of those

i7ed commercial acquisition system, rather than government expenditures. This longstanding prinactual characteristics of such a system. What then ciple of equity was reaffirmed by the Congress

are the specific business practices used in the com- in 1984 with passage of the Competition in Conrnercial sector that yield these desirable charac- tracting Act (CICA) requiring "full and open comteristics? We must have this level of specificity petition" in DOD procurement. 8 However,

before we can implement commercial practices in equity is sometimes achieved only at the expense

DOD, but it is here that the definition of these of efficiency. The two concepts often conflict. Propractices is unclear. It is not surprising that this curement procedures that ensure equity may be

lack of definition has worked against DOD's patently inefficient.' As Plato observed maný

wholesale adoption of commercial practices. centuries ago, a democracy is an inherently inefAnotier factor that mitigates against adoption of ficient form of government, primarily because it

commercial practices in DOD is the inherent dif- is a government of compromise and consensus.w0

feretice between a public activity and a comner- Consistent with that observation, in this country

cial one. A commercial activity has essentially a we routinely trade off efficiency to ensure that

single constituency (the stockholders), and a equity is preserved in government spending."

singleness of purpose in pursuing their chosen An example might be the mandate that a portion

business endeavor in the most efficient, effective oi government business go to small business firms.

manner possible. They have the bottom line of While arguments supporting this mandate are

their profit and loss statement to objectively assess compelling from a equity standpoint, buying from

their performance toward that goal. small business may not necessarily be the most

efficient way for the government to do business.

A typical government activity, on the other hand, Another example might be the CICA requirement

serves a multitude of constituencies (the that most government purchases be competitive,

stakeholders), many of whom have different, since competition connotes the fairness and equity

otter, conflicting, expectations of that activity. A the public expects. There are instances, though,

government activity does not enjoy the clarity and when a competitive purchase may not be the most

singularity of focus customary for a commercial efficient, or even the most prudent way of doing

activity. The focus of the government activity is business. Again, the concept of equity overrides

likely to be ambiguou!, and rapidly changing, with what might be the best business practice.

changes made for political reasons rather than

efficiency. In addition, the service provided by This is not to imply that the public does not want

the activity may be abstract, making measurement efficiency in DOD procurement. Quite the contrary, Dr. F. Ronald Fox, speaking of the Packard that service very difficult. 7 As such, an activ- Commission's 1986 survey of public attitudes,

itv's success can not be measured easily by a single said, "The commission's survey made clear (that qjuantitative parameter such as the commercial firms bttom line but, rather, by a general feel- the public feels) that inefficiency in DOD spend- g s bing is a problem of major proportions."'12 Many ing (i goodness. would argue that at this point in the defense

Finally, Lormmercial and government a(tivities dif- reform debate, the public is demanding efficiency

fer signifiantly in the flexibility they have in ex- in defense procurement. However, they have not

pewnding fund-,. The (ommercial activity is abandoned their desire for equity in order to

primarily concerned about the efficiency of an achieve it.

expenditur,' in furthering the objectives of that ~iciviy, he thein had, inc ~igovrnmnt These institutional differences between private activity. els ithe ubir hand, since a gv need and public ativities are indeed significant; some a1c tivitv dealk, with r~li,, tunds, the~re v, a ne'ed

5
feel so significant that the government can simply Analytic Sciences Corporation and another by the

never do business like business. 13 Others, Rand Corporation suggest that given roughly

notably the Packard and Grace Commissions, equivalent project complexity (a large facility

recognize the deep-seated differences, but still project for example), the commercial sector does

believe there are areas where the government can no better than DOD in delivering a project within

borrow selected business practices from the corn- budget.14 1S

rnercial sector to great advantage. The Packard Commission said of these studies,

Commercial Practices: A System Worthy of "The good news.. .is that DOD is no worse than

Emulation? other large bureaucratic organizations in managFinally, it is interesting and instructive to look at ing major programs." However, Packard then

the actual performance of the commercial sector identifies a number of specific commercial yenthat the Department of Defense is being ericour- tures that were, in fact, "models of excellence"

aged to emulate. In doing so it is important to worthy of emulation.16

recognize the technical complexity of many DOD Notwithstanding this conflicting evidence, the

acquisitions, with the typical program pushing the general perception persists that the government

state-of-the-art in severa! technologies can benefit from adopting commercial ways of dosimultaneously. The fiadings of a study by The ing business.

FIGURE 1-3. COST GROWTH IN MAJOR PROJECTS

RAND TASC

P['RCNT C•ST GROWTH

0 s0 100 ISO 200 300 M80 

I PUVAI¢l "u"CUUCT

-'.4 I wmmWAV PROJACTS

j 3. ~ PEINUVLVASNA AV. OMOIVSILOPWIk

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GGENEW aIEMIAL ENTIflS

NAJSTE W OWLANIY BLAO DILktIO

eo l~ WI a•inN.t MAA.VUf~d g • eO hli EthiCU t~l~ll , l~? 0313LAO ?.4 LW I /Z 693%

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Direction and Scope of Research Effort rience and opportunity to "kick off" our research;

It is with a sincere belief that selected commer- we were able to effectively immerse ourselves in

cial practices can be of benefit to DOD, that we the ways commercial companies do business.

embarked upon this course of research. Briefly Because our research objective is to import some

stated, our objectives were: of these smart commercial ways of doing business

)To define commercial practice! into DOD, we focused on commercial business

functions that were comparable to functions car2) To identify practices which seem to be ap- ried out by DOD. Specifically, we focused on how

plicable to, and offer high payoff in DOD commercial companies develop new products, and

3) To explore fully how to implement those how they acquire major capital projects. We felt

selected practices. these activities most closely parallel the acquisiOur approach in pursuing these objectives was tion of major military systems because:

partly driven by the nature and duration of the -Such products and systems require large cornDefense Systems Management College (DSMC) mitment of corporate resources with extended

research fellowship in which we participated. payback periods.

Early in that fellowship we attended an executive -They often incorporate new technology and

education program at the Harvard Business push the state-of-the-art.

Scho, I (The Program for Management Develop- puh th e ateofh rt.

menL). This education program provided aca- -tey reqre a compre sive managemen

demic exposure to the latest in theory and prac- system to integrate the efforts of many people,

tice of managir'g commercial companies. In equipment and technologies.

addition to significant classroom experience, we Even with our focus constrained to new product

were sequestered during the 12-week program developments and capital projects, it became clear

with 135 classmates who were up-and-coming that the universe of commercial practices was exmiddle managers from many of the world's most pansive. To conceptualize this universe, we

prestigious companies. The combination of the developed a three-dimensional model as shown

two forums proved to be a superb learning expe- in this exhibit:

FIGURE 1-4. RESEARCH MODEL

THt LNIVERUl 40 1L *

~iNCUT3V 000

P"Cf- t ~ CAMS POSICS

• *LICWISWO altp IL lilii! . 4 C oI09bI m om.lrloIIonI4oSI i 6"oI. 'am ff|it|O GA f NameP&mCA 

so-" .mmAMAO 610it -£555 O

• al olIpwOCIf&¢ A40 1frai • fIOfoo A ' . m

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7
We designated the axes of the model as follows: (DSMC). They include seven discrete disciplines

on the X axis, the traditional measures of project under the umbrella of systems acquisition

success; on the Y axis, the functions or disciplines management; to wit: quality, systems engineerof acquisition; and on the Z axis, "commercial ing, production, contracting, logistics, program

practices." Our objective h,.re is to show not only and business/; !finarcial management. Each inthe broad universe of commercial practices, but teracts with the others, so that policy changes

to show their interdisciplinary and interdependent designed to improve one area may impact

nature. We will now briefly explore the variables another, perhaps adverse!y. Each function has

that make up each of these axes. specific policy, doctrine, and culture, as well as

The bottom line of any management practice is multiple levels of advocacy within the acquisition

the degree to which that practice contributes to hierarchy. Any analysis of commercial practices

the success of the mission, and the success of a must, therefore, examine the impact across the en-

"'project," whether commercial or defense, is tire range of disciplines, although this research is

judged on three variables: cost, schedule, and per- focused particularly on those of program manageformance. Accordingly, we felt these success ment, quality, contracting and financial

criteria should be an integral part of the analysis management.

of any commercial practice. We include them in The final axis of our model is the crux of this

our model to reflect this importance. The three research effort--commercial practices. As a point variables are so highly interrelated that the suc- of departure we used commercial practices idencess of a project is dependent not only on each tified by the PacL:ard Commtission and the 1986

variable independently, but also on the effect that Defense Science Board (shown on the left side of

each exerts on the others. Mathematically. this our research model). Our real target, however,

relationship would appear: was a level of specificity below those that the

SI = f (S, P, C) Packard Commission and the DSB identified. We

SI =successful implementation sought to identify management techniques,

strategies, and practices used in the commercial

S Schedule sector to develop major new products, or manage

P = Performance capital plant/equipment projects.

C = Cost Again, our ultimate objective is "lessons learned"

for DOD, so we constrained our focus to corn- The goal is optimization of the total equation mercial practices that: 1) seem to be consistently rather than its individual variable values. The sucsflan2)redfrntro thetyi impeimets o dingso ie i th copleityand successful, and 2) are different from those typi- impediments to doing so lie in the complexity and cally employed by DOD. We found many. Too

amorphous nature of the interrelationships, as calemoydbDO .W funmn.To

amorphous well as the nathediffcul difficulty of of thnreadtionalstipnal traditional, functional many, duration in fact, and resources. for this research Therefore, effort it of became limited

organizations to work across organizational lines. durato and nresourcsT -ert became

While it is possible to optimize one (or even two) necessary to concentrate our in-depth research on

Whioenitis) ossifl the equtimieon, it is prati e y a selected number of these practices. In choosing component(s) of the equation, it is practically from among the many "good ideas' for additional

impossible to optimize all three independentlyfollowing criteria:

The process of making effective trade-offs between

variables is, therefore, critical to the overall suc- 1) Commercial practices that DOD could imcess of any project. We found stark contrasts be- plement within it's existing authority

tween how this process is treated in the defense 2) Practices that offered high payoff if intacquisition environment versus the commercial plemented in DOD

world,

The second element of our model, depicted on the functional 3) Practices background that complemented the diverse and interet~st ot members

Y axis, is the array of functional disciplines im- of the research team.

plicit in acquisition. While many conventions

were possible, we adopted the approach used by This focusing process is depicted in the model as

the Defense Systems Management College a funnel yielding an output of targets for further

8
research. It is important to note that this research agement practices being used to accomplish like

effort does not purport to be an all-inclusive study functions. The organizations that were the subof the commercial practices that might be applied jects of our interviews are shown in Figure 1.

to DOD. Rather, it is an in-depth treatment of

several of those practices. The practices we chose FIGURE 1-5. RESEARCH

to deve!op offer real advantage if adopted institu- CONTACTS WITH INDUSTRY

tionally by DOD, but there was clearly an element of "randomness" in their selection. There are

many more commercial practices that are worthy

of further research, and we hope that this report a WESTINGHOUSE GTE •* GENERAL DOW CHEMICAL ELECTRIC

will cýt.ablish a framework for such research. * TEKTRONIX * PUBLIC SERVCE GAS •

EASTMAN KODAK * a BECTON DICKINSON• It is important also to note that we did not find ROCKWELL • * PACIFIC BELL *

anv heretofore undiscovered, "gee whiz" panaceas VALENTEC * BOEING •

MARTIN MARIETTA • 9 UNITED TECHNOLOGIES• from among the range of commercial practices DIGITAL * GEHL •

that we examined. The term "commercial prac- GENERAL DYNAMICS • AT&T •

tice" really means "smart business practice." Most BRITISH AIRWAYS* * HP

are strongly rooted in common sense. Many are

already in use sporadically throughout DOD - Interviews; 9 CommerciAl Case; e DoD Case

(reference appendix G discussion of MSE for example). In keeping with this perspective, recognize Based on the first round of interviews, several opthat our findings and are not novel or "inspired" portunities for program specific case studies

but instead seek to report for widespread im- developed. These are annotated on the exhibit.

plementation some good things we saw consistently in successful commercial programs. We

firmly believe the commercial practices identified FIGURE 1-6. COMMERCIAL

can and should be implemented by DOD. CASE STUDIES DEVELOPED

Research Approach and Case Studies Scope

We relied on a literature search and our Harvard C4800 1 2 3 4 6 a 7

experience during the early phase of our research Co. uTC HP Dow Tektronix GE PaChell 018

to identify the range of commercial practices. We Prol PW4000 Severe, Several Several Several Adv FAC

assessed the various business practices in use in Engine olgt, star

the commercial sector against the background of Ntk

our individual acquisition experiences as Product Now rrod ProdPlants. Plnts Plants Prod. Prod. Plants

Manager, Contracting Officer, Financial Manager, Technical Manager, Logistics Manager and Time ,,yr•, 1.-yr, Isms ,-2yr, 3yra 27,m ia,,mO

Quality Manager in prior military assignments. Fundsa 813 SSOOM '8500oM 'SioM ,Si0oM Not slom0

By doing so, we identified several potentially high (" Released

pay-off opportunities for in-depth research. Figure 3. 1986 DSB Commercial Case Studies

Scope

Once this focusing process was complete and we

had specific targets for study, interviewing became CaseD A B C I E

our principle method of research. At that time we Co. AT&T B 888 IBM MITRE

embarked upon a course of face-to- face, intensive, nonstandardized interviews with personnel Prog. EES-4 767 Comm 360 FAA Nat'l

at various management levels in a broad range Switch Aircraft Sat'llte Computer Airep Sys

of concerns.' 8 These concerns ranged from corn- All cases were new product developent.

panies with purely commercial business, to companies engaged in a significant amount of defense Time 8 yrq 4 yra 34 mois 3 yrs Unk

business, and finally to DOD program offices.

Thus, we were able to compare and cont.'ast man- Funding was not Identlfiod In cases by D8B.

9
We found the case study method for further data tion start-up and costs from several tens to several

gathering most appropriate in order to investigate hundreds of millions of dollars.

not only what commercial management practices 4. Six separate capital plant/equipment projects

were employed, but why, how, and how well. were documented in the Tektronix case study.

Further, in examining specific cases we could Design and implementation of the following

determine the interdependencies of the practices plants is included: Integrated Circuit (IC) developwithin each program. All case studies were ment and production facility (cost $53.4M; 21

developed without any preconceived bias as to months to completion in 1981); Gallium Arsenide

which practices or techniques to include for assess- (GaAs) IC development and production plant,

ment. The scope of each case study program is designed into the IC facility (cost S1.7M; 14

summarized below; the full zase study narratives months to completion in 1985); Automated

are in appendices. The cases cover a range of pro- Warehouse (cost $23M; 18 months to completion

gram sizes and types that we feel are comparable in 1979); Cathode Ray Tube (CRT) production

to defense system programs (all the commercial plant; Hybrid Circuit production plant; and Circases (1-7) were financed privately). cuit Board production plant. The latter three

1. PW4000 is a high thrust, fuel efficient, turbofan plants cost between $20-50M each and were cornenginc for large. wide--bc:d commiercial aircraft pleted by the mid-1980s.

developed by United Technologies Pratt and 5. The "Factory of the Future" was designed and

Whitney Commercial Engine Business. Cost $1B built by General Electric Aircraft Engines. It is a

(approximately); 54 months from concept to fully automated machining facility for processdeployment. ing (i.e., turning, milling and drilling) rotating

2. The Hewlett Packard (HP) Computer Business components of high performance jet engines. The

Organization's new product development project required 3 years from concept to initial

management process was studied and documented proJuction start-up and cost $52M.

in lieu of a specific case study. We discussed a ma- 6. The Advanced Digital Network (ADN) is a

jor program, the "Spectrum" which was the total new digital line service customer providing full

HP 3000-series computer hardware and software duplex, point-to-point or multi-point service with

architecture development program conducted customer selectable data rates from 1.2 to 64

from 1980-1985 and funded at approaching Kbps. It was implernented in 27 months from

$500M. Spectrum was not managed via the phase completion of concept development to deployreview process. Also, we discussed a major new ment in 1989. Program costs are not releasable.

surface mount technology facility program, now 7. The Fluorescence-Activated Cell Sorter

in process, in the H11 Microwave and Com- (FACStar), an automated system, identifies blood

munications Instrument Group. This latter pro- and tissue cells in a flow stream, separates them,

gram provides a state-of-the-art development and and collects them for further analysis. It is the lead

production facility. It is scheduled to last 3 years new product of Becton Dickinson Immunoand will cost several hundred million dollars. It new Systems Becton develon protoo, does not use the phase review process, which cytometry Systems (BDIS). The development proappears ment most applicable to product-line enhance- gram required 18 months 18M. and more than It and customer-unique application projects. w~as completed in 1985.

8. Mobile Subscriber Equipment (MSE) is a major

3. The Dow Chemical Company's Michigan Divi- U.S. Army program to acquire a complete tacsion's new capital plant,/equipment management tical telephone, mobile-phone and facsimile

process was studied and documented in lieu of a system for the entire field Army at Corps-andspeifi L_.ýe study. The Michigan Division has below levels. The system is provided by GTE

four or five major capita! programs underway at Government Systems Division. It is a $4.3B NDI

any point in time to build production facilities program requiring 10 years for system integration,

(e.g., aspirin plant, plastics plant, etc.). The testing, production and deployment. The MSE

typical program is on an 18-month schedule, from was selected for case analysis as a non-commercial

approv~l for preliminary engineering to produc- program to determine what commercial practices

10
were employed and how they fared. The Army 2. Note: A third concept that may also prove

Communications Electronics Command had been confusing is Commercial Activity Contracting by

directed to employ commercial management prac- the government. This is when the government

tices in the acquisition of MSE. contracts out a service that historically has been

The 1985 DSB Summer Study developed the performed by government employees. An examfollowing five major new commercial product case ple is the contracting out of aircraft maintenance

studies; we considered their findings along with services to a commercial company, rather than

the cases developed above: continuing in-house maintenance.

A. The EES-4 telephone switch developed by 3. Deputy Secretary of Defense Memorandum,

AT&T; 2 years from requirement to start of "Improving the Acquisition Process," April 30,

development; 8 years to deployment 1981.

B. The 767 aircraft developed by Boeing; long 4. "President's Private Sector Survey on Cost

conceptual development period; 4 years to Control: A Report to the President," January 15,

develop and deploy 1984.

C. Communications satellite developed by SBS; 5. "President's Blue Ribbon Commission on

14 months from requirement to start of develop- Defense Management, Final Report to the Presiment, 34 months to deploy dent," June 1986.

D. System 360 computer family developed by 6. Office of the Under Secretary of Defense for

IBM; 12 months from requirement to start of .Acquisition, "Final Report of the Defense Science

development; 3 years to deploy. Board, 1986 Summer Study," January 1987.

E. The FAA National Air Traffic Conirol 7. Under our system of government, the public

System developed by MITRE; schedule not sector steps in to provide a service only when the

providcd.)I free market cannot, or has not done so. Good examples are national defense and police protection

The 'cguts' of our research effort is contained in which simply cannot be provided effectively by

Sections II and Ill of this report. There, we pre- the free-market system. These public services, by sent the findings of our research and make sug- their very nature, are abstract and difficult to

gestions vis-a-vis implementing certain commer- theify.

cial practices in DOD. Section II is dedicated to quantify.

the treatment of issues affecting program stabili- 8. Kirby, Wendy T., Esquire, "Expanding the

ty; Section III covers individual topics in acquir- Use of Commercial Products and 'Commercial

ing quality systems, establishing buyer/seller rela- Style' Acquisition Techniques in Defense Procuretionships, and implementing certain regulatory ment: A Proposed Legal Framework," A Quest

issues. for Excellence: Final Report by the President's

We rEcognize We that our approach and mhodl Commission on Defense Management, June 1986, ecgnzetht or ppoah ndmethodoogy Appendix H.

to this research may not be consideied "rigorous"

from a purely academic standpoint. We do feel, 9. Musgrave, Richard and Peggy, Public Finance

however, that we garnered sufficient evidence, in Theory and Practice, McGraw-Hill Book Coinalbeit primarily anecdotal, to strongly support our pany, New York, N.Y., Fourth Edition, 1984.

findings and suggestud improvements, particularly 10. Plato, The Republic.

when considered in the context of the broad 11. Georgetown University, Center for Strategic

acquiition experience of the authors. We believe and International Studies, "U.S. Defense AcquisiDOD can, in fact. learn a great deal from the com- tion: A Process in Trouble," March 1987.

mertial sector, and this report provides a blueprint 12 Fox, F. Ronald, The Defense Management

for doing so. Challenge: Defense Acquisition, Harvard Business

Eridnotes School Press, Boston, Mass., 1988.

1. Report of the Commission on Government 13. Hartle, Terry W., "Sisyphus Revisited: RunProcurement, December 1972. ning the Government Like a Business," Public Ad11
ministration Review, March/April 1985. 17. Hayes, Robert G., Steven C. Wheelwright

14. Biery, F., The Analytic Sciences Corporation and Kim B. Clark, "Dynamic Manufacturing,"

(TASC), "Cost Growth and the Use of Corn- The Free Press, New York, Chapter 11, 1988.

petitive Acquisition Strategies,' The Natioiial 18. Non-standardized interviews are designed to

Estimator, Vol. 6, No. 3, Fall 1985. elicit different information from each interviewee

15. The Rand Corporation, "Improving the by tailoring questions to their individual

Military Acquisition Process--Lessons from Rand background, experience and placement.

Research," R-3373-AF./RC, 1986. 19. The DSB study did not identify development.

16. A Formula for Action. costs for the programs.

12
ENHANCING PROGRAM STABILITY

13
ENHANCING PROGRAM STABILITY

COMMERCIAL

PRAC E PROJECT/PRGM MGMT

SYSTEMS ENGINEERING

LOGISTICS MGMT

CONTRACTING MGMT

ACQUISITION PRODUCTION MGMT

FUNCTIONS

QUALITY MGMT

FINANCIAL MGMT

SSCHEOULE

'PERFORMANCE

MEASURES OF SUCCESS

A fundamental commercial practice in successful In this section, program stability is described; sucmajor new product development and capital cessful commercial business management apsystems project implementation is program stabili proaches to stabilizing programs are identified;

ty. The 1986 Packard Commission report Departmen't of Defense (DOD) policies and inhighlights stability as one of: hibitors impacting program stability and actual

"six underlying features that typified the practice are discussed; and specific improvements

most successful commercial programs"and are proposed for application via DOD acquisition

that "defense acquisition typically differs policy changes. The motivation is to institufrom the commercial model in almost every tionalize the use of those good business practices

respect . (but that several) successful DOD which enhance program stability in the DOD acprograms have incorporated some or all of quisition system.

these management features to a greater or Program stability features ripple across all of the

lesser extent."' traditional functions associated with systems ac15
quisiticn. The obvious focus of this section is on

program/project management functions, but our FIGURE 11-1. ACHIEVING

treatment of program stability must, and will, PROGRAM BALANCE

cross functional boundaries (i.e., engineering,

logistics, and financial management) to deal

effectively with the necessary complexity of V

system programs. The criteria for measuring success in systems acquisition--cost, schedule and

performance-as impacted by stabilizing management techniques are the central treatment of ,UTlO,."Y 'U,,

Chapter 2. 

V , 

The research model, introduced in Section I, is

recast at the beginning of this section to highlight

the commercial practice, program stability. We AuhOR.TY V- • OT

develop in Chapters 1-4 the principal management /S

techniques impacting the stability of systems programs, major and non-major, which we observed

employed in highly successful major commercial

systems programs.

A Working Description The misfortune here is that defense acquisition

The key attributes of program stability are professionals are all on the same team but often

steadiness of purpose, a firmly established plan act counterproductively and very inefficiently in

and a supportive system. 2 For a program to have both a micro and macro sense. Progr3m Manager

stability it must have a goal of ,sufficient per- (PM) perception is that DOD and Service funcmanence that it outlives the time it takes to im- tional organizations and staffs are often the probplement the plan. The -'rogram plan links the pur- lem rather than team members in achit ý,ing propose to the resources (time, people, fun-Is and gram success. These organizations and staffs often technology) needed. It organizes these resources operate as though PMs should not be trusted. In

and defines the process for achieving consensus Section 1, we mention that cost and schedule conand approval to implement. It then guides the ex- trols on major defense programs are no worse

ecution phase and provides for the integration of than on other public or private programs. We all

effort. The plan should be realistic and provide recognize that cost, schedule and performance

flexibility to adapt to unforeseen problems or accomplishment in defense systems acquisition is

modest changes in purpose and resource availa- not what it should be. Especially in times of

bility. In a bureaucracy, such as DOD, the ap- decreasing budgets and increasing operations and

proved plan should be a product of systematic maintenance needs, DOD must do better if it is

consensus and a clear decision rather than the to continue essential force modernization. result of continual incremental decisions.

From the PM's perspective, the essence of the

What's Wrong? problem is instability. There are an inordinate

Figure 11-1 dramatizes the issue; it represents the number of often conflicting requirements and

current imbalance of forces impacting program demands, coupled with a basic lack of authority

stability. This situation is the result of decades of (anywhere) to tailor them into a cohesive plan.

piecemeal regulatory efforts to ensure against And no one seems to remain in charge long

recurrence of perceived (including some very real) enough to see the plan through. It is the singular

past transgressions. It shows DOD and Service intent of this section to identify and promote

functional organizations and staffs attempting to adoption of good business practices which can

ensure against ineffective and excessively costly begir. to bring our acquisition forces into construccdefense bystems. tive balance.

16
Commercial Practices Enhancing Program

Stability--What Are They? FGURE 11-2. COMMERCIAL

Our research used literature search and interviews TECHNIQUES FOR ENHANCING

of practitioners of commercial practice in major PROGRAM STABILITY

new product development and capital systems

development projects. There is a wealth of

literature in existence describing good and bad 1. Role of Top Management

business management practices; in general, this

material was useful to overview applicable (Chapter 1)

philosophy, but not particularly informative in

establishing how to implement the concepts. The * Vision and Selectivity

best sources /or implementation techniques were e Active Involvement

those which used the case study method based on * Supportive System

real examples or those which documented real

time issues and their resolution. 2. Cost, Schedule, Performance

We anticipated researching only commercial Prioritized (Chapter 2)

capital plant. equipment programs due to their e Meet Schedule

functional similarity to defense weapons programs Sufficient Performance 1 

(e.g., size, funding, technology, purpose, coraplexity, etc.) but found that maior new product- 9 Flexible Funding

line programs were. handled similarly. We decid- 3. Authority, Accountability,

ed to use evidence from both types of programs.

On the surface, one might initially question the Resource Control and

jJl)li.dbilitV of new product development techrti- Responsibility to Line

ques since commercial businesses tend to execute Management (Chapter 3)

these programs internally versus contracting-out

to a prime contractor-the typical defense system e Enable Line Managers

approach. We also found that all of the commer- * Focus Responsibility

cial capitai programs we saw were internally * Experienced People

managed aid integrated, using contractors for

component subsystems and supplies. We leave toyou, the reader, the final call as to applicability

under these circumstances, bat expect you will Chapter 4 assssesseveral congressional and DOD

recognize that the management techniques policies which impact across program stability,

discussed here are no more than good manage- and provides some suggested implementing steps

mnent methods applicable to any large, complcx for institutionalizing these techniques into the

program within a large bureaucratic organization, defense acquisition system.

Based directly on this research, we round that the Endnotes

good business practices contributing most to program stability are: (1) top management involve- 1. Presidents Blue Ribbon Commission on ment, (2i on-time 

men, 

completion, and (3) the authori- Defense Management, A Quest for E.xcelletice, () omletonan n-tme (3 th athoi-Final Report to the President, June 1986, pp.

ty and accountability of acquisition line manage- atte J 9

rnent. We also found the commercial techniques 40-51.

tor implementing these practices; these are out- 2. These derive directly from definitions of "prolined in Figure 11-2. Each is developed in Chapters gram" and "stability," Webster's New Collegiate

1-3 along with DOD environmental inhibitors. Dictionary.

17
I

THE ROLE OF TOP MANAGERS

FINDINGS a. Active involvement of top corporate managers is essential to program success.

b. The commitment to program success crosses organizational lines.

DISCUSSION OF THE FINDINGS cessful businesses identify customers needs/wants

1986 Packard Commission: "At the outset and what they are willing to pay; they are also

of a commercial program, a program very aware of what the competition is doing and

roaanager enters into a fundamental agree- likely to do. 2 These two factors allow top

rneni or 'contract' wth his CEO on specifics management to determine when they must bring

of performance, schedule, and cost. So long in a new product or new capability to cover costs

as a program manager lives by this contract, and make acceptable profits before the competihis CEO provides strong management sup- tion catches up. For example, Nissan's highly sucport throughout the life of the program. This cessful implementation of their truck and auto

give,,, the program manager maximum incen- plant in Smyrna, Tenn., was, in part, attributed

tire to make realistic estimates, and max- to senior management's focus on a single, simple

imnum support in achieving them. In turn, goal: "To build the highest quality truck sold in

a CEO does not authorize full-scale develop- North America." 3

ment for a program until his board of directors is solidly behind it, prepared to fund the Figure 1-1 diagrams the relationship of top

program fully and let the CEO run it within management to several key elements of program

the agreed-to iuriding."• management. Basically, it shows the top manager

We found that successful major systems programs is decision actively making involved as it with applies strategic to major planning programs; and

(i.e., new product line, new capital plant/equip- it also shows top management commits to seeing

ment) within the commercial acquisition environ- prgals thouh top manage rs ar persna

men ar th ofuneuivcaltopmange-programs prduc through. Top managers are personally

ment are the product of unequivocal top manage- involved in making early trade-offs to get to a

ment approval and support. In the programs practical program baseline; and they select the ivhilz r¢,flect thie strcitegic emphasis of the PM. Not all proj ,cts, conceived and proven feacompany, there was clear linkage to organiza- sible in the bottom-up process most organidations

tional business strategy and direct involvement se int ifyb newo ppor es , will diz etly use to identify new opportunities, will directly

ot the Chief Executive Officer. Involvement did support such vision; those that do are seized upon

not mean micromanagement, but .:ji awareness and made to work.

of the program's current status, active questioning, and a willingness to commit organizational Active Involvement

resources to resolve problems. Our assessment of top management's role in the

Strategic Vision and Selectivity case studies (Figure 1-2) is that the predominant

Best business practice is to develop project plans role is active involvement: either they lead, actor new products, and any necessary new pro- tively champion the important projects; or they

ce, seUS, from toi management's strategic vision of enable, ensure the system functions whereby the

what custonmers want and when it must be there whole organization actively supports, approved

to beat the wompt'tit ion. Top management of suc- programs.

19
FIGURE I-1. ROLL OF TOP MANAGEMENT

MAJOR

COMMERCIAL BUSINESS

PROGRAMS

CUSTOMER NEEDS STRATEGIC ORGANIZATIONAL

& COMPETITION VISION IDEAS

"fTOP MANAGEMENT

STAFF SUPPORT,

=SELECT JOINT 7DEFINE

PMCOMMITMENT - PROGRAM

BASELINE

FIGURE 1-2. COMMERCIAL CASE STUDIES

Case# 1 2 3 4 5 6 7

MODE Lead Lead Enable Lead Enable Unk Lead

#Prog 1 1,6* 2 2 2 2

MS.

Dcs'n Prog COO PM Gp Mfr Cmt'y Div

Auth'y Dir VP GM Pres

* Strategic Programs Had 1 Go/No-Go Decision

20
Although procedural methods of establishing pro- ject to program oversight by committee unless the

gram approval were not specifically investigated, approved baseline was expected to be breached.

we did note that such decisions were often based The environment was set for speedy and effecon intuitive judgment as opposed to detailed cost tive execution. In each of the companies visited

and benefit analyses. Top management actively there was a real organizational commitment to the

participates in managing these selected programs success of approved programs. New product line

to ensure focus, focus of program objectives and development and capital acquisition programs are

focus of organization effort. strategic commitments reflecting the company's

A senior HP executive stated that the most damag- future direction and emphasis. Such program going new product problem is failure to bring in a ahead decisions are clearly communicated to all

new system once development has begun.4 participants in the corporation. Along with vision

Major projects in all seven commercial case studies and active involvement in creating and pursuing

were limited to two or fcwer "go/no-go" deci- strategically essential projects, top management

sions; typically, the first is a decision to create must establish the environment for success. This

a design and a mini-business case; the second is includes smaller projects which would fragment

approval to enter full-scale development and im- top management attention to oversee directly.

plementation. For example, UTC committed $1B Delegation of top management decision authorion a new jet engine development (the PW4000) ty and resource control is the technique they use

based on market research and a decision to be to provide smaller projects the same opportunity

ready with a new proven product when the for success as major programs. Division presidents

market needed it. There was no further need to are the final decision authority on less-than-major

reconsider the commitment as the work was be- programs once approved for development/impleing done.5 Quinn went oi to say that top mentation (e.g., BDIS case #7).

management should establish a "few critical As stated earlier, the commercial marketplace

points tor intervention (i.e., it cannot be a con- severeiy penalizes companies which do not bring

tinuous necessity) and not depend solely on new products on line once the decibion has been

elaborate planning and control systems. The made to commit major resources (typically, ennumber of intervention points varies, but is try into full-scale or detail engineeting). The funccharacterized by an acceptance of "chaos and tional staffs, operational and program managers

replication in early investigations.. (but at the) spoke of shared goals and direction. Functional

later stages, these managers have learned to main- organizations recognized that they were accounttain flexibility and to avoid the tyranny of paper ab!e to higher management for support of those

plans.", We found that early conceptual plan- programs. Managers of functional departments

ning is very decentralized to promote oppor- (e.g., VPs of marketing, engineering and manufactunities for good idcas to bubble up; whereas pro- turing) were responsible for providing resources

granimatic decisions following the approval for (the right people and technology) and assisting the

deveiopment/implementation were delegated to PM in solving problems. They were not involved

acquisition line management. 7 Smaller projects, with program oversight and direction. Corresponsuch as product-life extensions or customer-unique dingly, the program manager considered it to be

appliques were more rigidly controllrd by a for- in his best interest to accommodate the reovinmal, central decision process, Since these smaller mendations of departments such as engineering

projects were not central to the thesis of this and manufacturing because they bring the best

research, we did not pursue this area in most case technical knowledge and experience to bear on instudy effort,,. dividual program objectives.

For example, Sony feel!, top management must

Supportive System. manage the value system and atmosphere not the

Figure 1-2 also shows that ia six out of seven cases details of all projects; nor should their staffs.

a line mnina:er had authority to make program Depending on the scale of projects, PMs should

decisions following, 1301) program approval. Ap- report as closely a5 possible to the management

proved programs were, therefore, no longer sub- level making the critical decisions concerning the

21
project. 8 However, no "best management struc- A system that spreads program oversight and

ture" evolves out of the literature. It is situational; decision-making authority broadly, especially via

various alternative approaches are needed large powerful staffs and functionally segregated

depending on the projects, the market area and organizations, but that fails to hold them accountthe people involved, able for program success, is counterproductive.

As a result of his investigation of decision-making Successful commercial companies recognize that

in large conglomerates, Richard J. Marshuetz staffs are necessary to manage ongoing business

points out that these organizations must separate matters, but line management must assume the

decisions supporting daily operations from those risks of change. In Chapter 3, the authority, acdetermining the future of the business (the same countability and oversight factors of stability will

people who manage daily operations are not be treated in detail. They are mentioned here to

necessarily the right people to manage essential establish the dependency on the environment set

change). To do that the program management by top management.

process must be simple and efficient. (Note, the

process must be efficient, not necessarily the pro- DOD PRACTICE AND INHIBITORS

jects; we'll take that up later.) Typically, "business In DOD, it appears that our large senior staffs

as usual" applies to daily operations but not perform many of the roles associated with top

management of essential -inange; that is the arena management in the commercial world. There apfor line management.9 There are sufficient layers pear to be major distortions between the role of

of line management in DOD that a hierarchy of top management in competitive, commercial inprojects can be implemented, within resources, dustries and DOD. In the former, the critical proif line management takes appropriate actions. grams are recognized and made to work; in the

FIGURE 1-3. DOD ACQUISITION MANAGEMENT ORGANIZATION

1C1

ACOM tt

Fua rI un, Staff PM

]Per

22
latter, it is often not clear which of the programs A typical, Services, commodity-oriented, buying

are critical. McDonough and Spital found three command is responsible for support of current

principle reasons for new project failures-- operations of fielded systems plus the designappearance that success or failure really doesn't through-implementation of new systems promatter to top management; slips are ignored; and grams. (The Air Force is a major exception in this

there is no reaction from top management to respect.) On one hand, we should expect feedback

status reports.10 from current systems operating and support exHistorically, in the Services, systems acquisition perience would be helpful in new systems. On the

has been an ancillary function of logistics support other hand, functional organizations (e.g.,

to the operation forces. As such, top Service maintenance or supply-support directorates)must

management focused on other things; but, of prioritize and standardize procedures for effeccourse, had to approve major resource corn- tiveness and efficiency. They tend to institutionalmitments. This beginning appears to have evolved ly impose many rigidly interpreted, standard decito a defense management system devoid of clear, sion systems optimized for dealing with support

CEO-like, top management. Figure 1-3 depicts of fielded systems. This latter tendency flies in the

DOD's organizational structure for acquisition. face of effective innovation on systems in

The DAE is on the OSD staff; the SAE is on the development.

Service staff, both are without control over the SUGGESTED IMPLEMENTATION FOR DOD

personnel resources who work for the military Improvement in this fundamental area boils down

Chief. to establishing who is in charge. Though layers

The implementation of the PEO-the SAE rela- of organization are a major complicating factor,

tionship was very different in each Service; i.e., the solution here is more one of delegation than

the Army PEO does not control personnel reorganization. The practical authority of the

resources and, the Navy and Air Force PEOs have DAE, in particular, is crucial. The DODD 5000.1

two different bosses. and 5134.1 must clearly provide the relationship

The point here is that it is not clear who should of the DAE to the top DOD decision-making

have and communicate his vision as applies to ac- authority and DODD 4245.1 must similarly treat

quisition priorities; this inhibitor contributes to the SAE and the top Service decision-making

those covered in Chapters 2 and 3. Senior, ap- authority. If these positions, DAE and SAE, are

pointed managers in DOD and the Services are to be decision-makers, so state; if they are to be

often transients who may never have the time to staff advisors to the Secretary, so state; but don't

develop clear visionary strategy objectives which then confuse the direction with other names (e.g.,

link to acquisition programs. One result is that Procurement Executive). This inhibitor is prothe bureauicracy, the uniformed military and civil bably the toughest to fix, for many reasons, but

staffs, function in the absence of a dlear relation it must be fixed if major improvement is intended.

to top management. These staffs and functional Suggested improvements in the following chapters

organizations have grown great institutional do not depend on this one, but will be much

power which contributes to the Chapter 3 in- enhanced if this problem is corrected. There are

hibitors. A second important result is that senior sufficient layers of line management in DOD that

leaders and staffs manage via committee consen- a hierarchy of projects by priority/resources can

sus, versus personally-attributable senior decision- be implemented if a clear chain of authority for

making. This has bred a practice whereby in- them is established from the top.

dividual decision-making is often ignored or

wateied down due to the continuous need to build

and riaintain consensus with the many heads of The 1986 Packard Commission concludes:

the bureaucracy; and committee consensus is rare- "He (the PM) should be fully committed to

ly timely, especially when it must handle many abide by the program's specified baseline

diverse and complex projects on a continuing and, so long as he does so, the Defense and

basis. Service Acquisition Executives should sup23
port his program and permit him to manage 6. Quinn, p. 82.

it. This arrangement would provide much- 7. This term means the program manager up

needed program stability."" through general managers to line vice presidents

or division/business presidents; not all these levels

Endnotes are present in any one company.

1. A Quest for Excellence, Final Report to the 8. Quinn, pp. 77-83.

President, p. 40. 9. Marshuetz Richard J., "How American Can

2. Quinn, James B., "Managing Innovation: Allocates Capital," Harvard Business Review,

Controlled Chaos," Harvard Business Review, January-February 1985, pp. 87-88.

May-June 1985, p. 78. 10. McDonough, Edward F. III and Francis C.

3. Campbell, William IH., CDR, USN, Ptoduc- Spital, "Quick-Response New Product Developtivity Using Japanese-Style Management: Any ment," Harvard Business Review, SeptemberDefense Industry Applications? p. 31. October 1984, pp. 52-57.

4. Interview with Carl Snyder, Director of Pro- 11. A Quest for Excellence, Final Report to the

gram Management, HP Computer Business President, p. 59.

Organization, Cupertino, Calif., March 21, 1989.

5. Interview with James Bruner, Director of

PW4000 Engine Programs, Pratt and Whitney,

East Hartford, Conn., April 14, 1989.

24
2

ON-TIME COMPLETION

FINDING Schedule is first among cost/schedule and performance.

DISCUSSION OF THE FINDING market share and the need to recover investment

The 1985 DSB Summer Study on Practical Func- and overhead costs quickly. Seven out of seven

tionai Performance Requirements found that in first-hand commercial case interviews (Figure 2-1)

5 successful, major commercial new product systematically established a "must" schedule and

development programs differed from the typical traded cost and/or performance features to meet

defense program, of which 26 were analyzed, as it.

foliows:

" Financial and market considerations made FIGURE 2-1. COMMERCIAL CASE

schedule top priorityFIUE21CO M R ALC S STUDIES COST VS. SCHEDULE

* Performance requirements are traded to hold

schedule; block upgrades, P31 fur new VS. PERFORMANCE

requirements Coae* 1 2 3 4 6 6 7

". Tendency toward proven technology as

schedule is paramount Prior- Sked S3Md Skied Skad Skied Sked Sked ity

"Quick reaction to mandatory changes. Push Ye Ye No Ya No No No

Of the primary criteria for success in major com- Tech

mercial capital investment or new product Pert Yoe yea Yes yes Yea Yea Yes

development projects, we found on-time comple- Trades

tion to be the first priority. If the first entrant in Risk 10% 10% 10% 10% 10% 10% '10%

a product field is considered to be a good value, Buffer

it will sell. Product price and performance are the

next most important criteria since the competitiorn must bring in its competing products later

at a better overall perceived value in order to take awymrktsarfomteleader. Program stability both enhances and is enhanced

away market shrt from the leaby a priority to on-time completion. First, a stable

Meet the Schedule program can be executed more quickly than one

Without exception, schedule was the driving which is continually changing or subject to change

motivation, in the commercial acquisition en- in an unforeseen way. Second, a project comvironment, once a program was approved for pleted quickly is naturally subject to forces of

development and/or implementation, This is not change for the minimum time possible. Figure 2-2,

to imply performance or cost are ignored but, borrowed from Norm Augustine's recent book

rather, they are considered principle variables Augustine's Laws shows that the absolute length

which may be adjusted, following baseline ap- of the program development schedule beyond its

proval, in order to meet the scheduled introduc- approval point is directly proportional to the

tion. This practice is primarily market driven due likelihood of cancellation (left graph); and any atto the implications of late entry on long term tempt to change schedule (a,.ze!erate or stretch

25
decision makers. It is a "chicken and egg" proFIGURE 2-2 blem. A short schedule facilitates maintaining

tenure of management. Continuity in management reinforces rapid decision-making and thus,

so short schedules. If, as in DOD, system acquisition schedules are too long and management 40 PROJECT ) MORTALITY EPICTANCY (a tenures are too short it becomes more and more

difficult to acheive real program successes unless

30 the reinforcing negatives (i.e., long schedules and

short tenures) are broken.

Sufficient Performance

U i 0 L DATA BASE INCLUDES 114 Performance features were next in priority. Suc- Pt CANCELED

SPROJECTS cessful non- DOD industry develops and proves0 L .,, -" 11--0 out new technologies and then introduces them

E O PROJECT. I into new products. Sufficient performance in

IYEARS AFTER INITIATION OF DEVELOPMENT) terms of mission capability, supportability, life-

.201 cycle costs and unit costs, etc., was required. But

stretch goals were also used, along with contingeiwy development to rfacilitate tradc-off,

.* should the schedule be jeopardized or develop-

.10. ment costs become excessive. Typically, top com-

"0 •mercial management recognized that not all

technical goals could be achieved and delegated

0 o- - to program management, or first level general

POINTS REPRESENT INIIDUAL management, authority to make required tradeSEVELOPMENT PROGRAM off,. The PM had authority to use the best

-,0------ _ .,_technical I support available in the company to

-30 -20 -a .20 . 30 -40 .o0 assess relative costs and benefits of performance SCNU.JLE CHANGE. PERCENT trades and to make timely trade-off decisions.

"TO INITIAL OPERATION CAI-ASILITY Functional department chiefs supported program

managers on performance trade decisions and in

out) will always lead to increased costs for the solving technical problems in a cooperative mansame capability. ner. Their motivation was frequently enhanced

The Final Report of the Defense Science Board, by pay incentives associated with program

1985 Summer Study, also concluded, "Schedule success.

is paramount (in successful commercial programs), and resources-in terms of money and It takes industry about 10-12 years to bring new

people-are planned to solve problems in an ef- technology into the market, so technology profort to hold schedule "I Two examples, previ- grams are usually separated from new product

ously introduced are: development. Preplanned product improvement

-The PW4000, a $1B jet engine project, depen- and evolutionary development were the standard

dent first on completing development and FAA approaches to pick up desired technology or

certification within 54 months of approval. 2 features not available at planned schedule cutoff

points. The focus on new products is to get them

$Nissan's Smyfrna truck and auto plant, a into the market fast. This is done by applying

$60I effort, required to be inl full rate produc- available and proven technology. In this way,

tion within 42 months of groundbreaking.1 commercial industry takes low cost chances on

In industry, schedule is measured in month,, not small, new technology projects but few technical

yeams. This related observation is significant in chances on new products or production capability

terms of tenure of program managers and senior which are too expensive t'- experiment on.

26
Pianning for s11iccessful new products involves over funds allncation and expenditure (versus

avoiding earl.y detail since the design process is funds control by functional management). 4 In

iterative and many decisions should be flexible so six of seven out of our first hand cases, acquisias to advantageously consider trade-offs as it tion line management had direct funds control (if

evolves. Our first hand interviews with commer- the PM didn't have funds control, his line manager

cial firms established that seven of seven began did). This evidence reinforces the concept that

development and implementation with flexible fast, timely projects arc predictable in terms of

designs: seven oi the seven indicated that they funding needs, and do more for effective cost con.

were prepared to, and did, trade off technical per- tainment than a priority focus on cost.

forinance requirements for overriding schedule or Of the twelve individual programs documented

cost reasons. in the seven commercial case studies we

Flexible Funding documented, only two had overruns beyond 10

The commercial companies we researched had percent of the original estimated cost. The

business planning systems not unlike our PPBS evidence strongly supports the conclusion that

meeting schedule reduces risks of cost overruns i-n Most functional aspects. They were, barring b int major revenue problems, less constrained than limiting expenditures for direct and overhead major ~~ ~ ~ ~ evlpmn costs.rblmlescnsriedta

DOD in committing funds over the full program development costs.

investment phase. The keys to successful integra- DOD PRACTICE AND INHIBITORS

tion of business planning and stable funding in Of the fundamental criteria of proiect success,

commercial business enterprises are: 1) realistic DOD, on the other hand, effectively prioritizes

financial planning-using the business planning performance (overstated mission and adprocess in a disciplined manner to accurately mini3trative requirements and overly detailed

trcas, revenues and expenses, thus capital fun- specifictionb' and acquisition cost ( or price) over

ding available: 2) selective advancement of pro- quality. We have an institutional willingness to

gram opportunities to BOD approved status- trade time for added funding or performance. Getensuring that all approved programs w.ere affor- ting the "most bang for the buck" is not necessarily

dable based on business planning; and 3) com- bad; but, :it can be and is counterproductive if perpleting approved programs on schedule, thus sup- .ormance is optimized independent of cost and

porting the program assumptions used in the schedule objectives. Our historic failure to meet

business planning process. schedule objerives also promotes excessive re-

, 1, quirements. Users must wait extremely long

Cost teperformante cfriterial for m easurent- periods before their needs are satisfied; the fur- :.chedule- performance criteria for measurement ther out requirements must be projected, the more

o, project success in commercial industries. That technologically impractical they will be. If, in

does vo!. mean cost is unmanaged; rather," budgetins is done a to xpected cost and flexibiahty practice, system performance requirements are exbudgtypinglly pisdone to acquisitionostlandefleibiiycessive they' drive costs unnecessarily high and

i,, typic~ally piovided to acquisition line manage- stretch out schedules.-

ment to proceed as long as costs are within 10 percent ot the approved budget. Robert N. Anthony Typical DOD programs take 10-15 years to cornand David Vw. Young, when describing manage- plete development, production and initial deployment controls in non-profit organizations, iden- ment. This is about twice as long as it takes to

titied two subactivities-accounting and pfrfor- see fundamental changes in defense strategy goals

iiia.ce. Thev attribute best accounting practice with unique types and quantities of forces required

to include establishment of "guidelines" and not to support it; and more than three times longer

to focus on detailed resource breakdown (e.g., than line managers have to commit to executing

travel versus salaries versus materials versus con- approved programs. We must do something to

tracts, etc.). Best practice invohles mauagemewt turn this around or forego necessary force moder-

,vdhority and accountability to meet project goals nization in a constrained resource environment.

,ind fie2.ibility to change plans, if needed. They It is generally understood that DOD's systems are

als, stated line management must have control more complex than commercial. Thus, they tend

27
to suffer lower mean time between failure (MTBF) We have an institutional aversion to budgeting

and availability, larger O&M costs and are pro- for risk and contingency. Though the Congress

duced in smaller quantities. The higher complex- has acted to permit a 15 percent cost growth in

ity and smaller quantities are sometimes development on Defense Enterprise Programs (5

unavoidable; but unnecessary. complexity together percent in production), as part of its milestone

with less mature production techniques (due to authorization process, the PPBS decision process

smaller quantities) may impact availability and doesn't provide such flexibility. Typically, any

O&M costs too much. Despite the obvious intent risk buffer is pulled out and committed elsewhere.

of functional department• and staffs at all levels Thus, when needed, it requires contributions from

of DOD to protect and "help" program managers other "bill- payers," which ripple down through

deal with the complexity of new systems, they ac- programs. Perhaps more important is our avertually complicate the process and confuse PMs sion to committing funds more than 1 year into

(Figure 2-3). the future, thus, limiting flexibility to change

priorities annually. This latter destablizing effect

is well documented and is above DOD's authoriFIGURE 2-3. MANAGEMENT ty to direct change.

VIA DETAIL POLICY, PROCEDURE SUGGESTED IMPLEMENTATION FOR DOD

AND REGULATION The DOD can simplify procedures and facilitate

' 'success in executing essential programs. We can

simplify all programs, major and non-major, via

disciplined, program specific decision-making

S(i.e., establishing priorities among programs and

/ internal program objectives) from the top-down. "The milestone decision process must establish the

Pgessential cost, schedule and performance criteria

M M? gests that: 1) performance should be treated with

INTENT IMPACT minimum detail, not reems of standard "-ilities"

references; 2) a realistic schedule should be

established; 3) with funding guaranteed for the

The impact of innumerable functional directives duration of at least the development phase; and

and regulations (many of which are countermand- 4) the funding commitment should provide a bufing of each other) is to dump more requirements fer to the program manager to give him some flexon the programs in the form of excessive single ibility to perform trade-offs and optimize the total

interest "-ilities" which drive the total performance equation.

envelop, thus the time and cost to implement. Figure 2-4 portrays several interrelated features

The job of trading-off counterproductive elements of what could be our PPBS and acquisition

of performance is extremely difficult for most management systems. The diagram is adapted

DOD PMs. The typical DOD PM is a colonel or from one seen at HP's Computer Business

Navy captain; whereas the "-ilities" functional Organization. We need to link decisions made in

specialists have, and use, their senior executives the acquisition management process to constrain

(who are usually generals, admirals and SESs) to future decisions in the PPBS process. To be fully

support them. Thus, performance trades are forc- consistent with successful commercial businesses,

ed up into "Flag Officer" channels or are not ac- approval occurs at what effectively is our MS II

complished. We should not become slaves to for developmental programs (MS III for NDI prounrealistic schedules; but we will perform better grams). The diagram shows PPBS driving funding

if we have an achievable schedule objective which availability up to MS II, then being driven by acis not compromised by inflexible, bureaucratic quisition program decisions at MS II and beyond.

procedures. Implementation of this improvement would en28
tail phasing in Defense Enterprise-like Programs Practical baselining of new systems requires a proat all levels (major and non-major) with milestone- fessional, disciplined organization and process.

authorized stable funding for clearly essential pro- The suggested improvements of this chapter and

grams. Key to this implementation is disciplined Chapters 1 and 3 are so interdependent, a fuller

decision-making based on realistic planning and treatment is provided in Chapter 4.

programming, and institutional follow-through Endnotes

based on commitment to and communication of

strategic priorities. 1. Defense Science Board 1986 Summer Study,

FIGURE 2-4. LINKING DEFENSE STRATEGY, PPBS, AND

MAJOR SYSTEMS ACQUISITION MANAGEMENT

Objective: Provide capable systems to our uslrs, efficiently and on time.

Defense PPBS System Systems Milestone Review Process

Strategy

Planning Programming Budgeti% o 1 2 3 4 S

"* History 0 UASer 0 Inmalte - Systems T "* intemratonal • A. ".,-ares PEO SAE DAE DAE/ PEO PEO

Trends 0 Prioritize SAE

-Economic * R .. ,rces Systems

-social

-Technical a Miesions • Resource

-Po"ticl Estimation*

" Strttgic

Position User Needs

" Woorldwide Budgt Impact Expectations Technology Baseline 1-2 yrs Needs 2-5 yrS

Strategic =-l5 yrs Issues 15 yrs

The MS II (MS IllI for NDI programs) is the critical Use of Commercial Components in Military

point in the life of a program where the baseline Equipment, January 1987, p. 10.

is defined and committed. The PM/PEO should 2. Bruner interview.

be given flexibility and authority to make tradeoffs to achieve an optimal mix of cost, schedule 3. Campbell, p. 30.

and performance within flexibly defined limits (the 4. Anthony, Robert N., and David W. Young,

MS II baseline agreement). This improvement Management Control in Nonprofit Organizations,

depends on how the program authority, account- pp. 537-541.

ability and resource control aspects of Chapter 5. Cohen, Barry L., CMDR, USN, and Stewart

3 are handled. L. Manley, CMDR, USN, An Evaluation of the

The key policy directives applicable are DODD Packard Commission Recommendations En5000.1 and 5000.45 which should be revised to couraging Commercial-Style Competition and Exemphasize stability and flexibility. Many lower panding the Use of Commercial Products, p. 2.

tier directives and procedures detail how to do 6. A general conclusion drawn from the book by

many of the "-ilities;" these need to be consistently Robert P. Haffa, Jr., Rational Methods, Prudent

treated in order to emphasize objectives and Choices: Planning U.S. Forces, December 1988.

facilitate effective, tailoring to individual program, acquisition strategies.

29
3

PROGRAM AUTHORITY,

ACCOUNTABILITY AND RESOURCE CONTROL

FINDING Program managers are afforded significant authority and resource control, and

are held personally accountable.

DISCUSSION OF THE FINDING or general manager (GM). Program authority was

1986 Packard Commission: "We must give not shared with functional managers. Acquisition

acquisition personnel more authority to do line managers generally are "captains of their

their jobs. We must make it possible for peo- ships" held responsible and accountable for the

pIe to do the right thing the first time and success of the project but given the authority to:

allow them to use their common sense."' 1) make timely decisions and, 2) control critical

1986 DSB Summer Study: "The commercial resources (especially participating personnel). This

program manager has very great authority finding is intrinsically tied into the findings in andrsprogy Haer lChapter 1. Our first-hand interviews (see Figure and responsibility. His review levels are very 3-)etbihdncossuon()aole

few--2 or 3 at most.''2 3-1) established no consensus on (1) absolute

authority to the project manager (PM), (2) who

We found that program stability in successful has absolute control of program resources nor,

commercial projects is fundamentally dependent (3) showing clearly the "best" project management

on clear delegation of program responsibility, organizational approach. The best commercial

authority, accountability and resource control. practices in this area of authority and accountaAccountability, as used here, includes line bility go deeper.

management's accountability and the accountability of all program participants (e.g., functional FIGURE 3-1. COMMERCIAL CASE

specialists, functional management and senior

staffs) for program success. Resource control is STUDIES AUTHORITY AND

further narrowed to mean control of participants; RESOURCE CONTROL

funding stability is not a central focus of this study coco 1 2 3 4 5 6 7

due to the reality in DOD that funding is not going to be independently stabilized without PMO Do". MatrxA Mix Matrix& Mix Mix Matrix

statutory changes; materials are not a central Dod. Mix

focus for DOD acquisition programs because most Type PU PC or PMd PC or PM PC- PC*

of that is provided by the prime contractor in- PM' PM PM

volved. The other primary resources, time and

Res. PM GM or PM VP or PM Matrix PM technology, we've addressed in preceding Auth'y PM PM

paragraphs. • PC no control; PC- some control. PM full control

Enable Line Managers

Program management authority in commercial

svtems programs is, assigned to a clearly visible Best commercial practice is to place authority and

acquisition line manager whose title may be pro- resource control in the hands of acquisition line

gram,'project manager (PM), vice president (VP), managers; then, they are fully accountable for

31
program success. Career success of the PM in the (e.g., VPs of marketing, engineering, manufaccompany is linked to his project, but bad news turing, etc.) are charged with providing support

is not punished. Problems discovered as the pro- to line management but not direction of lowerject progresses, if reported quickly and accurate- line program management. The primary support

ly, do not reflect poorly on the manager. Hiding they provide is experienced, professional personproblems, even if tile project is deemed a success, nel to give ihe PM every opportunity to get it done

would result in separation from the company. At right the first time.

Tektronix, for example, there was a 50 percent Quinn observed that bureaucrats require many

overrun in a critical, major capital project which approvals in the "name of efficiency." Successful,

was not reported by program management to cor- competitive, commercial businesses know that

porate management; responsible line managers such "efficiencies" are not affordable in a comwere replaced, but the company philosophy and petitive marketplace. Some inefficiencies are

system of total project authority and resource con- directly attributable to the way a specific program

trol to acquisition line management was not is run but the concern here is the inefficiency

changed. The real issue was not the overrun; it systematically imposed on all programs by a large

was the matter of line management failing to bureaucracy if it is not held accountable for proreport a cost problem, thus surprising top ject success; nor is it accountable for the overhead

management when it was too late to consider costs it embodies.6

aiternatives.. This example applies as well to the

environment (Chapter 1) for program success; the In another recent example, Goodrich announced

rules w ere not rule chnge wee no jus beausesomone the elimination of many vice presidential positions

disobeyed the old 

ch anged 

rule. just because som eone and a d staff; s a f the h 

new 

e CEO E observed b e v d that t a "The T e com- c m

pany had VPs of every function imaginable" when

Jerry L. Chapin, in comparing major program he joinec the company. He systematically went

managempnt at John Deere, HP and Boeing with about eliminating most of the people in "approvDOD, attributes small central staffs and line ing" types of jobs. He recalled that when he had

management authority and accountability as best been a division general manager he had to obtain

business practices.' In a recent example, McDon- corporate approval for $25,000-plus purchases. 7

nell Douglas Aircraft Company was reorganized

to remedy a burgeoning $26B backlog in orders As seen in Figure 3-1, matrix management or a

to "end the fingerpointing and frustration caused mix of some dedicated project staff with matrix

by lack of authority and accountability." The support is normal. The way industry provides the

solution included elimination of all five senior vice professional work force to the PM is to focus the

presidents and provided each aircraft program responsibility cf matrix functional managers and

with departments for engineering, finance and make them accountable for program success. The

procurement. The atter change was made to result is they provide responsive support or must

avoid delays in ordering parts, hiring people and answer to top management directly. Companies

getting other necessary support.5 The lesson here visited seemed not to require frequent top

is to enable line acquisition managers, management intervention to solve people problems because everyone understood the vision and

Focus Responsibility top management's commitment to successful proSuccessful commercial programs ore also deperi- jects. As well, these functional departments are dent on focusd decision-making up the line; PMs given no project oversight role; they are a resource dent onfmorcustddemshve a ind uste diret access t provider. Their only means of contributing to pro- of 

top 

manor 

m anagem systems ent to 

heve keep and use direct access to ject success is to be responsive to acquisition line the C EO , or surrogate ma ge nt no by f di g au .

(for example COO, a VP or GM), up-to-date and management, not by finding fault.

to resolve problems beyond the capability ef the During our interview with the PW4000 Program

PM. Staff review of the program prior to PM ac- Director, he was asked about the role of senior

cess to the CEO is unusual since it would frag- functional management; specifically, what reports

ment line management's responsibility and slow were required of him to assure them of proper exdown decision making. Senior functional officers ecution in their functional area? His answer was

32
in line with that of other companies visited but The best available people are recruited for the prostill surprisingly concise; it was: "I don't; they gram support positions and they are accountable

assure me!"-8 Successful commercial companies to only the PM. Their best efforts are orchestrated

typically minimize project reporting requirements by the PM and compromise among competing into t'xose essential to keeping upper line manage- terests is handled at that level, not by the corment informed. The companies we visited did not porate functional staff. Senior level (corporate

formally involve functional management in the staff) expertise is invited by the PM, not the suppost-approval program review and decision porting functional specialists, if help is needed.

process. Though virtually all companies were matrix

Experienced People organized, with many functional specialists

1986 Packard Commission: "Generally, assigned to programs in a task organized fashion,

commercial program management staffs are all functional personnel assigned to support a promuch smaller than in typical defense pro- gram look only to the program manager for programs, but personnel are hand-selected by gram direction and decision-making. Program

the program manager and are of very high managers, in turn, depended on the expertise and

quality. Program staff spend their time recommendations of their assigned functional

managing the program, not selling it or specialists.

defending it." DOD PRACTICE AND INHIBITORS

"They involve, above all, trust in people. A key difference between best commercial pracThey involve the belief that people in an tice and typical DOD practice is that commercial

organization want to (d0 a good job, and projects encourage compromise and consensus

they will, if given the opportunity...'-Q building up to the point that the program is apA key prerequisite fnr decentralized management proved, then all participants support the solution.

control is an experienced professional acquisition In DOD, typically, the functional specialists conwork force. Successful businesses appear to tinue attempting to optimize according to their

employ such a work force on projects which are special interest and are supported in doing so by

determined necessary to the future of the business, policy (e.g., each OSD functional staff office

Project manager selection criteria varied across publishes detailed procedures for all components

the companies visited. But there was a strong to follow; these are translated and "enhanced" by

tendency to appoint a technically oriented PM for Service and command level regulations) and

the early "sell" phase leading to project go-ahead reporting structure (OSD, the Services and all

decision and then replace him with a strong levels of command have staff functional chiefs, "organization" (business or production) oriented some of which are entitled "advocates"). ResoluPIM to implement and initiate operations. tion of conflicts over functional issues often deCommercial businesses (e.g., GE, P&W, pend on the Secretary's personal involvement and

Tektronix, HP and Nissan) also focus much at- decision, one case at a time. This is very impractention to prequalifying and selecting the right tical due to time constraints on the Secretary, so

people into support positions on project dedicated many counterproductive compromises are agreed

staffs or from matrix departments. They also in- to if only to get on with something; lost is the optentionally kept the skill categories few, prefer- timal, tailored solution. The DOD acquisition

ring generalists who can appreciate the project culture has become one of extremely strong cengoals over the narrow disciplines traditionally tral control of the details of execution via comavailable from functiona! departments. Mr. mittee consensus. The overwhelming strength of

Quinn also observed (during several years via our senior functional staffs has robbed: 1) PMs

many industry case studies, including Sony, IBM, of any significant discretion in making program

AT&T, Intel, HP, 3M and Honda) that a clear execution decisions and, 2) functional participants

long term vision by top management will attract of opportunities to compromise in the best interest

quality people, focus creativity and channel ac- of the program.

tion to the high payoff opportunities.") Functional and special interest advocates exert

33
significant influence over the systems acquisition Figure 3-2, for example, represents the impact of

process. They often can stop or delay actions to compromise between a program manager and a

ensure their particular interest is accommodated; special interest advocate or narrowly defined funcand the defense bureaucracy is constructed so the tional participant. The graphs are simplified to

senior advocates outrank many PEOs and most show performance versus schedule indifferencr at

PMs. This latter feature causes PM! PEOs, who a constant cost. Here, performance is a composite

may disagree with senior advocates from time- of mission performance and all "-ilities" which imto-time, to have to consider career-risking, "fall- pact the work effort on the project. The left graph

on-your-sword" encounters with top acquisition shows at point O(PM) the optimal intersection of

line and staff management every time (it could the program budget line with the PM's utility

be often) there are disagreements. function at U -- 4. The right graph shows that the

Economic utility theory provides a useful means arne budget line applied to a functional

of analysis of our advocacy situation." If specialist's utility function yields an optimal utility

stipulates that each program participant has a at 0(F) where, coincidentally, his U=4; his inunique set of indifference curves which , for ex- difference curves are significantly biased toward

ample, represent his willingness to trade off pro- some added performance feature(s) and a willgram performance and schedule (cost is held con- ingness to trade schedule as necessary for it. Atstant for this example). The participant is equal- tributing such bias may seem unfair but it is

ly satisfied anywhere along a curve, but feels bet- typical in DOD given the direction of accountater off on a higher curve. The point of tangency bility of many functional specialists. The 0(C) is

between the program budget line and the highest a hypothetical compromise along the budget line

utility curve provides the optimal point for the between the PM and the functional specialist. Of

participant whose indifference curves are course, compromise yields less utility for each paremployed, ticipant, U(PM) =3 and U(F) 3, in this case. This

compromise process is healthy if concluded prior

The dilemma is to identify the participant who to program approval; but is unhealthy if it conis best able to evaluate this trade-off. Whose itili- tinues following that point. i

ty function should be maximized? f

FIGURE 3-3.

FIGURE 3-2.

HighHigh

High P I I\ 0(\1M

P LCw

ong Shor"

SS

Pu• Utidy (P)

High 0(p) OC

Low_

LongShr

Low

Long Shofrt

Funellonal Utility (7)

34
Considering the impact these advocacy offices The "segmentists" approach, where the subunits

have on the program decision process, it is im- are kept separate from each other, causes hostiliportant to understand their genesis. They large- ty and difficulty in achieving consensus. 13 The

ly evolved in response to some real or perceived segmentist attitude pervades defense acquisition.

problem. we have evolved to the point that most DOD parConceptually they can be considered like a fire ticipants in systems acquisition are checking to

alarm system:12 see what the other guy is doing w-or, g. Compromise is required continuously in corder to overcome the short memories of transient participaFIGURE 3-4. FIRE ALARM tion at all levels. The incentive for many seems

p to be, "How can I keep anything from going

A wrong on my shiftt7" Instead, it s),inuld be, "How

R T "ANY1- - can I help thi5 program succeedi"

I A ,uAL mu Another important inhibitor to professional funcL F tional expertise to PMs in DOD is the civil serE vice system which requires people to be promoted

s1 -to earn more money. Promotions are tied to

N .organizational positions; the higher grade posi- T / CIGAR@M0g tions are on headquarters staffs, not in program H or functional operations offices.

E

E The myth that fewer functional people can acA Le I.o~L___ - complish more in a part-time, indirect, consulting

I oR LCMO RPoEl role has further reduced the effectiveness of

RESPONSE rIME defense acquisition. All programs are not alike;

to effectively tailor standard solutions to program

unique situations requires functional knowledge,

program experience and an ability to trade-off.

This graph shows the trade-off between the alarm Typical, offsite matrix management approaches

sensitivity setting (which represents a special in- preclude functional participants from gaining proterest being advocated) and response time (repre- gram experience and from feeling a part of the

senting the impact that failure to accommodate program they must support. It boils down to there

the special interest may trigger). A low alarm set- being no positive motivators for such matrixed

ting (greater sensitivity) provides more response personnel to do their best and to accept some

time in the event of a real fire but also may result risks.

in false alarms; false alarms tend to reduce attention given to the alarm system.

As problems are identified in the defense acquisi- SUGGESTED IMPROVEMENTS

tion system, alarm settings have been made more Following approval for a program to enter fullsensitive to prevent possible reoccurrence. How- scale development, the PM and PEO should be

ever, in doing so, the effectiveness of the system empowered to use the best expertise available to

to identify real problems or make practical trade- them to solve problems and perform trade-offs

offs between conflicting special interest demands, as necessary to complete the program within

has been reduced, baseline constraints and without independent program oversight and direction from functional staff

Rosabeth Kanter, in her 1983 book, The Change managers. The SAE or DAE should be kept inMasters, defines two different organizational formed of progress and problems, directly by the

cultures: 1) the "integrative" organizations which PM, on a quarterly basis. The SAE or DAE should

minimize conflict between subunits; whereas, 2) then be the link to the DRB and the Congress

the "segmentist" organizations which are anti- should there need to be a significantly altered prochange and compartmentalize issues and people. gram baseline.

35
Implementation of this impt ovement would en- proach should reverse the growing trend in some

tail the decision-maker, at MS 11, committing to commands to place functional participants (even

the program baseline with all subordinate acquisi- those full-time on specific programs) under the

tion line managers and ensuring the baseline ob- control and evaluation of the functional matrix

jectives were sufficiently prioritized that acquisi- manager.

tion managers had flexibility to solve problems

encountered during execution. Endnotes

Professional functional support to program 1. A Quest for Excedlence, Final Report to the

managers should be strengthened and the need for President, p. 42.

staff functional oversight of program execution 2. DSB 1986 Summer Study, p. 10.

greatly reduced, Professional functional expertise 3. Interview with Alan Patz, former Director of

should be assigned in direct support of program Finance and Operations at Tektronix, Beaverton,

management. The thrust of this improvement is Ore., March 30, 1989.

to implement, within DOD, a system whereby top

functional executive staffs are primarily focused 4. Chapin, Jerry L., Government and Industry

on creating and managing a system to educate, System Development Models: A Review and

train and govern the careers of acquisition professionals. Such a system would provide PMs and 5. Valente, Judith, and Roy J. Harris, Jr.,

PEOs the functional expertise they need to plan, "McDonnell Douglas, Flush With Orders,

organize and direct programs right the first time Overhauls Management of Aircraft Unit," Wall

and be much less dependent on program review Street Journal, Feb. 15, 1989, p. A6.

by functional managers at all levels. A collateral 6. Quinn, p. 77.

benefit is that programs would be less exposed to Deutsch, Claudia H., "Goodrich Finally Gets -

the diffuoion of ieaponsibility assu(iated with It Right," The New York Times, March 12, 1989,

committee decision-making. pp. 1, 8 (business section).

Matrixed, functional, program support person- 8. Bruner interview.

nel should be dedicated to programs through

organizational alignment and incentives. To the 9. A Quest for Excellence, pp. 42, 50.

maximum degree possible, matrixed personnel 10. Quinn, p. 78.

should work full-time for, and be rated by, the 1 Browning. Edgar K., and Jacquelene M.

PM. In some of the Services and many subor. Browning, Microeconomic Theory and Applicadinate commands, functional acquisition tions, Boston: Littk, Brown and Co., 1983,

specialists and PMs/l'EOs have different chains Chapter 2.

of command. The thrust of this suggestion is to

provide PMs and PEOs the functional expertise 12. The convention was suggested by Dr.

they require, and deserve (dependent on program Elizabeth Pate Cornell of Stanford University in

priority) to plan and execute the program. The several articles dealing with building codes for

policy should be in the form of principles and earthquakes and the dangers of nuclear waste.

goals, not directives, due to the need to provide 13. Dean, James W., Jr., Deciding to Innovate

flex'bility to local commanders to optimize the use - How Firms Justify Advanced Technology, pp.

of scarce personnel expertise, Adoption of this ap- 25-27.

36
4

DOD ACQUISITION POLICY

WHAT IS IT?

HOW SHOULD IT BE IMPROVED?

1986 Packard Commission: "The program tion commitments, (3) Elimination of the need to

manager finds that, far from being the follow policy and regulations and reduced reportmanager of the program, he is merely one ing channels for PMs of designated major proof the participants who can influence it. An grams; (4) the need for a plan for improving proArmy of advocates for special interests fessionalism in acquisition managers; (5) buffers

descends on the program to ensure that it in cost threshholds and milestone dates; (6) limits

complies with various standards for military in SECDEF authority to stretch out programs solespecifications, reliability, maintainability, ly for budgetary reasons; and (7) direction to

operability, small and disadvantaged busi- SECDEF to review all programs transitioning from

ness utilization, arnd competition, to name development to production by 1993 to minimize

a few. Each of these advocates can demand the demands for very limited funds. These are ali

that the program manager take or refrain statutory attempts to get DOD to stabilize major

from taking some action, but none of them programs. Limiting aspects of these laws include

has any responsibility for ultimate cost, the emphasis on independent Cost Estimating and

schedule, or performance of the program. Operational Testers. Though these latter conNone of the purposes they advocate is straints do run counter to best business practice

undesirable in itself. In the aggregate, as they impact DOD leadership, the general thrust

however, they leave the program manager is for DOD to implement stabilizing features in

no room to balance their many demands, major programs. Some of the committee language

some of which are in conflict with each accompanying the acts indicates congressional inother, and most of which are in conflict with tent to ultimately mandate more stability yet, to

the program'3 cost and schedule objectives, wit: (1) HASC and SASC desire for all major proEven more importantly, they produce a dif- grams to be milestone funded; (2) joint authorizafusion of management responsility in which tion conferees desire for SECDEF to make recomeveryone is responsible, and no one is mendations to reduce test time and eliminate

responsible."' philosophical problems in current test approaches.

In this chapter we look at recent congressional (3) The SASC encouraged SECDEF to develop a

guidance and statute as applies to program sta- system whereby PMs and contracting officers

bility then assess DOD's major applicable direc- have appropriate decision-making authority and

tives and instructions, greater Impact on the PPBS process; (4) the Congress chided DOD for not linking programs to

strategy, policy and operational concepts. 2 If the Congressional Guidance. Though there are several latter is not considered fair criticism, then DOD

statutes and implementing regulations controlling should clear up the appearance of lack of continui- relatively detailed aspects of procurement prac- ty between strategy, policy, operational concepts

tice, recent congressional guidance and statute are t bd sys tem poisition congrams

tioticably in line with our previous descriptions and system acquisition programs.

of best commercial practices as applies to program The DOD Policy

stability: (1) baselining; (2) multiyear authoriza- Next, we evaluate the key DOD acquisition policy

37
which tends to promote instability despite its recommendations to the USD(A) thence to the

stated goal of facilitating stability. The top two SECDEF ensures time is wasted while line manageDOD policy documents dealing with acquisition ment is put through a wringer. These committees

are DODD 5000.1, "Major and Non-major should be reduced and redirected to review and

Defense Acquisition Programs," and DODI advise the DAE but not have any directive power

5000.2, "Defense Acquisition Procediires." The over programs. For example, they should not meet

former captures, fairly concisely, the essence of with the PM/PEO/SAE prior to and separate

congressional guidance, but with many counter- from the full DAB. Senior functional staff, freed

stabilizing measures. The latter is, as entitled, a from these committees, could then be assigned to

procedures document. We will not repeat the con- proactive work in managing the career system for

tents of these documents but critically identify acquisition specialists, or to PM and PEO staffs.

aspects which appear directly contrary to the ef- (6) The Directive subordinates Acquisition Decifective adoption of best commercial practice in sion Memoranda (ADM) to the PPBS without

defense acquisition. qualification; PPBS should be subordinated to

(1) The DODD 5000.1 directs the policies, puin- ADM baselines from MS 1l-on.

ciple and objectives in managing major DAPs be The DODI 5000.2, the second acquisition policy

apph,_ d to non-major DAPs. However, the prin- in precedence, is a procedure. If a staff procedure

ciples and objectives are riot stated; they should is necessary, and it probably is, it should be an

be, as lower-level staffs tend to overapply detailed internal OUSD(A) SOP; it should not be appolicy and procedores when in doubt. (2) The plicable directly to the DOD components. The

DAE is described as an advisor; the SECDEF is bulk of the document directs procedures for

the decision-maker. This appears contrary to the milestones and the preDAB process for which the

Packard Commission recommendations. With the latter should be discontinued. Those enclosures

SECDEIl', USD(A), Service Secretary and SAE in which would still be revelant to the DAB main

the chain of command and authority for defense decision reviews (MS II and Iii only) could be apacquisition, there are six levels of acquisition line pended to DODD 5000.1.

management in DOD from the PM to the The DODD 5000.45 and 5000.52 are key policy

SECDEF; each layer has a staff checking on the dii'ectives directly impacting the culture of defense

efforts of lower managers and staffs. What's acquisition. The former establishes baselining,

wrong with SECDEF and Service Secretary per- whereas the latter establishes certain objectives

manently delegating acquisition systems decision for acquisition career management. They both

authority to the DAE and SAE tespectively7 (3) need strengthening to establish the ient.n to proFive phases, with six DAB milestone reviews are vide authority, accountability, resource control,

directed. This conflicts directly with best business and reasonable flexibility in the management of

practice of two or fewer go/no-go program deci- defense acquisition programs.

sions; these should be our MS II and MS III at .i

maximum. Wf cannot afford, any better than in- This criticism has been brief and direct; there are

dustry, to second/third/fourth/etc.-guess our ap- at least 50 second- and third-tier DOD directives

proved programs. The MS 0, MS I and MS IV and instructions (and hundreds at lower tiers) that

reviews are appropriate but should not be DABs. add excruciating detail to OSD acquisition policy

These reviews should be left to the PEO and user and cascade down to Service staffs who must imcommunities. The MS V is a duplication of MS plement via service directives, regulations and

0 and should be eliminated. (4) Affordability procedures. All these should be reviewed keepshould not be reconsidered at each milestone, only ing in mind to eliminate or redirect are procedures

once; MS i1 is optimal with adjustment at MS Ill for internal OSD staff.

if necessary. (5) The ten DAB acquisition corn- For DOD to emulate best commercial practices

mittees diffuse responsibility from line manage- will be difficult because thE true solutions will cut

ment and set an example for lower executive deep into our bureaucratic organizational

staffs. The requirement that they use senior staff overhead. Successful commercial companies are

consensus to identify program issues and make lean; DOD is fat. To begin providing effective

38
authority and accountability to acquisition James Ambrose, prior to the aforementioned conmanagement, functional stafts must be removed gressional acts, but which incorporated many of

from program oversight and direction roles. their features. A look at the features of the MSE

case is instructive to see what good business prac- "The fundamental intent of the (Packard) tices were employed and several that were not (see

Commission's recommendations is to Figure 4-1). Many techniques like those attributed

simplify the acquisition system by con- to best commercial practice were used in MSE

solidating policy and oversight, reducing with the result that it has been much more stable

reporting chains, eliminating duplicative than most major DOD programs. However, we

functions and excessive regulations, and will focus on commercial practices that were not

establishing an environment in which pro- employed as they illustrate the essence of some

gram managers and their staffs can operate remaining problems. Do not miss the point that

as centers of excellence. This should allow MSE is exceptional in the degree that innovative,

for a substantial reduction in the total good business practices were used. A reading of

number of personnel in the defense acquisi- the MSE case will underscore the institutional diftion system, to levels that more nearly com- ficulties MSE encountered in employing many

pare with commercial acquisition counter- good business practices even with top-level cornparts. Eliminating a layer of management by mitment and support. Unfortunately, just because

moving the functions and people of that practices (see Figure 4-1) were used to advantage

layer to some other layer clearly will not in MSE, it would be wrong to assume DOD has

suffice." 3 institutionalized them. Rather, the good techniques used in MSE were due to extraordinary

Thus, stability in defense acquisition programs top-management efforts and an unusually long,

boils down to the presence of strategic goals which stable tenure of key program management

top management has committed to-a full organ- personnel.

izational commitment to on-time completion, and

the clear delegation of top management's authority to acquisition line management to get it done. FIGURE 4-1. COMMERCIAL

Congressional impact upon DOD system acquisi- STABILIZING FEATURES OF MSE

tion is probably exaggerated. Yes, the Congress

does overly micromnanage projects; but it is less ACQUISITION

likely to step in if it, too, can identify the strategy

goals of the project and, most imnportantly, it is 1. Those employedconfident that the project will deliver a satisfac- @ Schedule prioritized over performance

tory product, on time and within cost allowance. a Top management (SAE) Involvement

* Freedom from policy, regulation An Example, Mobile Subscriber Equipment * Fewer Go/no-go decisions (effectively 3) * Flexibility to use orogram savings It can be inferred from our comparisons of suc- * Telt schedule flexibility

cessful program management in commercial com- * Competed once for life of program

panies and in the DOD environment, that there * Used avallable production technology

is room for improvement in DOD acquisition 2. Contrary practices employed:

policy. Without enumerating all problems (that @ Special Interest and functional staff oversight

would take more room than appropriate here), * No buffer to bottom line cost (Congressional cap) a PM/PEO continual fight for people and travel funds an example of a major Army program ultimately ___________________

designated as a Defense Enterprise Program may

be illustrative. As part of our research, we investigated the Mobile Subscriber Equipment The Under Secretary of the Army made the uni-

(MSE) program and a case was developed which que acquisition strategy work for MSE. The PM

is included as Appendix G. The MSE acquisition and later thc PEO, once appointed, are more like

strategy was an experiment by then Under project coordinators than directors. Due to the

Secretary of the Army (USA), the Honorable Army's implementation of the PEO concept and,

39
within AMC, the simultaneous restructuring of "now" and that top DOD managcment must

the functional matrix, there was a need for the decide which ones must be accomplished and

PM, with PEO support, to continue to fight for when, and communicate these decisions to the

people resources and travel funds and with senior field.

functional and special interest executives to stay Our recommended authority and resourcing apwith the program baseline and acquisition strategy proach demand that all program participants be

decisions made by the Secretary of the Army directly accountable to an acquisition line

when he approved entering full-rate production manager. These acquisition line managers are few

in 1985. The DEP designation helped force prac- by law; they are: the Project Manager, the Protical trade-off decisions, but they had to be made gram Executive Officer, the Service Acquisition

at the major general level and above (the PM is Executive, the Service Secretary, the Defense Aca colonel; the PEO is a brigadier general) to over- quisition Executive, the Secretary of Defense, and

ride the institutional biases of the lower-level ac- the President (the SECDEF and Service Secretaries

quisition bureaucracy. These lower-level func- could be eliminated via proper delegation of

tional staffs continue to try to standardize the " authority). Staff executives and staff officers, by

illities" aspects of the program rather than pro- definition, are not in the line-management chain;

actively applying their innovative, functional ex- therefore, they must not have power to influence

pertise to optimize program success. The PM, Col- programs executed at lower organizational levels,

onel John Power, has committed to seeing MSE except through line management and then only

through deployment. In doing so, he provides the via policy, not program specific, direction. This

continuity essential to a management system recommendation would remove staff elements

which quickly forgets earlier program decisions. from any review or approval role as pertains to

His tenure as PM, MSE is expected to be 5 individual programs. Staff responsibility must be

years-about twice the norm for PMs and key to create and maintain concise policy so the acprogram participants in the Army. 4 quisition system works for line management, thus

Conclusion facilitating the accomplishment of the programs

and the strategic goals which are the domain of

If we in DOD can clearly link each major acquisi- line management.

tion to the strategy supported; if we can show the Each Service has implemented the PEO concept

product being acquired is a practical, sufficient differently, but each approach can work, and

product; and we remain on a practically achiev- work well, if the following inhibitors are removed:

able schedt-le; we should expect the Congress to

recognize the need to continue necessary funding.

If DOD top management can prioritize systems -Staff executives who have direct program irneeded and plan around reasonable funding levels pact such as resource control (i.e., personnel,

for all programs, then the project managers of funds, schedule and other equipment) or program

those truly essential systems can focus on system approval

capabilities and on-time delivery. The authority -Functional personnel resources assigned and

requirements for acquisition line-management suc- accountable to other than acquisition line managecess are really just good people-management ment (e.g., directorates of the Services' materiel

techniques. It is through our people that we con- commands or subordinate commodity

ceive, plan and implement projects. commands).

We have recommended that acquisition line To effect such changes in DOD, which has grown

managers be given clear authority to implement a large number of executive staff directorates, the

approved projects without the intercession of in- executive staffs must be reduced and functions

dependent review authorities and senior staff limited. Also, the Services' commodity or product

bureaucrats, and be given the functional person- divisions and headquarters, which provide the

nel resources to get the job done right the first functional participants to programs (e.g., engitime. Inherent in this recommendation is the neers, contracting officers, logisticians, testers,

understanding th.,t riot all programs are needed controllers, etc.) must allocate their personnel to

40
acquisition line managers for the duration of need- with more laws, more regulations, more ined services without imposing additional layers of spectors, DOD should concentrate on those

program oversight. The key to an effective tran- things that are done right and use them as

sition for such functional staff elements from pro- models."'

gram oversight roles to program support is to ensure professional development and experience of

such personnel and program managers. This can

be done -without major reorganization by the

senior functional staff at each organizational level, Endnotes

once properly led and directed. 1. A Quest for Excellence, Final Report to the

A good beginning would include a total rewrite President, pp. 46-47.

of DODD 5000.1, elimination of DOL'I 5000.2, 2. Office of the Under Secretary of Defense (Acand review of all DODDs and DODIs with the quisition), "Legislative Guidelines Data Base,"

intent to eliminate most. Our recommendations January 1989. An analysis and summary of

to senior defense acquistion leaders for enhanc- 1986-88 Senate and House legislation and public

ing program stability are provided in the executive law.

summary. 3. A Quest for Excellence, p. 55.

In conclusion, the 1986 Packard Commission 4. Interview with Colonel John R. Power, USA,

report points out: Project Manager, Mobile Subscriber Equipment,

"Instead of concentrating on the things that January 18, 1989.

are being done wrong and trying to fix them 5. A quest for Excellence, p. 42.

41
INNOVATIONS IN THE

SOURCING PROCESS

43
III

INNOVATIONS IN

THE SOURCING PROCESS

The previous section dealt with program stability as fundamental property of many successful FIGURE l111-.

commercial practices. The focus was on how COMMMM"

companies internally manage a project in order PiACTICUOCTW4a

to enhance the project's stability, and correspond- ggtuus 11aoWhtm,

ingly, the project's chance of success. The manage- % WWI CO•'TRACTlhO MOUTl

ment practices described were applicable to ACoUIcI, .... . NOR"

projects performed in-house as well as those Fu"nm QUAUTT NOW

performed by an external concern (i.e., MA"-NOW

contracted-out). Differentiation between in-house

and external projects was not relevant in Section CO,

II, because the focus there was on project manage- I L.. N

ment practices internal to the company; practices

fo u n d to b e s u rp risin g ly c o n siste n t re g a rd le ss o f _ _ _ , _ _ O_ S _ _,_ _ _ _ _ _ _ _

the sourre of the project's execution. This change, perhaps best described as an evoluIn this section we direct our focus external to the tion toward a more cooperative buyer/seller relacompany, to the processes by which companies tionship, will be explored fully in this section.

go about procuring or sourcing from outside yen- Specifically, the nature of the commercial

dors, suppliers, or subcontractors (terms which buyer/seller relationship wil! be examined, then

will be used interchangeably throughout). Like some lessons will be drawn for import into DOD's

program stability, this area is a fundamental com- way of doing business. Chapter 5 examines the

ponent of successful business management. In the relationship as it pertains directly to the governcontext of our research model, this change can ment purchase decision, with particular focus on

be characterized as a shift from focus on the how quality is made a viable factor of that

stability "slice" of the model, to other "slices" sourcing decision. Chapter 6 wili drop a level, and

representing various other commercial practices. examine the relationship as it pertains to purely

Several factors are at work in today's business commercial companies and DOD contractors

environment, making this focus on external alike, as they make sourcing decisions.

sourcing particularly relevant. First, companies Finally, Chapter 7 provides a brief discussion of

are increasingly giving suppliers a greater "share the pervasive influence of government regulation

of the action." In the manufacturing sector the on sourcing, and all other decisions, of defense

amount of "action" placed with suppliers is cur- contractors.

rently 60 percent and rising.'

Second, the entire area of sourcing has been Endnote

extremely dynamic over the last decade, with 1. Leenders, Michael R., and David L. Blenkhorn,

some fundamental changes, particularly in rela- "Reverse Marketing - The New Buyer-Supplier

tionships existing between buyers and sellers in Relationship," The Free Press, New York, N.Y.,

the commercial marketplace. 1988, p. 8.

45
5

QUALITY SOURCING

FINDING Price is but one element in the purchase decision.

DISCUSSION OF THE FINDING quirements process. In systems programs, the

The Packard Commission, identified the dif- ultimate source selecting authority was the proferene inPapproacktward identiiee psio, the d gram manager. Firms tended to employ strong ference in approach toward price between the technical (engineering) background in the purcommercial and defense decision processes and chase department so that they not only knew the

suggested that industry practice could be adapted marketplace but also could understand the

as follows: requirement.

Commercial procurement competition

simultaneously pursues several related ob- Quality in many firms is becoming a total comjectives: attracting the best qualified sup- pany commitment with access and input to suppliers, validating product performance and plier quality data base information being made

quality, and securing the best price...Defense available to more organizations in the company.

procurement tends to concentrate heavily on Firms are developing systems to factor quality perselecting the lowest price offer, but all too formance into their source seiection decisions and

often poorly serves or even ignores other im- are communicating their use of these systems to

portant objectives.' their suppliers.

Throughout the United States there is renewed Purchasing involves a complex ranking and

emphasis on the importance of quality in all evaluation of objective and subjective factors.

aspects of the manufacturing and production pro- These factors may be addressed explicitly in the

cess. Within the Department of Defense, this em- form of objective criteria or implicitly based upon

phasis has been shaped within the framework of judgment or taste. Personal, commercial/inTotal Quality Management as developed from the dustrial, and governmental purchases all adhere

works of W. Edwards Deming, Dr. J. M. Juran to the "classical" definition of the purchasing

a 1r.-J)'. 13. e? .... '•:this concept wV.T- Mbjecti•P."tW" "

successfully applied first in production and Buy materials and services of the right qualimanufacturing organizations, it is not as clearly ty, in the right quantity, at the right price,

defined to defense purchasing. In defense pur- from the right source, and at the right

chasing there are countervailing forces based on time. 2

law, and regulation which restrict its full The extent to which selection of the "right source"

implementation. may be based on subjective factors accounts for

We found that ownership costs and dependable the differences in personal, commercial/industrial

quality are the dominant variables in commercial and government purchases.

buying decisions. Purchase price was not ignored, In personal purchases, in contrast to those in the

but it was a variable which would be traded off commercial/industrial and governmental environfor desirable features, uniformity and ments, selection may be completely subjective

dependability based upon a mental evaluation of how a given

Purchase decision-making in support of systems product meets the personal requirements of the

programs was decentralized and geared to the re- individual. The selection process is likely to be

47
unstructured, may change over time, and only Recalling the concept of competing utility funcneeds to satisfy the individual. tions from Chapter 3, we can see the potential of

By comparison, in most government and indus- competing functional goals and objectives which

trial offices, purchasing is structured in method, may lead to compromise solutions.

centralized to some extent to provide consistency, The flow of information becomes complex; it is

and open to audit and review. In government and difficult to design a feedback loop which allows

industry, the purchasing office takes written re- the user, purchaser and quality assurance inquirements from the requesting office, matches dividuals each to accommodate each other's functhem with available suppliers, and negotiates the tion and incentives. As organizations become

most itvorable terms for the purchase. Their suc- larger, with centralized purchasing, the distances

cess in selecting the right supplier is important to and barriers giow. In the study of government

the efficiency and effectiveness of any firm or contracting officers and industry purchasing

government agency. However, despite certain agents previously cited, there was a definite corcommon procedures, there are fundamental dif- relation between the size and centralization of purferences between government and commercial chasing and the quality information which the

organizations in terms of their :,z:us, accounta- purchaser had at the time of making the source

bility, process complexity, and objectives. 3 selection.

These differences result in a significantly different

approach to value of quality and the role it plays Within this model, purchases are based upon the

in the purchase decision. purchaser's evaluation of price, quality and

It is useful in looking at the sourcing decision to ownership costs. Price is a concrete decision

aan measure, which represents an outflow of today's

develop organizational a simple, purchase conceptual decision. framework Such a simple of a n budget. count for Quality later year and expenditures life cycle considerations which may not acmodel includes on!y a user, purchaser, vendor and confrlaeyarxpdiuswhhmynt modlt issncludes onsypacuser, pchaser, vegind and be visible at the time of the particular purchase

quality assurance inspector. The loop begins and decision. Incentives placed on the purchaser in the

ends with the user. The purchaser and the auali- form of business practice are extremely important.

ty assurance inspector act as the user's agents. This If sucinen s phasize pre reductionth

model is diagrammed below: If such incentives emphasize price reduction, this

reduction may come at the expense of quality or

ownership costs. Trade-offs made by the purchaser among price, quality and ownership costs,

FIGURE 5-1. THE FORWARD may conflict with user preference. This problem

PURCHASE FLOW is compounded because often no accepted measure

of quality exists. 4 By comparison, price can be

Purchaser easily and accurately measured.

Recognizing problems associated with obtaining User 4.- Quality Assurance -- Vendor a workable definition of quality, competing utility

functions for the players in the model, and the

need for a systematic approach to improving

Each individual in the purchase flow has multip!e quality, the following convention is developed.

obje( tives and incentives. For simplicity, we con- Along the X axis is the sophistication in the quality

sider only the most significant. The user has a requirement, a budget and is responsible for the

use of the information in making source selections.

costs of owning the item. The purchaser must conform to established organization practice, convert In Quadrant I, the organization has a limited

the requirement into contract terms and evaluate quality collection system and no objective way

bids received from vendors. The vendor must of evaluating quality when it makes source selecunderstand the requirement, produce the item and tions. It must rely on subjective emphasis on

be paid. Quality assurance inspects the item to quality and hope that its suppliers Will provide

ensure that it meets the terms of the contract. adequate quality.

48
in data collection and a willingness to use it. FIGURE 5-2. APPLICA'TION OF Unlike Quadrant II, the bid factors are based on

QUALITY DATA a wide range of integrated data, closely monitored

and updated. It seeks to systematize the professional evaluation discussed above into a method

______,- which is objective and perceived as fair.

For most large firms, it would be preferable to

I__ operate in Quadrant III, however for the reasons

N - 1'- III &) already discussed most firms find themselves in

- ----- --- Quadrant IV. The following are some examples

I ,IV of systems in use. 5

6•) -Company A

* ' -This large firm has a significant quality-control

to.bo organization and a large centrally-managed pur- OP,"fl,,OW AM O ,MCW. chasing department. For most purchases,

historical quality information is available in

In Quadrant IF. while there is an i' nce of corn- addition to price information for review by the

prehensive qual zy information, there is a corn- purchasing department official. Selection of a

mitment to use that which is available to make higher-priced item can be made only with the

future seluctions. Such systems are generally tied approval of the purchasing supervisor.

to a single measure such as schedule or are based In one division of the business, a comprehensive

on inspections of supplier facilities and pro- supplier qualification and rating program has been

cedures. Because they are based on limited or established. It looks at the quality control

incomplete information they may measure and documentation and system which is installed at

emphasize measures not accurately reflecting the suppliers' plants. Based on an annual review the

quality of the material being received. Type II vendor is given a rating factor which is then

cases, however, provide a strong indication to applied to all purchases from that vendor. The

suppliers that quality is important and the firm prie b s a dju sed by th at factor.

will use the data available to discriminate between

its suppliers. -Company B

Quadrant IV reflects an objective quality data col- This large organization has an elaborate quality

lection system, but little use of the information collection system which records the results of

in making selections. There are two primary facility certifications, on-site inspections and probreasons for its lack of use in making selections. lems reported on receipt or users. Purchasing is

First, this information is often collected in different a separate organizational entity. Source selections

parts of the organization and not integrated in a are made based upon competition with only

fashion which permits easy application in pur- limited prequalification of the suppliers, and withchase decisions. Second is the question of profes- out consideration of past history.

sional competency and relationship to suppliers.

An experienced purchasing agent knows the -Company C

market, coordinates with the manufacturing The company implemented their quality system

elements of the firm, monitors the performance in the early 1980s and following several refineof suppliers, and enjoys the confidence of manage- ments, 40 percent of its production purchases are

ment in making the subjective evaluation of which made through the system. It is based on an onsupplier will be selected. Such experienced pur- line computer system which contains information

chasers may not need a systematic quality-based provided by vendors as well as past company purselection system because tl-.ey subjectively make chase data. It concentrates on items with a signifiqu;.'ity-based selections. cant dollar volume or for commodities which

Quadrant !Hl shows a high level of sophistication when taken together are significant. A value

49
analysis approach employs commodity-teams -Company F

early in the requirements process. These teams This large firm is developing a vendor perforinclude people from engineering, purchasing, mance improvement system which stresses immanufacturing, and marketing as well as vendors, proved communications between buyer and seller.

end users and customers. The result is a total Early involvement in new product development

systems approach for those items which meet the projects by potential suppliers, supplier process

crteria for inclusion in the system. Th- company controls including statistical qualification of pro--

believes that it is achieving cost savings and ob- cesses, and delivered performance measurement

taining better quality items. are included. It is an integrated system which will

provide the firm with the ability to rate a sup-

-- Company D plier's performance accurateiy. However, it does

This large firm has long collected quality infor- not employ a bid factor to adjust the relative

mation from various sources. Recently, its efforts prices between suppliers. Placing the six cornhave focused on the integration of this informa- panies on the conventional diagram, most fall in

tion into a computer data base which is jointly quadrant IV. The ability to use quality informamaintained by purchasing and quality and which tion to adjust prices is not common. The efforts

can be used by the purchaser when making a made by Company D to move in this direction

source selection. The system produces a supplier seem to provide the most promising example for

evaluation rating ranging from outstanding to government procurement since the method of

unsatisfactory. Elements factored into purchase selection will be open and objective.

decisions include past delivered performance and

a graduated assessment of any problems with the

suppliei. Theassessment becomes progressively FIGURE 6-3. APPLICATION OF

more severe as problem discovery moves from the

supplier's self-identification to a problem reported QUALITY DATA

in an installed piece of equipment.

Presently, the rating system requires substantial _

justification if a source selection is recommended

for a marginal or unsatisfactory vendor. Likewise, "

substantial justification is required to select other 0

than a low bidder. It is planned that weighting III

factors which will adjust the price basis to account I

for past qvality performance.

L

-Company E

A vendor rating system was established to ' L" $@"

systematically evaluate price, delivery and quali- ,OPfWMA"0O AM SJ,,0,,MM

ty. Its goal is to allow the purchasing agent to

select the best vendor based on past performance.

It is purposefully simple to ensure that suppliers

understand the requirements. Each bid price is INHIBITORS

adjusted by applying evaluation factors to The policies, pressures and practices of governestablished prices. Evaluation of delivery at 100 ment purchasing places the DOD source selection

percent is based upor, receipt plus or minus 7 days process in a unique environment. Individual

of the established date, 75 percent if received 8-14 source selections must be made fairly and opendays early and 50 percent if received 8-14 d 4ys ly with each being defensibly based upon legal and

late. Quality adjustments to this rating are based technical criteria which can be demonstrated to

on sampling of incoming parts, and input from auditors, unsuccessful bidders and other interested

the company's quality control department. parties.

50
A definition of quality in the purchase decision "quality audits," is next to useless. Unless the

is murky. vendor is a complete and obvious disaster

Defining quality is complicated because in many area, it is impossible to know whether their

organizationis, including the Department of quality system will provide the proper conDefense, quality organizations have been separate trol or not. You can only know by being infrom line management. Major advocates of quali- side of the vendor's company."8

ty have focused on the importance to overall cor- The solution he posed to his problem was that

porate goals of a strong quality organization and quality control personnel should get involved

economic/profit benefits from a directed approach earlier in evaluating key items that will be bought.

led by these quality organizations. Such an ap- Such actions are evident in many commercial

proach concentrates primarily on improved firms.

manufacturing methods and the need for top- Dr. luran's definition of quality is "fitness for

management support and has a twofold objective: use."9 This determination is made by the usez,

(1) The scope and authority of the quality con- based upon features the user recognizes as

trol organization should be expanded. beneficial. His development of the concept of

(2) Top management must become personally "fitness for use" is quite comprehensive. He

involved in promoting quality, describes the interrelation of quality parameters

in a "tree" leading from fitness for use through Since this emphasis is primarily outside the pur- quality of design, quality of conformance, availchase function and organization, it is not surpris- ability, and field service to a further breakdown

ing that the principle advocates provide only a of twelve comrponents.10

minimal treatment of the purchase function.

Mr. Crosby, in his book Quality Is Free,6 defin- The comprehensive nature of Dr. Juran's work

ed quality as "conformance to requirements." Hi- makes specific application complex. Represen- ed qaliy a "cnfomane t reuirmens."His tative of this dilemma is the following:

major thesis was that the cost of scrap, rework,

service, warranty, inspections and tests which For important purchases it is well to use

result from "non-conformance" cost much more multiple sources of supply. A single source

than efforts to produce products which "do not can more easily neglect to sharpen its cornfail in the field." However on the subject of pur- petitive edge in quality, cost and service.

chasing quality goods, Mr. Crosby devotes only Despite the evident advantages of multiple

two pages if his work. He describes the futile ef- sources, there is an enormous extent of use

fort as follows: of single sources .... These operations are

"Traditionally purchasing's job has been to quite successful in using monopolistic

take an order constructed by some other sources of supply because they solve their

department and place it. The operation has quality problems through a combination of

not usually been involved in whether the managerial tools-"

item specified offers the best purchasing Dr. Juran's all-inclusive approach typifies the difopportunity. The shortest time lag in the ficulty in quantifying and measuring quality in

operation is usually spent searching tor the purchased goods and materials. In a later book,

best supplier in terms of quality, cost and Quality Planning and Analysis,12 he includes a

delivery. Most of the time is spent in prod- chapter on how to foster cooperation with the

uct development or conceptual design. Pur- vendor without offering suggestions other than

chasing has little opportunity to do a selec- two inspection sampling techniques. Dr. Juran is

tion job, and quality doesn't really know perhaps the best advocate of the importance of

how to help them." 7 a strong quality control organization, but like Mr.

Mr. Crosby's assessment of Crosby, he provides no objective measures to be the utility of the tradi- used in purchasing quality supplies.

tional audit and inspection approach was equally

pessimistic: Dr. Deming is perhaps the most widely-known

"A tour of potential suppliers, conducting and respected person in the field of quality. He

51
is credited by many for the successful implemen- attribute possessed by a product. As in

tation of a total quality approach in Japanese the amount of cream in ice cream it can

manufacturing.)3 He does not try to provide an be assessed objectively and is based on

operational definition of quality. Instead, he views more than preferences alone.

the concept in terms of who should judge quali- The User-Based Approach begins with

ty. The closest he comes to defining the term is the premise that quality 'lies in the eyes

in describing the difficulty of the task. of the beholder." Through maximizaThe difficulty in defining quality is to tion of the composite individual

translate future needs of the user into mea- preferences a "proper" quality is detersurable characteristics, so that a product can mined. It is subjective and rooted in

be designed and turned out to give satisfac- consumer preferences.

tion at a price that the user will pay .... The The Manufacturing-Based Approach

quality of any product or service has many focuses on engineering and manufacturscales. A product may get a high mark in ing practice. It identifies quality as

the iudgement of the consumer, on one scale "conformance to requirements" and it

and a low mark on another. 1 is equated with meeting specification,

Dr. Deming's thesis is that only a total approach or making a product right the first time.

to quality will be successful. In his "14 Points for The Value-Based Approach defines

Management," a comprehensive cultural change quality in terms of costs and prices.

in operations is advocated; however, the method Quality provides performance at an acof accomplishing the change is left to the manager. ceptable price. The phrase "affordable

Dr. Deming's focus has been on the benefits to excellence" summarizes the dilemma.

top management of adopting a total quality mnan- There are no defined limits arid no

agement program. While he fails to provide a means of application.

specific process, the success attained by firms

which have adopted his methods make it The five approaches often conflict and, depending believable.

on the perspective taken, lead to disparate conOf Dr. Deming's fourteen points, two deal with clusions. Under the product-based definition of

the purchase of items from suppliers. They 3tate: quality, we expect to pay more for quality because

# 3. Require statistical evidence of process we expect better materials, workmanship and

control along with incoming critical parts. inspection were applied to achieve this quality.

# 4. The requirement of statistical evidence Theoretically, from the product-based paradigm,

of process control in the purchase of critical there should be a positive correlation between the

parts will mean in most companies a drastic price of a high quality item over one of lower

reduction in the number of vendors with quality. This is a marketable attribute which,

whom they deal. regardless of whether it is based upon fact, reputation, or simply impression, can be applied when

David A. Garvin in a 1984 Sloan Management marketing under the user-based perspective. The

Review article' 5 reviewed five approaches to lack of precise information on the true attributes

defining quality. His definition framework is sum- of the product encourages managers to set higher

marized below: prices to "imply higher product quality."16

The Transcendent Approach is the Within the user-based paradigm, quality is an atphilosophic concept of "innate ex- tribute by which consumer goods are marketed.

cellence" which is both absolute and Many products are labelled using adjectives such

universally recognized. It cannot be as "choice," "select," "prime," "superior," or

analyzed but is recognized through "distinctive" to demonstrate the perception that

experience, quality is important and valuable. Perhaps

The Product-Based Approach focuses nowhere else is quality more extolled than in the

on the quantity of some ingredient or automobile industry. For reasons beyond the

52
scope of this research the American automobile provement, abandoning "minimum acceptable"

manufacturers lost considerable market share to quality, are philosophical shifts which have mathe Japanese and German auto makers on this jor implications for defense acquisition practice.

issue.1 " However, slogans such as "the quality The operational definition of quality which was

goes in before the name goes on," and "quality used to develop a plan to implement Dr. Costello's

is job 1" indicate a focus on the manufacturing- approach in DOD, was:

based definition of quality. Ford Motor Company

adopted a "defect prevention" approach to qual- Conformance to correctly defined reity which while manufacturing based, has yield- quirements satisfying customer needs. 22

ed dramatic improvements and boosted Ford's This definition closely resembles a combination

standings in consumer quality ratings.) 8 of those of Mr. Crosby and Dr. Juran. It was also

Numerous studies have shown that in many con- the most commonly cited definition by industry

suiner products people will pay a premium for real and government contracting officials in a survey

or perceived quality." In such simple items as a conducted during the Summer of 1989.

pen or a pencil, suitable value-based products can Cooperation and Competition Are Mutually

be found for under a dollar, while there are also Exclusive

many value-based products marketed at a much Companies are dealing with fewer suppliers. This

higher price. Production management and qual- is not an abandonment of competition but a

ity sampling techniques which operate under the rPcc-cnition of its limits. Practices such as Just-inmanufacturing-based definition can ensure that 'ime (JIT) and Material Requirements Planning

the established quality standards for both the (MRP) depend on reliable deliveries of uniform

Number 2 wooden lead pencil and the precision quality from suppliers. Performance information

drafting pencil are maintained. However, the is being collected on suppliers and is beginning

premium that will be paid for quality is deter- to be used in the purchase process.

mined by the market mechanism within the user- In an intervi w uwit aDr.proe s h e

based definition,20 In an interview with Dr. Broedling,23 she expressed the conflict in terms of the bi-polar model No concise view of defense acquisition quality illustrated here:

emerges, rather one can infer, based on organizational structure and implementing policies. Dr.

Robert E. Costello, former Under Secretary of FIGURE 6-4. VIEWS TOWARD

Defense for Acquisition, in establishing a Total

Quality Management Program for the Depart- ACHEIVING BEST VALUE

ment argues that efforts toward a continuous improvement process are necessary. The following

excerpt from Costello's speech to the Defense VALUE /4\

Logistics Agency Commanders' Conference in

November 1987 establishes his desire to push for

a change in focus:

Fur much too long we have been following COMPETITION COOPERATION

the concept of "minimum acceptable" quality. America's manufacturers and our maintenance 

tyAen cadepots 

depots hanufaveupursuend have pursued this othisonct concept One pole is centered on competition and the

with the placid resignation that a persistent positive effects it has on price and the other

level of errors, perceived as irreducible is a centered on cooperation as the most important

way of life.... The process should continu- in quality decisions. The benefits of each can be

ously strive for improvement rather than illustrated by analogy to team sports. Individuals

accept a predetermined level of on the team must cooperate rather that, compete

imperfection.2z with each other to be successful while they are

simultaneously competing rather than cooperating The concept of continuous efforts toward im- with their opponent.

53
Dr. Deming views competition on a much larger curement overemphasizes the importance of price

scale than an individual purchase decision. Corn- intensified. While not criticizing the intent of

petitiveness in the international arena requires CICA, the Packard Commission identified three

cooperation in the many small purchase decisions problems with its implementation by the Departwhich impact a firm's product. What emerges is ment of Defense:

not wide-open competition for each item but a (1) Interpretation that the government must

limited competition in which repeat business, buy from the lowest price bidder

stability and product improvement are emphasized.24 (2) The notion that CICA precludes qualification criteria, consideration of

There is a definite conflict between free and open technical expertise, or life cycle costs

competition (required by law in government pur- chasing) and the cooperative concept. Dr. Deming (3) The resulting focus on the number of explained the justification for limiting suppliers competitions rather than the success the

as follows: competition achieves in terms of reduced prices for current items or better products.

We can no longer leave quality and price to

the forces of competition -- not in today's The Commission concluded that the full potenrequirements for uniformity and reliability, tial of CICA could not be realized until these probPrice has no meaning without a measure of lems were overcome.

28

quality ,eing purchased. American industry Recommendation F of the Packard Commission's

and the U. S. Government are being rooked final report was to "Increase the Use of Competiby rules that award business to the lowest tion" which was explained as follows:

bidder. 21 Federal law and DOD regulations should

The recent awakening of the importance of quality provide for substantially increased use of

in American products has greatly expanded commercial-style competition, emphasizing

writings in the field. Most authors, in discussing quality and established performance as well

quality, focus on application of one or more of as price.

the principles discussed by Mr. Crosby, Dr. Juran

and Dr. Deming and adopt a "conformance to re- ithe g nmentprocment awardsbaresmade

quiremnents" type of definition. Those attempting within an environment influenced by history,n

to deal with the role of purchasing focus on reduc- social legislation, budget pressures, a distinction

ing the number of suppliers and increasing the between price and cost, specification complexilevel of cooperation between the requiring and ty, a definition of what distinguishes suitability

supplying companies. 21 from gold-pl ting, a preference for fixed-price

contracts and a preference for competition. InThe dominant role that price plays in government dividually and collectively, these environmental

purchases stifles creativity and innovation. Ob- influences may skew any procurement decision.

purchasing, requires that there be little innova- It is apparent that the theoretical foundation for tion in the suppliers' approach becaus te inncom- objective quality measurement is not established petitive decision process becomes one that is based well enough to facilitate objective evaluation of

on price. Dr. [larry Page described this process quality factors in either the government or comas follows: mercial/industrial environments. The principle authors in the field of quality: Mr, Crosby, Dr.

It has become traditional practice in govern- Juran and Dr. Deming fail to provide objective

ment to write purchase specifications in such methods of obtaining quality purchases. Current

a way that any potential supplier can pro- conventional wisdom in obtaining quality is to

duce the item, and award can be based upon work toward development of long-term symlowest price.' 7 bionic relationships with suppliers. Such relatior,-

Since passage of the Competition-In-Contracting ships are impossible to attain under the current

Act (CICA) in 1984, the view that defense pro- environment of government rules and practice.

54

,= . . .. ! . . .... i = i I I I .. .. =: I . .. I- - = ... 1 - I I i
SUGGESTED AREAS FOR IMPROVEMENT DOD also contribute to the need not only for an

On-Line Contractor Performance History File on-lire contractor performance file but imThe first step in using quality information in mak- provements in quality data feedback. However,

ing source seleteions isingomake itnfor labetion te a several examples of attempts within DOD to ing source selections is to make it available to the apply quantitative past performance to source

contracting officer. The elements of the file need selections should be noted. For example, the "Blue

to be established and should include indices for Ribbon Supplier" systems being established in the

price, delivery, and reported quality problems. Services and DLA recognize a supplier's past perSecond, the ability to input and access the files formance and apply a percentage cost bonus in

throughout DOD must be estab!ished. A partial subsequent source selections. 3

1

net will not be sufficient, since it will fail to pro- A Variable-Incentive Specification

vide the objective information needed eventually to mak' source selections. The current method of establishing a minimum

specification which, if satisfied, permits the selec- Third, once the network is functioning, quality tion to be made based on price, should be selec- factors can be established to adjust bid prices to tively replaced by a method through which perreflect the value associated with variations in formance specifications define the value of

schedule, quality or other performance features. variable features. Performance feature variations

There are several innovative techniques being would be evaluated using a preestablished and

tried to implement such a system. We are aware published cost/performance criteria.

of efforts being sponsored by the Defense Logistics Such a method would preclude the need to "gold

Agency,' 9 and the Services: but. thev are limited plate specifications. It would provide incentives

in scope. not exploiting the potential for more ac- for contractor who have better ways of meeting

curate measurement, which is essentidl to their the requirement to be selected over contractors

widespread acceptance arid application and their who barely meets minimum requirements at the

ability to withstand administrative protest. lowest cost. Presently there is little incentive for

Quantification of Non-Price Factors a contractor to innovate or exceed the

There is a need for a method to quantify evalua- minimum.3 2 Such a focus on low price makes the

tiorn of factors in addition to price. Adapting the rules of competition easy to apply, focusing prindimensions of the quality framework established cipally on price, with results such as those

by David Garvin, it is possible to segment qual- reported in The Washington Post:

ity into dimensions which could be weighted,

ranked and evaluated. A quantifiable, auditable The Defense Department inspector general's

and defensible means could be developed for the office, testing random samples of parts

DOD contracting officer to use when evaluating bought by the Air Force the past two years,

source selections.3c The challenge is to develop estimated that as much as 98 percent of the

an objective quality system which can operate ef- money spent for the spare parts surveyed

fecf:..'ely in the defense acquiition environment, went for items with major or minor

A review.' of the regulatory and policy directives defects.,3

established no specific prohibition to the use ofT

quantitied non-price factors. The PAR specifically Ti shift the emphasis from price competition, it

states that source selections are to be made based is important the vendor recognizes that something

on price and other factors. The reason for their more than price will go into the 'ource selection;

lack of application is the lack of a generally ac- that there will be an incentive provide( for

ceptable, theoretical criteria for quality. Nieasure- delivering a better product even at a higher pice.

ment of quality is identified consistently as a What makes a product better must be established

major stumbling block. As discussed earlier, this clearly in the solicitation, as must the value of the

is because any system r, quiring information can incentive. This can be viewed in terms of percent

only be as good as the information input. The improvement in the designated performance eleproblems associated with quality feedback in ment for a percentage difference in price with an

55
PERFORMANCE QUALITY FACTOR SIGUREC5IATIO E An aircraft program has a need to reduce weight SPECIFICATION of installed equipment. Assume the current standard communications radio weighs 10 pounds and

%L1 costs $100, and there is some value for a reducp tion in its weight. The current contract method

E - would specify 10 pounds or some lighter weight. R

F " Contractors would then seek to minimize costs 0 -1 R -, I to meet that specification, perhaps ignoring weight

M A ] savings which might cost "a little more."

N .- x Simplistically, the proposed quality factors conC Itract would be structured as follows:

0E o."_' QUALITY FACTORS CONTRACT

MAX SPECIFICATION % :, COST

All other performance specifications are unchanged. An incentive of 10 percent of total

price for each pound less than 10. Maximum

price incentive is 40 percent.

upward bound as illustrated in the following Assuming that three bids are received which

figure. satisfy all the specifications as follows:

This can raise the specter of "gold plating" and Company A Company B Company C

too much subjective judgment. However, discus- Weight 10 8 6

sions with senior DOD contracting officials confirmed that, provided the relationship was clearly ,tdad in the solicitation and applicable to all Selection would be for Company B, because its

vendors, there is no impediment to its adop- price is within the range specified for the incention.3

1

4 The following examples illustrate the tive and beats the cost/performance trade-off

concept. ratio. The product proposed by Company C

would not be selected because the preestablished weight/price relationship is exceeded and it proFIGURE 5-C. VARIABLE vides less relative benefit per extra unit of cost.

SPECIFICATION RELIABILITY QUALITY FACTOR

Reliability improvement may also be desired for

the same ratio. If the current ratio has a Mean

% 3 Time Between Failures (MTBF) of 100 hours, a

P 40°F _ C similar relationship could be set where a 10 per- E - cent improvement in MTBF would be valued at R c

FI I/ 5 percent of the acquisition price. The contract

0 solicitation would be structured as follows:

M. ? --': .QUALITY FACTORS CONTRACT

c SPECIFICATION

A All other performance specifications are un0°••- o changed. An incentive of 5 percent of total

% COST price for each 10 percent improvement in the

MTBF up to a maximum of 60 percent price

incentive.

Assuming that three bids are received which

56
satisfy all required specifications, they would be to understand the relationships proposed and the

evaluated as follows: evaluation criteria.

Company A Company B Company C Endnotes

MTBF 100 110 200 1. The President's Blue Ribbon Commission oiPrice $100 5115 $150 Defense Management, A Quest for Excellence,

Final Report to the President, Washington, U.S. Using this specification, the selection would be Government Printing Office, June 1986, Sec. F,

Company C's product 1.

2. Dobler, Donald W., Lamar Lee, Jr., and

FIGURE 5-7. VARIABLE David N. Burt, Purchasing and Materials

Management, 4th Edition, New York, McGraw SPECIFICATION Hill, 1984, p. 15.

3. Sherman, Stanley N., Government Procure-

% :•ment Management, 2nd Edition, Gaithersburg, p10 Woodcrafters Publication, 1985, Chart 1-1.

ER ,4. Many specific models exist; one prepared for

F 0'r shipbuilding was done by George N. Sideris, Life 0 /" " I

R I Cycle Cost Guide, Oct. 22, 1986.

A , 5. Due to the critical assessments of these exN amples, they are not dire.

-10 6. Crosby, P.B., Quality is Free, New York,

0 1 , MAX McGraw-Hill, 1979, pp. 12-20.

% COST 7. Ibid, p. 73.

8. Ibid, p. 74.

9. Juran, J.M., Quality Control Handbook, 3rd

GENERALIZED APPROACH Edition, New York, McGraw-Hill, 1974, p. 2-2.

From examples discussed, the contract proposal 10. Ibid, p. 2-9.

process has become more complicated for the sup- 11. Ibid. p. 10-5.

plier. No longer will attainment of the minimum 12. Jurzn, J. M., and F. M. Gryna, Qualtiy Planspecification be sufficient. A product which ex- ning and Analysis, 2nd Edition, New York,

ceeds the specification in a quality factor con- McGraw-Hill, 1980, pp. 227-247.

sidered valuable to the requestor may be selected 13 Siegel, James C., Managing with Statistical

over one which meets the specification. The ex- Methods, SAE Technical Paper Series, Warringamples cited are simplistic but not impractical for tod, SaE Tech P ap ang- applcaton.Of oure tereis he otetia of ton, Pa., 1982. Through the Union of Japanese

applicaion. Of course there is the potential of Scientists and Engineers, Dr. Deming became a

adding so many incentive systems that the pro- national celebrity in Japan. Japanese manufaccess would become one of linear programming; turers created a national competition for quality

but, ever, in this case, the evaluation of the criteria and named the award after him.

would be based objectively. It provides a means

to change the focus from lowest price to one of 14. Deming, W. Edwards, Out of the Crisis,

best value. Cambridge, Technology, Mass., Massachusetts Institute of 1986, p. 169.

One of the major distinctions between the government and commercial purchasing practice is that 15. Garvin, David A., "What Does 'Product

this relationship must be clearly stated in the re- Quality' Really Mean?" Sloan Management

quest for bids. Because of the absolute require- Review, Fall 1984, pp. 25-28.

ment for fairness, all interested parties will need 16. Riesz, P.C., "Price Quality Correlations for

57
Packaged Food Products," Journal of Consumer 25. Deming, W. Edwards, National ProductivAffairs, Winter 1979, p. 234. ity Review, Winter 1981-82, 1, 12-22.

17. Callahan, J.M., "The Deming Era Arrives in 26. Sloan, David, and Scott Weiss, Supplier ImDetroit, Automotive Industries, Vol. 191, provernent Process Handbook, Milwaukee, Wis.,

November 1981, pp. 45-47. American Society for Quality Control 1987, and

18. Dyer, Davis, Malcolm S. Salter and Alan M. H. James Harrington, The Improvement Process,

Webber, Changing Alliances, Boston, Mass., Har- How America's Leading Companies Improve

yard Business School Press, 1987, p. 234. Quality, New York, McGraw-Hill, 1987, Chapter

19. Milgrom, Paul, and John Roberts, "Price and

Advertising Signals of Product Quality, The Jour.. 27. Page, Harry, Public Purchasing and Matenal of Political Economy, Vol. 94, August 1986, rial's Management, Lexington, Mass., DC Heath

pp. 796-821, and J.T. Penttinen, "The Role of & Co., 1980, p. 194.

Price in the Perception of Product Quality," Ph.D. 28. Ibid, p. 2.

dissertation, University of Michigan, 1981. 29. Interview with Mr. Cheasa, Director of Pro20. Johnson, Marvin M., and Ruoh-Shin Lo, "An curement, Defense Logistics Agency, April 21,

Investigation of the Effects of Quality Deter- 1989.

minants," 1985, Annual International Industrial 30. Perkins, Charles A., "Identifying, Ranking

Engineering Proceedings. The authors studied the and Evaluating Quality Factors for Use by Navy

relationship of consumers in their perception of Contracting Officers in Making Source Selection

quality. Decisions," Ph.D. dissertation, The George

21. Costello, Robert E., Defense Logistics Agen- Washington University, 1989.

cy Commanders Conference, Homestead AFB, 31. Demers, W.A., "Grading Contractor PerforNov. 4, 1987. mance," Military Forum, May 1988, pp. 38-42.

22. joint National Security Industrial Association 32. Groocock, J.M., The Chain of Quality, New

and Aviation Industrial Association Workshop, York, 1986, p. 182.

"DOD Total Quality Management Strategy,"

Dec. 16-17, 1987. 33. Moore, Molly, "Report says Air Force Was Cheated on Parts," The Washington Post, No,,,.

23. Broedling, Laura, Ph.D., Interview Nov. 11, C, 1989, p. 3.

1987. Dr. Broedling is a career civil service

e-nployee who has the lead in the Navy's im- 34. Interview with Mr. Richard Moye, Acquisiplementation of Total Quality Management at its tion Policy Analyst, Office of the Assistant

aviation depots. Secretary of the Navy for Shipbuilding and

24. Buffa, Elwood S., Meeting the Competitive Logistics, May 6, 1988.

Challenge, Homewood I1, Dow Jones-Irwin,

1984, pp. 33-34.

58
6

SOURCING BY DOD CONTRACTORS

FINDING Companies are adopting more cooperative relationships with their suppliers.

DISCUSSION OF THE FINDING partnerships, etc.), but the central elements are

We have examined, in some detail, the nature of common. All are long-term arrangements with a

the buyer/seller relationship in the commercial small number of high quality suppliers; relationmarketplace, with particular emphasis on how ships characterized by mutual dependence and

that relationship is evolving to improve quality, open communications.

This chapter continues that examination, look- Note that our focus in this chapter is exclusively

ing specifically at the buyer/seller relationship in on relationships between companies and their supthe context of commercial companies and their pliers. What we do not discuss is the "teaming"

suppliers and subcontractors (a.k.a. sourcing). We of major companies to spread the risk and return

established the prevailing commercial practices in of a major development effort. Also not discussed

this area, ard elxarmined hew they may differ for is a company's internal "make-or-buy" decision.

companies operating under the umbrella of a While "make-or-buy" is a critical element of any

DOD prime contract. Our premise at the outset sourcing decision, we examine here relationships

was that defense contractors are uniquely con- external to the company.

strained or inhibited from using certain innovative To fully understand the forces driving companies

commercial practices in sourcing. toward cooperative relationships with their supOne need not look far to discover evidence that pliers, it is important to understand first the forces

commercial companies are definitely changing that drive the traditional way of doing business.

their relationships with suppliers. They are mov- Traditional, Competitive Buyer/Seller

ing down the continuum toward more cooperative Relationship

supplier relationships and away from the traditional, competitive way of doing business. The dependence theory of bargaining (Bacharach

This and Lawler, 1981) provides an excellent concep- new relationship goes by many names (part- tual framework for* understanding the traditional,

nering, strategic alliances, comakers, value-added t itv a ppr o tot buyer /selle ration- competitive approach to the buyer/seller relationship, a relationship often referred to as "competi- FIGURE 6-1. tion". The dependence theory asserts that the

power of buyer or seller is based on the degree

of dependence the other party in the relationship

Competition CO onl has on the first. This degree of dependence is

coiomm driven principally by two factors -commitment

<: 0 of each party to an outcome, and the degree to

,•suaoe a u •u~ CoRAeTMu,.h which each party has alter native means of satisIAN o, 6- .,at eLn e,.mn w on, fying that outcome.1 In the normal course of the

AmPA.I t.SAM CoMU•"mwMow Iu &L buying/selling process, each party seeks to maxmaimbfe SNO.TW OIG NcU toUR "IWs

,u,,,,,s •mqtf o" I imize their power by making the other party more

dependent on them (in reality or perception), and/or making themselves less dependent.

59
Traditionally, most relationships with suppliers damental element of our free enterprise system.

have followed this competitive model. Companies With multiple buyers and sellers in the marketgo to great lengths to avoid being trapped in a place, the laws of supply and demand make price

sole-.our-e position with its associated loss of essentially self regulating. This is the situation

bargaining power. They feel the pressure of corn- most buyers desire. Conversely, if there is only

petition is the best tool to avoid becoming over- one seller (a monopoly), or one buyer (a monopcommitted to a supplier, thereby maintaining sony), or if the marketplace is not "free" (regulated

parity in the bargaining process. If this corn- or collusive), then the laws of supply and demand

petitive pressure is lost, companies fear their sup- cannot be relied on to determine price effectively.

pliers will exploit the power of sole-source status, This traditional approach to the buyer/seller relaand take advantage of them. Chester Karrass, a tionship is by no means passe, but is still the

noted expert on practical negotiation techniques, favored approach by many in industry, and by

says of this sole-source tituatieon, "Buyers fold most in the government. However, there are an

like a tent in front of a seller who has no increasing number who are employing, and

competition."- benefiting from, more cooperative approaches in

Conversely, suppliers go to great lengths to dealing with their suppliers.

maneuver themselves into a sole-source position Innovative Trends in Commercial Supplier

so they can take advantage of the power differen- Relationships

tial. T'hey employ what the Wall Street Journal

calls a "get-it-while-you-can strategy"; recogniz- The current literature of manufacturing science ing that when the tables turn, as they inevitably is replete with examples of the "new" supplier relado, their profits will be "cut to the bone." 3 Each tionship. Hayes, Wheelwright, and Clark of Har- dother illbe pofis CL~ toth boe." Eah yard Business School found that one important side inherently distrusts the other, and an arms- yardcBusin o l found tha o iortant

length, often adversarial, relationship develops, characteristic manufacturer" of what they termed a "world class n,.e., a manufacturer able to compete on equal footing with the Japanese) was a

FIGURE 6-2. DEPENDENCE redefined relationship with a small cadre of top

THEORY OF POWER IN BUYER/ quality suppliers. Specifically, they assert:

SELLER RELATIONSHIP "it is essential that suppliers change from

arm's-length adversaries to co-makers.

High Buyer highly Buyer & Seller highly Under the co-maker view, the buyer dependent dependent on

on s.eer each other organization seeks close working relation-

(sole.-ource) (,tategic,,lnce) ships with a few key vendors over the

Power Shifts to Seller Power Balanced long-term."4

uyer I Buyer Seller

Buyer's eller L

Degree Elwood Buffa of U.C.L.A. made a similar findof

Dependence No dependence Seller highly dependent ing in Meeting the Competitive Challenge: between buyer A on buyer belween buye opbuer & "there are economies that result from in-

(lull & open

competition) (monopeony) telligent, cooperative bu ":r-seller relationPower Belanced Power Shifts to Buyer ships,....which may even result in single

Buye SelSell r sourcing with the supplier located close to Buyor Seller B.yrtebyr"

--------- the buyer."s

Low H~gh Finally, Richard Schonberger, a noted manufac- Lw r' 

Degt" turing consultant, said that a world-class of

Mependrnce manufacturer found one good source of supply

for each part, and then treated that supplier as

Classic economic theory is useful also in a comaker.6 These expert opinions are represenunderstanding this competitive approach to the tative of what can be found in the current

buyer/seller relationship. Competition is a fun- literature.

60
They are also consistent with our findings after long-term, sole-source relationships with suppliers

visiting an array of commercial firms for this are the answer.

research project; every firm visited was attempt- Another commercial practice contributing to

ing in some systematic way to reduce their sup- redefined supplier relationships is the increasing

plier base, and many were trying to fundamen- use of Just-in-time (JIT) manufacturing. The JIT

tally redefine their relationship with suppliers, is a material management philosophy borrowed

Purchasing, a journal of the commercial purchas- from the Japanese designed to reduce inventory

ing profession, found in a 1988 survey that 68 per- and its associated costs. This is done by placing

cent of respondents use some form of partnering greater reliance on suppliers to deliver the item

with suppliers, and another 10 percent said they to the production site literally just-in-time for that

planned to do so in the next year. 7 item to be incorporated into production. Since

safety stocks are minimized (or non-existent), the

reliability of supplier's deliveries are critical. As

FIGURE 653. SEEKING PARTNERS such, just-in-time systems require closer, "open

kimono" relationships with sources and tend to

(% respondents) rely on a ý.iiail number of highly-reliable sources.

The evidence is clear, mor- commercial firms are

recognizing the long-term benefit of concentrating

purchases with one or a limited number of

sources, and substantially altering their relationship with those suppliers. They find a supplier that

SEngaged can meet their quality and schedule requirements

In partnering and enter into long-term buying relationships with

22% that supplier. Without competitive pressures on

No each purchase, the instant unit price may be

partnering higher, but that price is typically offset by im10% proved quality, schedule performance, and/or

lower life-cycle cost. With one vendor supplying

None now, a firm's total requirement for an item, quality

but plan tshould become more consistent, causing fewer rejects and less rework. Similarly, a single vendor

should be more consistent and reliable in deliveries

allowing the firm to maintain smaller inventories

of the item, hence saving money. If a firm concentrates their purchas,-q with one supplier they

There are a number of innovative commercial should enjoy greater influence over that supplier

practices that are, at least in part, responsible for since they represent a significant portion of the

this trend toward a closer, more cooperative rela- supplier's total business. The level of communicationship with suppliers. One practice, as discussed tion and cooperation between the firm and the

earlier, is total quality management or TQM. One supplier should increase, as each has a greater

aspect of TQM that is parti,.ularly relevant to this stake in the success of the other.

discussion-TQM nhilosopzhy with regard to the In these cooperative arrangements, the buyer and

supplier relationships. The Godfather of TQM, seller are agreeing to become more dependent on

Dr. W. Edwards Deming, rejects the idea that each other for the overall success of both corn-

"competition in the marketplace gives everyone panies. Some would argue that this refutes the

the best deal." He argues that ihe leverage of corn- dependence theory of the buyer/seller relationpetition may get the best price in the short term, ship, the cornerstone of which is minimizing your

but at the cost of reduced quality, which in the dependence on the other party. On the other

long-term reduces value. Dr. Deming argues that hand, proponents of the cooperative approach

61
would argue that in the long-term, power is max- (Chapter I contains a more through treatment of

imiLed on both sides of the ledger when each the concept of equity in public spending).

becomes dependent on the other. Graphically, this Consequently, at least since 1809, the government

would be seen as a shift to the upper right has favored using competition in its purchasing.

quadrant in the graphic shown earlier in this The Armed Service Procurement Act and the

chapter. Federal Property and Administrative Services Act

It appears that commercial firms are realizing mw- require that government procurement be competijor benefits from adopting more cooperative rela- tive to the maximum extent practical. The July

tionships with a limited base of suppliers. Har- 1984 Competition in Contracting Act (CICA)

yard Business Review attributes partnering with broadened the requirement for competition in

suppliers as a major factor in the recent turn- federal purchasing, and reaffirmed this need for

arounds of both Ford and Chrysler.A The Pur- equity in defense spending.

chasing survey cited earlier found that 80 percent Benefits of competition from an economic and an

of the respondents who use some form of part- equity standpoint can be compelling. The equity

nering. found it met their goals of reduced inven- consideration alone is so compelling it is unlikely

tor, cost control, dependable supply levels, and

red'uced lead times.' the U.S. Government will ever abandon competi- tion as the preferred method of government procurement. It should be recognized, though, that

in the commercial environment the need for equity FIGURE 64. PARTNERING GOALS becomes much Jers compelling, and competition

must stand on economic merits alone.

What are your goals when you enter

a partnering agreement? INHIBITORS

(0,t of respondents who use partnering agreements) Clearly, commercial firms are increasingly using

Reduced inventory 76% new, cooperative supplier relationships to advanCost control 7 tage. When the commercial firm is a DOD conDependable supply levels 70% vantage of these innovative commercial ways of

Reduced lead times 67% doing business? The answer appears to be "no." I .. I Research did not indentify even limited cases 0 20 40 60 80 where a defense contractor sought sole-source

alliances with suppliers, regardless of arguments

for doing so. It is ciear these contractors feel, to

some degree, inhibited from entering into this type Government Attitude Toward the Buyer/Seller of arrangement, so they avoid them. All had supRelationship plier reduction programs, but never with the inLike many other organizations with large procure- tent of reducing to a single supplier for a given

ment budgets, the government is interested in the item. A typical arrangement was for the defense

ecooomic merits of bargaining parity and a self- contractor to partner with several sources for each

regulated price offered by competition. It is a item, thereby preserving competition, but potenwidely-held perception in government circles that tially at the cost of watering-down the benefits

competition does, in fact, lead to a superior prod- of partnering. Alternately, defense contractors

uct at a lower price. Beyond these economic con- might have a sole-source of supply, but with

sidprations though, the government embrace: periodic (annual) competition. Again, the full

competition because of another important benefits of partnering are not being realized.

dimension-the connotation of equity it conveys. On the otder hand, purely commercial companies

Full, open competition conduced at arm's length (i.e., those with little-or-no DOD business), were

gives the public a perception of fairness and i1n- not reluctant to enter into long-term, sole-source

tegrity in the use of their tax dollars, since arrangements when the business situation wareveryone is able to compete equally for a portion. ranted it. Interestingly though, Dr. Deming and

62
the current literature to the contrary, these fit ms to emulate the methods and procedures it uses in

(some of whom have industry-leading quality awarding prime contracts, including the use of free

records) typically dc not use sole-source ar- and open competition. To maintain this oversight

rangements on a wholesele, across-the-board and control, the government uses the Contractor

basis. Rather, they tend to usc them very judi- Purchasing System Review (CPSR), the subconciouslv-only for the procurement of selected tract consent and notification requirements, and

items of strategic importance. In a majority of the the subcontract plan requirement.

c; 's these companies compete their supplier re- A CPSR is designed, "to evaluate the efficiency

qu,remcnts because it i, in their best business judg- and effectiveness with which the contractor spends

ment to do so. Unlike DOD contractors, however, Government funds and complies with Governthey seem uninhibited in using whatever supplier ment policy when subcontracting."'" In conductarrangement the business situation dictates. ing a CPSR, a team of government specialists

\\c% will now e.anmine what seem to be the major critically examines a prime contractor's purchasinhibiting tact,"rs to DOD contractors. ing system, with the objective of approving that

The DOD Intervention in Contrilctor's Internal system if it meets government requirements . The

Management degree to which the system "provides for full and

open competition, or obtains competition to the One coum argue thf t a DOD prime contractor, maximum extent practical:' are central to the

as a commeercial firm, should have complete flex- government's decision to approve or disapibility dealing internall, and externally with other prove."2 Where competition is not obtained, the

.unrmercial firms. However, this is not the case. svstem must ensure that its absence is fully

The D)O1) imposes a plethora of requirements dic- justified.iJ

tating how it's contractor., conduct their business. Many of these: requirements flows through the If a contractor does not have an approved pur- prime contractor diremfly t the fo subcontractors chasing system, each individul subcontract

and sappliers. The Defense Science Board ob- action falls subiemt t the suncc. I act consent or

served in 1986, "A typical military contract con- ntifian riments. 1. must requir

tairi, 214 general and special provisions, 144 of ment means the prime contrm " . .hg e must obtain

,.lic. flow down to subcontractors. - Osten- prior written consent from the government before

sibly, each o. ' ,se provisions has some impact they subcontract for work that is particularly

on how that cc, *pany (or subcontractor) conducts complex or of high dollar value. Subcontracts for

busine,s, In contrast, the Defense Science Board less complex purchases are subject to the less

found that in a purely commercial environment, stringent notification reouirement. Notification

even a complex zontract would more typically means the prime contractor must notify the

have about 45 of these types of provisions. Of government of certain , bcontract awards; no

course, D)Ol)'s requirements on its contractors are prior written consent i- ,ssary.

not imposed arbitrarily; each requirement is The subcontract plan ,eq .rement is levied on a

designed to elicit desired behavior on the part of contract-by-contract basis, usually only on major

the contractor (hiring from areas of high contracts. It is often tailored to the specifics of

unemployment, for example). The weight of the situation, but typically requires contractors

many requirements when taken in aggregate, to submit subcontracting plans up front for evalo,.vever, can have th ,.pposite, effect arid eli-it uation during the source-selection process. The

ualesirable behavior, such as bureaucratic degree of competition expected is often a critical

lethargy or resistanc to innovation. element in the evaluation of such plans.

The purchasing system review, consent and

1hw DO1) Intervention into Contractor's notification processes, and subcontract plan

Surcinlg l)eci~ons requirement provide a systematic framework

'ý D)OD) is particularly interested in how its under which DOD can have a direct influence on

mc ((intractor- Larry out their sourcing func-- how prime contractors do business with srbconi,,n. Id'ally, )01) Dscns to vtant its contractors tractors and suppliers. The degree to which DOD

b3
exerts that influence to advocate competition in tors including an evaluation of the data available

awarding those subcontracts will inevitably affect on subcontracts awarded .... This interest in data

the degree to which DOD contractors pursue is significant since any effort to expand subconmore cooperative relationships with their sup- tract competition must start with a quantifiable

pliers. Accordingly, 3 closer examination of the baseline from which to measure success. While

nature and degree of DOD's advocacy for sub- the government collected data on competitive excontract competition is called for. penditures at the prime-level for many years. there

has not been a reliable way to collect data on cornGovernment Attitude toward Subcontract petition at the subcontract level. In response to

Competition congressional interest, DOD began capturing

As we established, the government has compelling some data on subcontract competition, an action

reasons to be interested in competition at the some predicted would be a precursor to actual adprime contractor level. They h3ve established vocacy for subcontract competition. This prediccompetition advocates through various levels of tion proved to be true.

the government to maximize prime-contract-level The U.S. Navy is on the forefront in actively adcompetition, and annually establish specific com- vocating competition at the subcontract level. It

petition goals for each department. Beyond this, charges buyers to analyze carefully a prime conthere are reasons why government leaders have tractor's make-or-buy decision to ensure they are

also become interested in the once neglected area maintaining "competitive pressure on cost or

of competition at the subcontract level. On one quality." The Navy's Competition Handbook

hand they are faced with tremendous pressure says, "Subcontractor competitions.. .can have

from the Congress to increase the use of competi- dramatic cost savings," and cites examples where

tion as a panacea for the ills of the procurement they have done so. The Air Force, Army, and

system. On the other hand, less and less of DOD's DLA are less aggressive in advocating subcontract

procurement budget is staying with prime con- competition, but all seem to do so subtlely

tractors, but rather, is flcwing through the primes through the CPSR process which evaluates and

to subcontractors. Recent estimates place the approves purchasing systems based on that

percentage of subcontracted content as high as 75 system's ability to ensure "adequate price compercent and rising; this is up from about 50 per- petition," among others. High-level DOD officials

cent in the early 1960s.14 With an increasingly resisted attempts to mandate subcontract competismaller percentage of DOD's procurement budget tion goals or have advocacy institutionalized

actually subiect to prime-level competition, it through legislation, but they do advccate comcould be argued that the government should, petition at the subcontract level on any prime contherefore, subject all subcontracts to competition, tract awarded without competition. In some inas well. Therein lies a major impetus behind stances, this advocacy manifests itself through

DOD's burgeoning advocacy for competition language on a specific contract that provides

below the prime contraci level, monetary incentives to the prime contractor based

.. 1984 the Deputy Secretary of Defense in a on the extent to which he attains subtier competimemorandum entitled, "Increasing Subcontract tion. This approach is, by definition, very narCompeiition," identified circumstances where Sub- row in application since it must be applied on a

contract competition should be of particular in- contract-by-contract basis."h

terest, including instances where large quantities The primary inhibitor to effective supplier partof nigh priced components were being subcon- nering by defense contractors is DOD's advocacy

tracted. The Congress began showing an interest for free and open arms-length competition for subin subcontract competition in 1983 in the law contracts under defense contracts. While the

reauthorizing the Office of Federal Procurement strength and form of this advocacy are somewhat

Policy (OFPPP. In that legislation, they specifically amorphous, they seem to be sufficiently clear to

required the administrator of the OFPP to, "con- signal defense contractors on the desires of DOD.

duct StUdi(eS.. on the extent of competition in the Since, for most, DOD is their dominant customer,

award of subcontracts by federal prime contrac- they react to those desires, and use partnering only

64
on a limited basis, stopping short of entering into expected to fully implement new ways of doing

sole-source arrangements. business like TQM.

SUGGESTED AREAS FOR IMPROVEMENT

Adopt a Policy of Neutrality Regarding Endnotes

Subcontract Competition i. Bacharach, Samucil B., and Edward J. Lawler,

Because competition connotes fairness and equity Bargaining, Power, Tactics, and Outcomes,

in expenditure of government funds, it will likely Jossey-Bass Publishers, San Francisco, Calif.,

be the preferred method of government procure- 1984.

ment for years to come. The need for equity is 2. Karrass, Chester L., Give & Take--The Cornmuch less compelling at the subcontractor level, plete Guide to Negotiating Strategies and Tactics,

however, and the degree of competition or coop- 1974, Thomas Y. Cromwell, Publishers, New

eration with suppliers is a business decision. In York, N.Y., p. 152.

many or perhaps most cases, prudent business 3. The Wall Street Journal, "Shopping Around

judgment will warrant using some form of corn- - Seeking Better Prices, Firms Haggle a Lot, Afpetition: but, in others, the benefits of improved Cect Inflation Rate," Dow Jones & Cempany, Vol.

quality or reduced total costs will call for a sole- CCX!II, No. 73, p. 1, April 14, 1989

source, cooperative arrangement. The DOD

should not restrict its contractors from using the 4. Haves, Robert H., Steven C. Wheelwright,

best business practice; then, as always, hold them and Kim B. Clark, "Dynamic Manufacturing:

strictly accountable for ultimate results. Creating the Learning Organization," The Free

Press, New York. N.Y., pp. 19.3-208, 1988.

Two opposing arguments typically arise. One is, 5. Buffa, Elwood S., Meeting the Competitive

"DOD doesn't advocate subcontract competition, Challenge: Manufacturing Strategy for U.S. Cornthey just track it"; the other, "DOD only wants panies, Dow Jones-Irwin, Inc., Homewood, Ill.,

subcontract competition in cases where they don't Chapter 8, 1984.

have prime competition." Both are tantamount 6. Schonberger, Richard J., "World Class

to advocating subcontract competition across-the- Manufacturing: The Lessons of Simplicity Apboard. Tracking conveys the perception that plied," The Free Press, New York, N.Y., Chapter

DOD wants it; the contractors react accordingly. 9, 1986.

Requiring it on a single contract results in the con- 7. Purchasing, "Partnering with Suppliers: It

tractor adopting a single system to ensure competition on all purchases (reference Finding 71. orks," p. 23, July 28, 1988.

Further, the move toward partnering, TQM, etc., 8. HBR, July-August 1Q88, "Beyond Vertical Inrequires a fundamental philosophical shift that tegration - the Rise in Value-Adding Partnercannot readily be turned on and off on a contract- ships."

by-contract basis. 9. Purchasing, July 28, 1988.

Notwithstanding these arguments, it is clear that 10. Final Report of Defense Science Board 1986

DOD contractors when mdking business judg- Summer Study entitled, "Use of Commercial

ments vis-a-vis relationships with suppliers, are Components in Military Equipment," January

factoring in DOD's rea! or perceived desire for 1987, Office of the Under Secretary of Defense

subcontract competition. Accordingly, if DOD for Acquisition, p. 46.

wants the benefit of business judgments without 11. Federal Acquisition Regulation, 44.301.

this bias, it should adopt and communicate a

policy of complete neutrality with regard to corn- 12. 'rokopy, John A., "Contractor Purchasing

petition at the subcontract level. The degree of System Review: What Is It'?" Contract Managecompetition or cooperation with suppliers would ment, The National Contract Management

then, like other business judgments, be left to the Association, p. 43, October 1988.

discretion of the prime contractor. Only tv grant- 13. Federal Acquisition Regulation, 44.

ing this flexibility can the defense industry be 202-2(a)(5).

b•5
14. Department of Defense, Defense Systems 15. Johnson, Elizabeth Ann P., "Incentives for

Management College, Establishing Competitive Subcontract Competition: A Case Study," ConProduction Sources, A Handbook for Program tract Management, p. 8, December 1988.

Managers, August 1984.-

66
7

SOME REGULATORY IMPLICATIONS

FINDING Companies Adopt Uniform Administrative Systems.

DISCUSSION OF THE FINDING pose the defense requirement on itself so it would

Discussion of business management approaches not lose certification of its process. This has a

with several firms which conduct both military significant policy implication because we may

and commercial business (i.e., General Electric, consider that relaxing the requirements for a good

United Technologies, GTE and Westinghouse contractor will allow cost savings to be applied

Electric) showed that generally, these companies to the contract. This may not be the case where

segregated their business units so commercial and a contractor has other government business which

military business was not collocated or coman- will not be affected, or may wish to compete for

aged. In an advertisement, a Washington-based other business for which the waiver of the requirelaw firm highlighted the reasons ior such barriers ment may not be granted.

as follows:

-Minimizing the cost of necessary controls INHIBITORS

gcertification requirements The discussion of the finding has, in itself, been

a discussion of the inhibitors. The regulatory

-Localizing cost accounting standards aspect of governmental purchasing is recognized

compliance in industry as a fact of life in doing business with

--Using exemptions from cost and pricing data the government. The problem highlighted in this

disclosure section is the difficulty in selectively applying

-Limiting access to company records good ideas. In our research, we spoke with several

individuals from programs designated as Defense

-Protecting rights in technical data Enterprise Programs (DEP) which, theoretically,

-Narrowing exposure to suspension and could be excluded from governing policy direcdebarment. tives. Unfortunately, viewed from government

In addition, there is a strong preference to employ and industry, DEP designation made little difone set of administrative procedures. If the firm ference in the management and operation of these

was producing a military item and a commercial programs. Simply stated, trying to gain accepitem on the same floor, they would adopt the tance of the exempt status from the functional

military approach to sourcing, inspection and staffs and organizations in DOD became more difquality control for all items on the floor. For ex- ficult than simply adhering to the policies and

amples of this, look at the MSE/CTE, and GE regulations.

ca'es in the appendices. The cost of managing two The need for uniformity in industry/government

systems was deemed too expensive and confus- dealings is based on sound principles. It was largeing to the work force. We also found that relax- ly responsible for the consolidation of procureing a standard for a specific DOD contract was ment regulations into the Federal Acquisition

counterproductive because a firm would not want Regulation. Uniformity on the other hand, does

to be penalized for using a commercial practice make selective relaxation of requirements theoon a subsequent military buy. Generally, if a com- retically feasible, but extremely difficult to implepany had other defense contracts, it would ira- ment in practice.

67
SUGGESTED AREAS FOR IMPROVEMENT ment and prime defense contractors are working

Use the Contractor's Cost Accounting System from the same status data base. They are excepThe orginal intent of the Cost Schedule and Con- tions to CSCS requirements and we believe they

trol System (CSCS) was to use contractor- provide a more effective system for joint

provided data to monitor the performance under government-industry program management. A

t the co contract. ied tract. Inintorthe In intent and pan designitisnoer design it ce is not successful example is highlighted in the MSE/GTE

significantly different from the systems described case; a Defense Enterprise Program (Appendix G).

as in place to monitor commercial capital im- Policy or Reporting Requirement Deviation and

provement or new product development pro- Waivers Should Be Granted Only for an Entire

grams. Unfortunately, the CSCS system has Commercial Activity and Only for an Extended

become a source of contention between the Period

government and the contractor in its application. We investigated commercial and defense

Despite observations about the extra costs of businesses raid it became obvious that commermultiple control systems, it can be advantageous cial entities and the military departments could

to the contractor to maintain two cost account- use similar standards to advantage. Policies ening systems-one for internal management and couraging perception of uniqueness in defense

one as a CDRL requirement under the contract. systems management are counterproductive,

especially if the different administrative systems

Commercial program managers find that the serve only the burgeoning DOD bureaucracy. As

CSCS system provides too much information, discussed in the inhibitors section, each Defense

They use a system providing summaries of cost Enterprise Program (DEP) prime contractor conand schedule progress, timely (i.e., actual, vice tacted (i.e., General Dynamics and GTE) indimassaged data) and accessible -)n a daily basis. cated there is little difference in the requirements

Detailed backup information, available on an under which they and other non-DEP defense proquery-response basis, is used to investigate prob- grams operate. Commercial business leaders felt

lems highlighted in the summaries. The CSCS it was "too expensive" to operate parallel systems

reports, a data-deliverable rather than a real-time that must meet different policy or reporting

management system, delay status reporting and requirements.

focus too much time on extreme details and for- We believe policy or reporting changes need to

matting. Consider again the fire alarm conven- be implemented company-wide and for an extion introduced in Chapter 3. The CSCS system, tended period if positive results can be expected.

as currently employed, provides too much detail The target company must be convinced the rules

about what happened weeks or months before but will not be changed often so it can have confidence

has become useless in real-time management. to employ best business practices across-theThere are unique instances in which the govern- board.

68
IV

CONCLUSIONS AND

SUGGESTED IMPROVEMENTS

69
IV

CONCLUSIONS AND

SUGGESTED IMPROVEMENTS

CONCLUSIONS applicable to how we do business. These are:

Our opportunity to research systems acquisition Finding 1. Active involvement of top corporate

and purchasing management has been unique; for managers is essential to program success.

7 months, we assessed private industrys manage- Finding 2. Commitment to program success

ment of systems programs and purchasing. The crosses organizational lines.

field of study we chose is great. The allegorical

analogy is that of a 7-year old child given $10 to Finding 3. Schedule is first among cost, schedule

spend at a toy store. In our case, there was so

much to investigate. Though time, our main Finding 4. Program managers are afforded

resource, seemed substantial at the start, it ran significant authority arnd resource control, and are

out long before we could satisfy all our research held personally accountable.

desires. Finding 5. Price is but one element in the purWe approached this research to find good ideas chase decision.

and techniques; not more problems; the Press, Finding 6. Companies are adopting more coopGAO, and the Congress have done enough of erative relationships with their suppliers.

that. Instead, we sought to build on our experience in program offices, buying commands Finding 7. Companies adopt uniform adand at Harvard Business School to improve the ministrdtive systems.

defense acquisition process. Focusing on commer- Each chapter oi the report supports these

cial practices permitted detailed investigation of individual findings from published sources, our

various topics and scoped the potential for fur- iniustry interviews and the case studies.

ther research in the field. The findings are not unique; with some differences

The scenario of major commercial new product in approach or emphasis, 'hey parallel those of

development and major capital plant/equipment the Packard Commission and other studies of

programs closely parallels the acquisition of ma- government acquisition. To underscore this comior defense systems. Such programs involve many monality, reference was made to specific sections

years; major expenses upon which the future of of the Packard Commission report as the findings

the company depends; often new technology, and developed.

comprehensive employment of people, equipment Our contribution is not that we discovered

and services into an integrated whole. something new but, rather, we have assessed

Building on our defense acquisition experience and inhibitors to easy implementation within the

the Harvard "case study" method, we investigated defense acquisition environment and generated

literature f' •b:st b,, ,,CS prc&zz. =; cz,-pplicable some practical, implementable, policy-level sugto systems program management. Then we gested improvements The suggested improvedeveloped cases based on program exampies ments that follow have been provided to senior

offered by industry contacts. We found several Department of Defense and military departments'

commercial management practices definitely acquisition leadership.

71
We do not believe defense acquisition is beset with program baselining process, to maintain schedule

rampant fraud, waste and abuse. Rather, it is a and solve technical problems. huge, bureaucratic system operating in an huge bueauratc sstemopeatig i an Unless our progr,•m schedules can be shortened

environment of conflicting objectives and expec- Unles ouriprogr m se le cantbe sorte

tations and, thus, unacceptably inefficient. Also, and met consistently, we will continue to be

w we nave rjec th ersectve hatallansers unable to generate real teamwork so essential to

can 

e re 

be 

jec 

found 

t th e 

in 

n a 

private 

iv e p e rsp 

industry 

ec tiv e th a t a ll a n sw e rs p r g a s u c s . T p d f n e l d r , p o r m because problems program success. Top defense leaders, program

can also be found in many failed products. Look- managers and functional specialists must operate ing at how industry acquires capital and develops as teams, with confidence in each other attained ingat ow ndutryacqirs cptl ad dvelpsthrough demonstrated, on-the-job performance.

new products, we focused on successful programs, throug de stratdothj pr form ance. identified contributing management practices and With long and still unrealistic program schedules,

p se a few reach this level of shared confidence; thus, recommended adoption of these practices for teamwork suffers. Obviously, this aspect of imin defense acquisition. proving systems acquisition is heavily dependent

SUGGESTED IMPROVEMENTS on the professionalism and experience needed on

Improvement 1. Establish at MS II (MS III the part of all team members; Improvements 5 and

for NDI programs) the 6 are key to implementation of this one.

relative priorities of pro- Improvement 2. Subordinate PPBS funding

gram cost, schedule and decisions to DAB or

performance in the SSARC approved program

baselines. baselines at MS II and

-Give the PMi'PEO beyond.

flexibility and authority to -Recognize approval at

make trade-offs within MS II as a commitment for

baseline constraints. the life cycle.

-Ensure there is maneu- Commercial companies we researched had

ver room between stretch business planning systems not unlike our plangoals and practical, mini- ning, programming and budgeting system (PPBS)

mum requirements. in most functional aspects. They were, barring

At MS 11, the baselined schedule should be as major revenue problems, less constrained than

short as practically achievable via prudent DOD in committing funds resources over the incost/performance trade-offs made during the pro- vestment phases to new programs. The keys to

gram planning process. Performance features successful integration of business planning and

should be designated b,'tween minimum require- stable funding in commercial business enterprises

ments and stretch goal,. "Performance" means all are: 1) realistic financial planning-using the

features directly influencing design, engineering, business planning process in a disciplined manproduction, operat', n and support of the product ner to forecast revenues and expenses, thus capital

or system; thus, it includes such things as unit funding available; 2) selective approval of

cost, life-cycle cost, reliability and maintaina- program opportunities-ensuring all approved

bility, as well as mission features (i.e., speed, programs were affordable based on business planrange, accuracy, etc.). Stretch objectives should ning; and 3) completing approved programs on

be incorporated if technology permits, or reserved schedule, thus supporting the program assumpfor evolutionary upgrade if technological availa- tions used in the business planning process.

bility threatens the schedule. The PM should have Implementation of this improvement would

authority to use and the best functional support entail:

available, and his judgment, to assess relative ]) Phasing in Defense Enterprise Programcosts and benefits of performance tr,ýdes and to like (DEP) programs (maior and non-major) with

make timely trade-off decisions. A cost buffer of milestone-authorized siable funding

10 percent should be made available to

PMsiPEOs, without need to revisit the PPBS or 2) Subordination of future PPBS decision72

S . . . . . . . . . . . . . . . . . . . . ._.. _.. I . . . . . .. . .. . . . . ._ . . . . = I
making to program baselinc decisions at MS II Large commercial programs had only one or two

and MS III (too often budgetary cuts are applied go/no-go program decision milestones. Typical-

"across the board" as though no priorities exist). ly, the organization conceived of many

Key to this implementation is disciplined technological or market-driven opportunities

decision-making, based on realistic planning and which were winnowed down by committee acprogramming; and institutional follow-through, tion, advance business planning and feasibility

based on commitment to, and communication of, studies to a relative few. Based on strategic vistrategic priorities. sion and resources available, top management and

the Board of Directors (BOD) approved selected

This Figure portrays the point that PPBS drives programs for development and implementation. funding available to programs pnor to MS H, then If substantial technological uncertainty existed,

it is driven by MS II and beyond program deci- a second milestone was required to ensure there

sions. Thus, Milestones 0,1 and 5 would be subor- was sufficient likelihood of success before major

dinate to PPBS. while [PPBS would be subordinate resources were committed. The initial committee

to Milestone 2-4 decisions. The Figure also sup- screening of program possibilities was done at low

ports aspects of the next improvement to reduce levels within the organization as part of periodic

the number and level of program milestone business planning; line acquisition management,

decisions. without staff or committee oversight, was then

Improvement 3. Reduce the number and fully empowered to execute the program. The

level of program decision CEO, or CEO-surrogate, stayed informed and

milestones assisted line management as necessary throughout

the life cycle of approved programs. --Only MS II need be a

DAB-level decision. Implementation of this improvement within DOD

FIGURE IV-1. LINKING DEFENSE STRATEGY, PPBS, AND MAJOR

SYSTEMS ACQUISITION MANAGEMENT

Objective: Provide capable systems to our users, efficiently and on time.

Defense PPBS System Systems Milestone Review Process

Strategy Planning Programming Budgeting o 1 2 3 5

" History 9 Users * InitiateFi

"* International * Adversaries PEO SAE DAE DAE/ PEO PEO

Trends 9 Prioritize SAE

-Economic * Resources Systems

-Social

-Technical * Missions * Resource I -Political Estimations

" Strategic Ussr

Position User Needs ,

" Worldwide Budget Impact Expectations Technology Baseline 1-2 yra Neeas 2-5 yrs

Strategic 5-15 1

issuasI

15 yrs

73
would entail limiting DAB oversight and decision budget buffer is essential to success of this

to MS II only, for DOD major programs (SSARC improvement.

II only for component programs); accordingly In DOD, our large senior staffs perform many of

reduce the preceding and succeeding milestones the roles associated with top management;

one level; and delegating all other milestone deci- systems acquisition is an ancillary function for

sions to the PEO in coordination with the "user" senior defense leadership, providing logistics sup-

(surrogate user), port to operational forces. We have evolved to

Improvement 4. Empower acquisition line an acquisition system devoid of clear, CEO-like,

managers (i.e., PM, PEO, top managers. The DAE and SAE are staff

SAE and DAE) to make elements, both are without control over personprogram decisions, within nel resources (who work for the military chiefs),

approved program baseline and without full decision authority over all acconstraints, without in- quisition functional directors within the Departterference from furctional ment or Service, respectively. The result is transtaff advocates at higher sient leadership, temporary policy, and a huge

organization levels. functional bureaucracy which manages by conThis improvement augments Improvement 1. In- tinuous committee consensus.

dustry PMs and their first-line general manage- Improvement requires clarification and simplificament are empowered to execute their programs tion of who is in charge. We must establish who

without external interference as long as baseline (singular) has program decision authority over the

requirements are met. whole acquisition process, once a program is apFollowing program approval as discussed in im- proved at MS II. The DODD 5000.1 needs reviprovement 3, to enter full-scale development, the sion to define, clearly and simply, who (singular)

PM and PEO would be empowered to use the best can make program specific decisions involving

expertise available to solve problems and perform trade-offs, personnel assignments and priorities.

trade-offs as necessary to complete the program Improvement 5. Strengthen the professional

within baseline constraints and without indepen- functional support to prodent oversight or direction from functional staff gram managers and reduce

managers. The Service Acquisition Executive the dependence on staff

(SAE) or Defense Acquisition Executive (DAE) functional oversight of proshould be kept informed of progress and prob- gram execution.

lems, directly by the PM/PEO, on a quarterly -Change the focus of

basis. The SAE or DAE would then be the link functional staff managers

to the Defense Resources Board (DRB) and the from involvement in proCongress, should the program baseline need alter- grams to the professional

ing. Should "fact-of-life" strategic events occur, development of acquisition

such as a major force reduction, the DAE and specialists.

DAB should act to implement applicable changes specialists. to the baselines of impacted programs. Successful commercial programs were remarkable

in the degree of organization commitment to proImplementation of this improvement would en- gram success noted. Our discussions with protail the decision-maker (SECDEF, Service gram and functional managers showed strong,

Secretary, or manager with delegated program ap- mutual, shared goals and commitment to success.

proval authority depending on program scope), This is due partly to recognition of the importance

at MS II, committing to the program baseline with of specific programs to achievement of the corall subordinate acquisition line managers, and en- porate business strategy, and partly to the

suring the baseline objectives were sufficiently availability of professional functional expertise in

prioritized so that acquisition line managers (PM, direct support of program management. Though

PEO, SAE and DAE) have flexibility to solve virtually all companies were matrix organized,

technical problems during execution. A real with many functional specialists assigned to pro74
grams in a task organized fashion, all functionai matrix). This improvement is intended to augment

personnel assigned to support a program look on- Improvement 5 by extending implementation to

ly to the program manager for program direction the acquisition and materiel commands of the Serand decision-making. Program managers, in turn, vices where, in many cases, the functional acquisidepended on the expertise and recommendations tion specialists and PMs/PEOs have different

of their assigned functional specialists. chains of command. The thrust of this improveThe thrust of this improvement is to implement, ment is to provide PMs and PEOs the functional

within DOD, a system whereby top functional expertise they require, and deserve (dependent on

staffs are focused primarily on creating and program priority) to plan and execute the program

managing a system to educate, train and govern right the first time. We must get away from the

careers of acquisition professionals. Such a system climate in which senior military and civilian

would provide PMs ard PEOs the power to make leadership tolerates, even encourages, PMs to essential personnel and program decisions and the compete with each other for adequate resources, functional expertise to plan, organize and execute and accepts the divided loyalty engendered in our

programs right the first time. A collateral benefit special advocacy system. These senior leaders

would be less exposure to the diffusion of respon- should stop acting as "judges" of programs and

sibility associated with committee decision- actively manage the acquisition system.

making. Our policy should be in the form of principles and

This approach to matrix management is used ef- goals, not directives, due to the need to provide

fectively in military combat units where the "head- flexibility to local commanders to optimize the use

quarters commandant" (consider like a functional of scarce personnel expertise. Adoption of this

organization manager) provides staff assets to unit approach should reverse the growing trend in

commanders. The commanders make mission some commands to place functional participants

decisions and the staff members are not authorized (even those full- time on specific programs) under

to disagree. In the acquisition arena, the PM;PEO the control and evaluation of the functional matrix

must act with the user as "advocate" for the manager, thereby taking authority from the

system up to MS II. Following MS II, the "sell- PM/PEO and diffusing responsibility for program

ing" aspect of advocacy can end while the success.

PM/PEO and user shift full attention to leader- Improvement 7. Develop an o,-line contracship of problem prevention and solution. This can tor performance history file

work only if real program execution authority which is available to the

rests solely with the PM, PEO, SAE, DAE chain contracting officer (source

of command. selection official in systems

Improvement 6. Ensure matrixed, func- programs).

tional, program support This improvement is directed at procurement of

personnel are dedicated to non-system equipment and services which usually

programs through organi- do not rate a source-selection-evaluation process.

zational alignment and Some elements could, as well, be applied to maincentives. jor system acquisition, for example, the excellent

-To the maximum de- initiative of the Air Force Systems Command's

gree possible, matrixed per- Contractor Performance Assessment Report

sonnel should work full (CPAR).

time for, and be rated by, The first step in using quality information in makthe PM. ing source selections is to make it available to the

Program managers in successful commercial pro- contracting officer. Implementation of this imgrams have the full, dedicated support of func- provement should be phased. First, elements of

tional specialists. The PM has hire-and-fire the file should be established and should include

authority and evaluates the performance of the indices for price, delivery and reported quality

specialists assigned (dedicated and functional problems.

75
Second, the ability to input and access the files Improvement 9. Adopt, communicate, and

throughout DOD must be established. A partial enforce a policy of cornnet will not be sufficient, since it will fail to pro- plete neutrality with regard

vide the objective information needed to eventual- to subcontract competition,

ly make source selections. including a cessation of

data gathering.

Third, once the network is functioning, quality Because competition connotes fairness and equity

factors can be established to adjust bid prices to in the expenditure of government funds, it will

reflect the cost of schedule or other problems. (In likely be the preferred method of government prosystems programs, past performance, including curement for future years. The need for equity

quality, would be evaluation factors indepen- is much less compelling at the subcontractor level,

dently considered along with price. cost.) however, and the degree of competition or

cooperation with suppliers is a purely business

There are several evolving approaches to im- decision. In many or perhaps most cases, prudent

plementing aspects of such a system. We are business judgment will warrant the use of some

aware of efforts sponsored by the Defense form of competition; but, in others, the benefits

Logistics Agency and the military services to move of improved quality, or reduced total costs will

in this direction. These are limited in scope and will call for a sole-source cooperative arrangedo not exploit the potential for more accurate ment. The DOD should not restrict its contracmeasurement. This is essential in the acceptance iuib from uý.iit the best business practice; then,

of such systems and th.r ability to withstand as always, hold them strictly accountable for

administrative protest. ultimate results. Only with this flexibility can the

defense industry be expected to fully implement

Improvement 8. Establish a variable specifi- new ways of doing business like TQM.

cation method of contract Typically, two opposing arguments arise. One is,

source selection for non- "DOD doesn't advocate subcontract competition,

system procurement. they just track it"; the other, "DOD only wants

The current method of establishing a minimum subcontract competition in cases where they don't

specificatont wihod if esatabisfie, p mits theýhave prime competition." Both are tantamount specification which, ,f satisfied, permits the selec- to advocating subcontract competition across-thetion to be made based on price, should be selec- board. Tracking conveys the perception that

tively replaced by a method through which target DOD wants it; the contractors react accordingly.

pertormance specifications are set. Variations Requiring it on a single contract results in the conaround this target will be evaluated using a tractor adopting a single system to ensure conpreestablished and published cost, performance tretition on all purchases (reference Finding 7).

trade-off formula. For example, life-cycle cost p

elements of performance, quality (i.e., reliability, Improvement 10. Use the contractor's cost acmaintainability, etc.) could be quantifiably related counting system and

to adjustments to the price basis for award. The eliminate duplicate reportU.S. Army Communications Command has been ing methods.

doing this successfully for several years in their The ir:tent of the Cost Schedule and Control

non-developmental item (NDI) program to ac- System (CSCS) was to use contractor-provided

quire commercial electronic test equipment. data to montor the performance under the conSuch a method would prec!ude the need to "gold tract. In intent and concept, it is not significantplate" specifications, and would alter the incen- ly difterent from the systems described as in place

tive systems for contractors. It would provide to monitor commercial capital improvement proincentives for contractors who have better ways jects or new product introductions. Unfortuof meeting requirements to be selected over con- nately, the CSCS system has become a source of

tractors who barely meet the specification, as writ- contention between the government and the con

ten, at the lowest cost. tractor in its application. It can be advantageous

76
to the contractor to maintain two cost-accounting Commercial entities need and employ consistent

systems-one for its internal management and a standards for administering activities. Policies that

separate one as a CDRL requirement under the encourage a perception ot uniqueness in defense

contract so as to limit exposure to external review, procurement are often counterproductive because

Taken from the perspective of the commercial commercial business administrative systems have

program manager, the CSCS system provides too difficulty adapting to tnem. Each of the prime

much information. What is truly needed is a Defense Enterprise Program contractors contacted

system which provides top-level overview of cost indicated they saw little difference in the

and schedule progress and which is timely (i.e., requirements under which they operate and that

actual, vice massaged data) and accessible on a of other programs. Similarly, in the commercial

daily basis. The detailed backup should be avail- environment, it is felt to be just "too expensive"

able on an "as needed" (query response) basis to to operate parallel systems which must meet difinvestigate any problems highlighted in the top- ferent policy or reporting requirements.

level document. Presently, the time delay in Policy or reporting changes need to be companyreporting is too long, and too much time is spent wide and for an extended period if any positive

investigating particulars of the reporting system. results can be expected.

Improv'ement 11. Waivers of policy and

reporting requirements

should be ganted for an

entire commercial activity

for an extended period of

time, not on a contract-bycontract basis.

77
APPENDIX A

UNITED TECHNOLOGIES CORPORATION CASE

PROJECT NAME: PW4000 Engine

COMPANY: United Technologies Corporation, Pratt and Whitney

DATE OF VISIm'/INTER'|lEWS: 14 April 89

PERSONS INTERVIEWED:

Mr. James Bruner, Director, PW4000 Engine Programs, Pratt and Whitney

Mr. Roger Chericoni, Vice President, Group Product Integrity, Pratt and Whitney

Mr. James Ward, Manager Internal Audit United Technologies Corporation

DESCRIPTION OF SYSTEM ScoPE or PROJECT

The PW4000 is a high thrust ( 50,000-65,00W 1. Timeframe. Study Phase - 1981

pound), fuel efficient, turbofan engine for use on BOD A~pproval: Fall 1982

large wide-body commercial aircraft. The FAA Certification (PW4000):

P'W4000 was initially designed, developed, and

FAA certified to cover a broad spectrum of air- June 1986

craft applications. It was then adapted to, and 2. Funding. Up to $1B were invested by Pratt and

recertifed with, each aircraft type it powers. It Whitney to design, develop and certify the

i% u ' to power the Airbus A300 and A310, PW4000 and its principle aircraft ipplications. Of

Boeirn 767 and 747 and MD 11 airliners. The this, approximately 60 percent was fcr' sign,

engine dev:lopment goals, coorpared with its development and certification of t; ;ic

p)redecessor engine JT9D-7R4, were low fuel con- FW4000, with the remaining 40 percent .. ap-

•urnption (7 pe,'cent less), low maintenance costs plications and improvements.

(25 percent less) and low manufacturing cost (50 ACQUISITION MANAGEMENT

p.rcent less). The thrust goal of o0,000 + poL.r.ds TECHNIQUES EMPLOYED

was, established as a result of forccasting efforts

in 198] o predict c, mmercial aircraft needs of 1. Program/Project Management

the 1990s (the JTQLg) thrust was 56,0U0 #). The June a. The PM (termed Program Director at P&W)

1906 FAA certificafion deadline was establihed wa- given "cartt blanche to do things different

to ertsu'e availability of a mature engine system ly" if necessary to meet the program goalb. This

in time to meet airline company nt'ds and air- was interpieted to include coordination with, and

frame .'r.•pany of erinys piojeaed for 1937. Pratt solicitation of. supr~lier&; such as inducing them

and Whiimry (I&W) personnel explained thit it to "buy in" to the future business opportunities

ti~kes airframe _ornp|Jtiies about 3 years to develop of a long-term strategic alliance; another "sacred

a new oidliner bit 1.5 years to develop a new cow' attacked in the PlY 4 000 program was "inertv,, -,,, tdiey hdl io stjrt before the aitliners series design and developmen"--that is. maxiwere dvs•,tri'd. miring concurrent enginevrir,i, Re"•,r •'ibility and

Al
authority to circumvent "business as usual" f. The Director, Mr. Bruner (referred to as the

attitude and procedures was driven down to the PM throughout) reports through the VP,

lowest level in the organization. Engineering, to the President of the Commercial

b. Dedicated project team of 1,200 persons, Engine Business Division, thence to the President

including matrixed specialty support, as required. of Pratt and Whitney and finally to the ChairThe PM's office was staffed by 250 personnel who man of UTC.

performed business management, design (120 g. Mr. Bruner indicated that his career has been

mechanical designers), management of develop- principally in project management which includes

ment, management of manufacturing and analysis aircraft integration and customer support. Proand marketing. Logistics management was done gram participants were free to pursue their own

in the support matrix. Excluding the design effort, car-eer paths into and out of project management.

the immediate PM office was moderate in size for

the project scope.

c. Mr. Bruner indicated that he and each subor- 2. System Engineering Management.

dinate manager had direct input to the selection

of all directly reporting personnel. The PM had a. Key to accomplishing most program goals

significant personnel management power and was the first 6 months in which detail planning

could rapidly direct increases and decreases in and desigr, was done by a team of design and

manpower applied to functional efforts; the manufacturing engineers. This team created a conmatrix was there to respond to the immediate tract between designers and manufacturing on needs of the project using an "equal hurt" features and technology to be used in the product. philosophy. To esure high-quali participants, This contract essentially was a functional

some soart-up manpower allocation efforts lagged, specification to guide and constrain . .. sign engineers. Using the production so.. ; for

d. The total programmed funds were commit- development hardware enhances leaming and

trd by top management at the beginning and total lowers initial product cost, but dos require

control of the funding was provided to the PM significant compromises in a volume driven

annually. The PM had flexibility to transfer facility.

funding between elements of the program as

required, providing he stayed within annual b. The PW4000 pushed the state-of-the-art in budget increments. He could move effort between several areas (e.g., compressor airfoil budet ncrmens. e culdmov efortbeteen aerodynamics). Most efforts involved backup

years as long as total annual expenditures were aerodnamic) Most efforts involved cac according to plan, designs using more conventional te:,nnlogical approaches should difficulties be encountered.

e. Pratt and Whitney Commercial Engine Technical problem-solving was done by the PM

Business manages about 8-9 engine projects at any in concert with his peer leaders from the applicable

time; these are managed under Program Direc- technology arc -.

tors. The I`W4000 is currently the largest, but

extensive management is applied to other current :. The IW4•,' PM had total responsibility

ci);in':, and somr developmcntal pro A ari authority for .onfiguration control.

larger thrust Ithdn the "W40001 engine ap,. Ars d. The teo plan was developed by the PM in

to be in the c.onceptiut; stages. 1t was noted that coordination with Directors (peers) of various

all projects wtre funded according to expected engineering elements of Pratt and Whitney. The

neetds; they used the term "smooth funding' to test proAranm was directed by the PW4000 prodiiting.uish from other t(.hniques which may ject team, not an independent tester. The IFAA cerinvolwv, lary,(e annual bud;'et junips or drops. Jihe tification testing was planned and conducted by

lIW4000 vwa, approveL; and funded by the United the project team; the FAA monitored tests of

Tt.inologit, Corporation (JTC) B.ard of Direc- choice; the project team wrote and submitted test

Iu,r,_ Sm1allet prujeV.ts drV aaplroved at ht' Sait reports. I he PM had authority to ,chedult,

lvel LIU' fund'd doId irua,.rged by Pratt aMid reus hedule and mequenuce tests as he felt necesiay

I,\'hfit; ii'• " 1cl meet pr,,ject goal'.

A-2
RESULTS ACHIEVED aircraft installations. Manufacturing costs are still

The PIA4000 has already been a major success for slightly higher than the goal termed a "stretch

Pratt and Whitney. Certification was completed goal." Improvement efforts are underway to meet

on time. June 1986, within budget. Of the pro- or beat original goals. Sales of the PW4000 thru

gram performance goals, thrust and maintenance 1988 were in excess of $4B despite the primary

cost goals were met; fuel coisumption is not quite U.S. competition introduction of an enhancement

as desired primarily due to competitive pressures of a current engine design 21 months ahead of

requiring further improvements. Post certification P&W. It appears that P&W's strategic forecast

improvements have been identified and are be- correctly targeted the timing of the market need

ing incorporated. The competition still lags in all and necessary features for success.

A3
USING COMMERCIAL PRACTICES

IN DOD ACQUISITION:

A PAGE FROM INDUSTRY'S

PLAYBOOK

Report of the Defense Systems Management College

1988-89 Military Research Fellows

Lieutenant Colonel Bruce D. Sweeny, USA

Commander Charles A. Perkins, USN, SC

Lieutenant Colonel Alan C. Spencer, USAF

December 1989
Views, findings and opinions in this Report are the authors

and should not be construed as official Department of

Defense positions, policies or decisions unless so identified.

ii
PREFACE

"Instead of concentrating on the things that are being done wrong and trying to fix them

with more laws, more regulations, more inspectors. DOD should concentrate on those things

that are done right and use them as models."

(Packard Commission Report, p. 42.)

This report represents the efforts of the first group of military Research Fellows at the Defense Systems

Management College. The 1]-month senior Service, college-level fellowship included 3 months at Harvard

Business School's Program for Management Development. Commercial practice was selected as the

research topic area to capitalize on: 1) the apparent interest in having the Department of Defense (DOD)

"do business like business"; 2) contacts and knowledge gained at Harvard: and 3) the strong, func.

tionally diverse DOD acquisition backgrounds of the authors.

This volume is the full x.reas-.ch report which includes the commercial case studies documented during

industry site visits and the Mobile Subhcriber Equipment (MSF) U.S. Army acquisition case study.

A Summary Findings and Recommendations volume has been completed and provided to senior DOD

acquisition leaders.

/ .f, ,,-Acct'sior, Fo~r

S- ,., ,... "X' per Bob Bal1 J,: .. ,:, .

DSUiC/b[iC-DP, -P, Ft. Belvoir, VA

22060-3426 t~y

"TIELICON 4/18/'90 VG &

#1-I

iii
EXECUTIVE SUMMARY

INTRODUCTION

Using commercial business practices, or "doing DSB' noted the potential advantages of adopting

business like business," is a recurring theme of the commercial practices in the Department of

defcnse reform debate. The 1972 Commission on Defense and, in broad terms, identified some of

Government Procurement called for the "busi- those practices.

nesslike" operation of federal procurement. The Despite the potential advantages that commercial

19S4 Grace Commission sought to apply "private practices offer, however, DOD has yet to implesector management tenets" across the entire ment them on a widespread basis. The exhibit

tederal government. More recently, the Packard below shows basic reasons for delay.

Commission and the 1986 Defense Science Board

EXHIBIT 1.

INSTITUTIONAL IMPEDIMENTS TO

THE GOVERNMENT

USING COMMERCIAL PRACTICES

-Confusion over specifically what they are

-Sheer size of public sector

-Inherent differences between the public and

private sector

PRIVATE SECTOR PUBLIC SECTOR

Single Constituency: Multiple Constituencies:

"Shareholders" 'Stakeholders"

Singular Focus: Mixed Focus:

"Efficiency" "Efficiency" & "Equity"

Clear Measure No Clear Measure

of Success: of Success.

"Bottom Line'
Some say these differences between the public and Principal methods of investigation were literature

private sectors are so profound that government review and personal interviews. Using facilities

can never "do business like business." Others, afforded by the Defense Systems Management

notably the Packard Commission and the DSB, College (DSMC) and Harvard University, extenrecognize these differences but teel DOD can still sive readings were conducted of topics under the

benefit from lessons of the commercial sector, general heading of good business practice. The

Believing this, we investigated commercial prac- research model we developed as the framework

tices for opportunities to improve the acquisition for our investigations is shown below.

process in DOD.

EXHIBIT 2.

RESEARCH MODEL

THE UNIVERSE

COMMERCIAL INDUSTRY DOD

RA PACT/040M roMt CASES W POLICIES

• 

SCLEAR $T &SLlITYf COMMAND CHANNELS PACARNO SYSTEMS EIOINEENINO

LIMASITEDOPOTN REQUIREMENTS 7LOPISTICS MOOT FocUSNG

* SMAiL. H10)14-O4ALIIY 1AFFIS /PRES

*COMUW~ATIONS WITH USIFRS /COO4RCTING 11001E * PAIOOTYPI•N AND TESTIO& DACOUISITION PfO0iCUTTN MGM? -" / FWCI•ION, ~ TTMM

* FUNCTIONAL RIOUIRWEIMNTS 055 /4A JTY MGMT

* SELECTEO SOUMRS FINANUCIAL MOMT SMlT• PROTESTS WOW CONTITNES0

@IEST VALtM SELECTION VS LOWESET COST

S IMPLfTLO COUTRACT FORM ADAPrED

SSCEDLE E•MAPS - P4 PESUPClS TO "OLD .SCHeOUL

QUICK RE[SPO • TO FIELD F .XPtPW FNCE /TORY•FO MA C

_GREATLY _ _•O IFCUiRUENIATY • F

iUALITY SOURCNG

*SUPPLIERREAINHP

REGULATI0N

vi
Target commercial practices were investigated for appendices. In addition, we developed a case

clearly successful applications and techniques study to document the experience of one of the

which can be implemented within the authority Defense Enteiprise Programs, the Army's Mobile

of the Secretary of Defense, and would have high Subscriber Equipment, because it utilized substanpayoff if established in policy, communicated, im- tial commercial-like acquisition pra:tices. plemented, and carried into general practice by Case studies were also extracted from the 1985

DOD and the Services. Our selected target prac- DSB Summer Study on Practical Fuictional Pertices are: 1) program stability (aspects other than formrance Requirements. These provided addifunding which remains largely in the domain of tional opportunities to invesigate ummercial

the Congress), 2) quality sourcing, 3) supplier rela- programs of similar scope and are identified in

tionships, and 4) regulation. Our investigation Figure 3.

drew heavily on our interviews with industry

representatives of the firms identified in Figure 1. FIGURE 3. 1985 DSB

COMMERCIAL - CASE STUDIES FIGURE 1. RESEARCH CONTACTS Scope

WITH INDUSTRY Case# A B C D E

WESTINGHOUSE * GENERAL ELECTRIC •

"* GTE ' * DOW CHEMICAL - Co. AT&T Boeing SBS IBM MITRE

"* TEKTRONIX ' PUBLIC SERVICE GAS,

EASTMAN KODAK e BECTON DICKINSON Prog. EES-4 767 Comm 360 FAA Nato

ROCKWELL • 4 PACIFIC BELL P S-t Ara Samm Cmt FAr Syr

VALENTEC - BOEING • Switch Aircraft Sat'lite Computer Airep Sys

MARTIN MARIETTA -* UNtT'.D TECHNOLOGIES •

DIGITAL GEHL- All cases were new product development.

GENERAL DYNAMICS ' AT&T

BRITISH AIRWAYS • * HP .

Time 8 yrs 4 yrs 34 mos 3 yrs Unk

- Intervbiws; * Commercial Case: • DoD Case Funding was not Identified In cases by DSB.

We developed seven commercial case studies corn- In our findings, specific techniques for managing

prising twelve successful, major, new product and successful major commercial programs are idencapital plant /equipment programs by commercial tified and attributed to these cases. These findings

business entities; the scope of these is shown in and suggested improvements are related to the

Figure 2; the full case studies are provided in the target practices we investigated via Figure 4.

FIGURE 4. RELATIONSHIP OF

FIGURE 2. COMMERCIAL CASE STUDY FOCUS TO FINDINGS

STUDIES DEVELOPED AND RECOMMENDATIONS

Scope Cased 1 2 3 4 5 6 7 9TUOY FOcs 101,IOINS0 PECOMMENOAI-O0S

Prlortlli. moos

co UTC HP Dow Tektroi•ix GE PaceeoI BOIS '. .•T .4v-; C.O.P ablg ml atS w

betellne at We I1

Pro) PW4000 Several Several Several Several Adv FAC- .o 411,416" l eas.

Engine DiOtl Star P,09t - fliltl*, ly " 5.oso, PUP11I0/11A

Ntwk • Line alal.tIII l illl" 644-n pt•a*.

.o.t SvIfItllvy Cente "t1 o.iom - OInt pI.Alr0

New P,• Prwd & Ptlnts Plant0 Pl-11t PrOd Prod Pfile V .bedul. COntrol t PMIPtO

P,.nQ,*.......................... ..... .. . .. . ... ,V -¥ -*a . ;,;o..... Il

T lme 4 5yrs I -dyte I8meos -2yre 3y1 r 27nto# i8mo0 Q.lty .. .. 0.....Use a .. tifabl ..

a.,,ai*, 'C6091t'IW, " - 111.0 fim""o'mitr

Fund* 816 6 0600M OOM '400MM ,111lOOM Not .810M 0I1iiO•h0not'.0'r ¢o.atIo

e) •oNReleased

Ulf K, C:4

I09'II|Ion • UVtlk • dlfl Atolljy r'01r1i0"

not toCi~l 0

VIto
FINDINGS tional departments (e.g., vice presidents of

There are no "gee-whiz" answers! marketing, engineering, manufacturing) and staff

We observed little in the commercial acquisition directoratc-s were responsible for providing

environment new or different from what has resources (the right people and technology) and

always been known as good management prac- assisting the program/project manager (PM) to

tice. Correspondingly, little has not been solve problems; they were riot involved with proassociated with DOD policy, identified as a prob- gram oversight and direction.

lern by the Department in the past, or is not be- Finding 3. Program managers are afforded signifiing tried someplace in DUD. Many good ideas cant authority and resource control, and are held

proposed by the Packard Commission and the personally accountable.

Defense Science Board must overcome tremen- Program management authority was assigned to

dous organizational inertia. As a direct result, a clearly-visible acquisition line manager whose

many good business practices, though employed title may be program manager (PM), vice presisomewhere in DOD, are not used widely. The dent (VP) or general manager (GM), but this

Dt:partment is like a supertanker--superb at ac- authority was not shared with functional manacomplishing its primary mission but sluggish in gers. Acquisition line managers generally are "capchangig course. tains of their ships," held responsible and accountFinding 1. Activ'e involvement of top corporate able for the success of the project but given the

m sis essential to program succes. authority to make timely decisions and control critical resources (especially participating

Successful major systems programs in the com- personnel).

mercial acquisition environment are the product pesonnl). of unequivocal top-management approval and Successful commercial programs also depend on

of uequvocl to-maageent pprvaland focused decision-making up the line; PMs of masupport. In projects reflecting the strategic em- focused dcso-ang upe ine; Pcs o maphasib of the _ompany, there is clear linkage to Jor systems have and use direct access to top

organization business strategy and direct involve- management to keep the CEO, or surrogate, inment of the Chief Executive Officer (CEO). In- formed and to resolve problems beyond the

volvement does not mean micromanagement, but capability of the PM. Senior functional officers

does mean awareness of the project's currnnt (e.g., VPs of marketing, engineering, manufacstatus, active questioning, and willingness to com- turing, etc.) are charged with providing support

mit organization resources to resolve problems. to line management but not direction of lowerline program management. They provide exTop management leads (e.g.. promotes within) perienced, professional personnel to give the PM

selected programs by: 1) communicating the vi- every opportunity to get it done right the first

sion, 2) reviewing programs often, and 3) solv- time.

ing problems beyond the control of lower-line

managers. Once a decision is made to enter Finding4. Schedule isfirstamongcost, schedule

engineering development, the CEO commits to

seeing it through. Without exception, we found that schedule was

the driving motivation, thus, the first priority in

Finding 2. Commitment to program success the commercial acquisition environment, once a

crosses organization lines, program is approved for development and/or imIn each company visited, there was a real plementation. This practice is primarily market

organization commitment to the success of ma- driven due to implication3 of late entry on longjor programs. The commercial marketplace term market share and need to recover investment

severely penalizes companies which do not bring and overhead costs quickly.

new products on line once major resources have Performance features are the next priority. Sufbeen committed (typically, entry into full-scale ficient performance (mission capability, supportor detail engineering). The functional staffs, ability, life-cycle costs and unit costs, etc.) is enopera'ional and program managers, exhibited sured. But, stretch goals were used, with conshared goals and direction. Managers of runc- tingency developments to facilitate trade-offs

viii
should the schedule be jeopardized or development costs become excessive. Preplanned prod- Competition FIGURE 5. Cooperation

uct improvement, or evolutionary development,

was the standard approach to pick up desired

technology or features not available at planned Fit% &"N ,,,iio, c00P9PAiV

schedule cutoff points. witha LAOR UP*VutM .,a• LWa SUI.PIPLHm Ia S SA V E Ch •t W WIE by O PIEN

Funding is the business tool to achieve on-time ANN-•.,,N to COUMUN".TION & MUTUAL

program completion. In all cases a 10 percent buf- inuirj,. ONT-TDM j NPININEN to ,iur,

fer was provided to the PM or his first-line general Lm,.,,,,, •,s,,, ,oO.tM dp,,,. _.

manager to use to stay on schedule and solve

unexpected technical problems.

Finding 5. Price is but one element in the purchase the trend. Dr. W. Edwards Deming, of TQM

decision. fame, says that best value can be realized only

Ownership cost and dependable quality were through ships. Similarly. long-term, sole-source supplier relation- JIT often drives companies

dom inant v.ariables in com m ercial buying deci- ships. S ol ar rangemen wi th so p anies

sions. Purchase price would be traded off for toward sole-source arrangements with suppliers.

desirable features, uniformity and dependability Commercial companies do not use sole-source on

in required products. Firms tended to have a a wholesale basis. Rather, they apply business

strong technical (engineering) background in the judgment to each situation, forming partnerships

purchase department so they knew the market- with a few suppliers for most items, but reservplace and could understand requirements. ing sole-source arrangements for items of parCompanies prefer dealing with a few suppliers. ticular importance. Department of Defense con- Cheyompnies preferbdaling with a fewcsupizer, ut tractors stop short of effective partnering with

They ?to not abandon competitiosi, but recognize suppliers, seemingly because they perceive DOD it~iiit. iatie ik lstinTie JT) and desires full and open competition in

Material Requirements Planning (MRP) depend subcontracting.

on reliable deliveries of uniform quality from suppliers. Quality is becoming a total company com- Finding 7. Companies adopt uniform adminismitment with access and input to data base in- trative systems.

formation being made available to more organiza- tions in the company. Firms are developing We visited Ifirms doing defense and commercial

systems to factor past performance into their business. Generally, these companies segregated their business units so commercial and defense source-selection decisions and are communicating business was not colocated or comanaged. In cases

tl-~ e systems to their suppliers, where the firm was producing a defense item and

Finding 6. Companies are adopting cooperative a commercial item on the same fjuur, they

relationships with their suppliers, adopted the defense approach to sourcing, inspecThere is a trend for companies to adopt tion and quality control for all items on the floor.

cooperative relationships with suppliers, away The cost of managing two systems was deemed

from the traditional, competitive way of doing too expensive and confusing to the work force.

business. This new relationship goes by many We found also that relaxing a standard for a given

names (partnering, strategic alliances, co-makers, contract was, in many ways. ineffective. Generalvalue-added partnerships, etc.), but the central ly, if the company had other defense contracts,

elements are common: long-term arrangements it imposed the defense standard requirement on

with a small number of high-quality suppliers; itself so it would not lose certification of its prorelationships characterized by mutual dependence cess. This has a significant policy implication

and open communications. because we may consider waiving certain requireEvery company we visited was using partnering mrents for a good contractor expecting cost savto some degree. Programs like Total Quality ings to be applied to the contract, But, this may

Management (TQM) and Just-in-Time (JIT) fuel not be the case if the contractor has other governix
ment business which will not be affected or may The Department recently underwent a major acwish to compete for other business for which the quisition reorganization in response to the

waiver or the requirement may not be granted. Packard Commission recommendations. ThereIMPROVEMENTS.. INHIBITORS AND fore, we do not attempt to deal with organizaIMPLEMENTATION tion issues but, instead, concentrate on people and

Our recommendations are similar to those of process management issues. Nor, do we propose

p rreviousmmtudies:ath fre, itmiseas to tosk l o any manpower adjustments. We do sense strongly previous studies: therefore,ei is reasonable to ask that most acquisitions professionals can be more

why they have not already been implemented. We effective and (he acquisition process more efficient

realize that overcoming irstitutional inertia is a if these commercial management techniques are

major impediment to successfu! application of institutionalized in DOD.

good ideas across a huge bureaucracy. In this section, we acknowledge certain environmental con- Table 1 identifies specif. improvements in acstraints inhibiting ready adoption of our recom- quisition practice, principle environmental inmendations and suggest somt: implementing steps hibitors and suggested implementing approaches.

we feel can begin overcoming the inertia.

TABLE 1

SUGGESTED

IMPROVEMENTS INHIBITORS IMPLEMENTATION

1. Establish at MS II AMS I11 Institutional willingness tc Revise DODD 5000 45

for NDI programs) the relative trade lime foi added funding or policy.; princ!ples.

priorities of program cost, performance.

schedule and performance in the Educate decision-makers and staff

baselines. Historical failure to meet advisors on wosts of requiring

schedule obiectives promotes perfection and benefits of

-Give the P%11 PEO flexibility excessive requirements. practical trade-offl.

and authority to makir trade-ofts

within haseline constraints. Institutional aversion to Relate, to Recommendations 2-6

budgeting for risk and below.

-Ensure there is maneuver contingency.

room between stretc" ,,al, and

practical minimumr requirements. Program development and

production phases far exceed

tenure of decision-makers: thus,

decisions are reconsidered by

later decision-makers.

2. Subordinate PPBS funding Institutional aversion to Revis? DODD 5000.1, para E.3.

decisions to approved program reducing flexibility in future and flow-down to other

baselines at MS II and beyond. budgets. directives/instructions.

-Recognize approval at MS II Lack of clear linkage between Build up the number of DEP

as comnmitment for life-cycle, essential programs and military programs with milestone

strategy objectives, authorizations.

Tendency of senior military and

civilian leadership to act as

"judges" of programs instead of

mar.a-cr:; of the system.

X
TABLE I (CONTINUED)

S-U(,.uLS rl.

IMI'IW Y EMENTS INHIBITORS IMPLEMENTATION

-. Iduce the number and lcel institutional tc'denmy to Revise DODD 5000.1, para D.3.

z-frogram decision iil-,ofncs ovrcontrol actions ot and flow-down to other

suibordi ate laytcrs directives instructicris

-Only MIS 11 need ,. a DABlevc, deci-ion In,-ttut onal tendency for

continuous management by

committee.

4 l.mpo,,er designated system Institutional tendency for Relates to Recommendations 1, 3, 5-6.

accqusitioln managers Oi.e . PM, functional specialists to appeal

PLO and S.\[' to makt. program to t-taft advocates rather than

At, I,: on, %% .in approcd .ompromise in the best interest

bak cc contraints without ot program as a whole

iterilrt!,enc tom functional

sti.0l .i(s aJ'c,t highir Lack of sutticiert trinctional

orga,:.a t.i,. Icvljel; Lxp|trhist in dirt:tt support oi P1" s

and PEOs

5 >,rem-, the proi.sional Institutional tendency to Strengthen DODD 5000 52 to

ufnl•onal a,,pport to pro)'ram regulate and check vs make include central career management

mranagers and reduce the long-term systemic for all functional specialits.

dependen(\ on staff functional impr,,.,evenls.

ovrsght ,,t program executiori.

Historical lack of institutional Discontinue use ot DAB

motivators for functiona! acquisition committees and ý,pvo I. . s ,i" I%ý ' . .S r :L. equi:-alcnts to "preparc"

-- nange tocus oi iunctional Ipec.aists I,, ., .c

stalt managers from involvement operational levels cf programs for MS decisions.

in programs to profess;onal organization.

development of acquisition

spe(:alists

6 Ensure that matrixed. Myth that matrix management See Recommendation- 1, 4-5.

functional, program support ol programs can be effective on a

personnel are dedicated to part-time, indirect consulting Ensure PMs have rating and ieward

programs through organizational basis. control over assigned functional

alignment and incentives. speciaiists.

Lack of institutional trust in

-- To the maximum degree PM l'EOs to consider functional Make functional matrix managers

possible, matrixed personnel input which may compromise responsible for ongoing execution

sh,.uld work full time and be cost, schedule or mission of system introduced in

rated by the PM. performance. Recommendation 5.

Institutional attitude that PMs

should comvete against each other

for resources.

7 Develop an on-line Information is not currently Us5.g the DLA system as a babe,

contractor performance history collected or maintained in a link air DOD contracting officers

Wile which is available to the DOD-wide system accessible and major ACOs with a data

contracting officer. to the contracting officer. network.

System of evaluation must be

objective and open to review.

Service and agency difference in

the approach to performance

monitoring.

xi
TABLE 1 (CONTINUED)

SUGGFLS rFl) INIPROVIMEN rs INHIBITORS IMPLEMENTATION

e E-ta",i'.h the v.a;ialcl -. irvltes the 'ource selection Select 25 developmental or ic.di(;t]luatr rmet hOd ot sourcv ['ro,"u,. tor non-vs,,erm upgrade contracts as a pilot SCt",C tloe pro-urements. test.

Dependunt on good spvei; cation

detinition with level, of

acceptability.

While no legal or regulatory

ist•iLtirn it will be difficult

to overcome institutional

emphasis on acquisition price.

Q Adopt. communicate and Defense contractors react to Adopt. communicate and enforcc cnitorce a policy of complCte what they perceive to be DODs the policy. neutralitv with regard to desire tor full and open subcontract competition, competition in subcontracting.

including a cessation of data

gathering. This severely restricts effective

partnering with suppliers and

inhibits full application of TQM

and JIT implementation.

10. Use the contractor's cost DOD's cost reporting system has For all contracts which are not accountimtn ystern and eliminate comc papcr bourd. Firm Fixed Pr ce, use the any duplicat, reporting methods. contractors data system for Cost

The current f-SCS systerr. an schedule and control information. provide inf rmation important This information siiotdd be the

to managing a program. same as that which is fed into

the company's financial reports.

The regulatory dilemma, companies

decry the cost of regulation

while exoloiting the advantage of

"knowing the system."

11 Waivers of policy and Waivers on individual contracts Disapprove any deviation or reporting requirements should be are considered ways of bypassing waiver which is not company-wide. granted for an entire commercial costly elements of standard

activity for an cxtended period systems.

ot time, not on a contract-bycuntract basis. Difficulty of startup

implementation and determining

how to react te poor performance

on a single contract.

Contractors performing on

mi,'hiple government contracts

adopt the standard.

xii
CONTENTS

PREFACE iii

EXECUTIVE SUMMARY v

CONTENTS xiii J INTRODUCTION 3

ENHANCING PROGRAM STABILI'IY 15

1 The Role of Top Managers 19

2 On-Time Completion 25

3 Program Authority,

Accountability and Resource Control 31

4 DOD Acquisition Policy 37

- What is it?

- How should it be improved?

INNOVATIONS IN THE SOURCING PROCESS 45

5 Quality Sourcing 47

6 Sourcing By DOD Contractors 59

7 Some Regulatory Implications 67

I V CONCLUSIONS AND SUGGESTED

jV IMPROVEMENTS 71

APPENDICES: A - United Technologies Corporation Case

B - Hewlett Packard Case

C - Dow Chemical Case

D - General Electric Aircraft Engine Case

E - Tektronix Case

F - Pz'cjhc Bell Case

G - B1ton Dickinson Case

H - Mobile Subscriber Equipment Case

xiii
I

INTRODUCTION
I

INTRODUCTION

Background It is important at this juncture to better define the

There is a longstanding public debate over how semantical difference between "commercial prodthe Department of Defense (DOD) acquires it's ucts" and "commeicial praciices." While the two

weapons; a debate fueled by periodic "break- are closely related and often confused, they are

downs" in DOD's acquisition system. Recent, distinctly different. "Commercial products" are

highly-visible breakdowns have eroded public and off the-shelf items developed to commercial stancongressional confidence in DOD acquisition to, dards for the commercial marketplace. "Commerperhaps, an all time low; and the defense reform cial practices" is a much broader term, meaning

debate has increased in fervor and pitch. the entire process by which commercial companies One, recurring theme of much of that debate is, conduct their business, In the latter case, the focus

why can't DOD simply "do business like on the business procers rather than on acquiring

business7"; in other words, why can t DOD adopt the end-product.2 While DOD's use of commercommercial ways of doing business in buying7

Early thrusts in this direction centered around

recommendations that DOD adopt the use of COMMERCIAL COMMERCIAL

commercial products whenever possible. Some Ofl.the.ahg~i PRODUCTS items V. PRACTICES

feel that if DOD would eliminate unnecessary Odevelopod to Commercial ways

specifications, it could purchase readily-available, commercial standards of going about the

off-the-shelf items, and by doing so, enjoy the for commercial full range of

markets. butines" activities.. benefits of the commercial marketplace (com- ] -- _ on Emp____l_ on

petitive pricing, the latest product development, Emphasis on Emphasis on

and rapid availability, to name just a few). L_

Arguments to this effect go back at least to the

1972 Commission on Government Procurement

which acknowledged the merit of buying cornmer- cial produicts has been the subject of multiple

cial products in lieu of items manufactured to studies since the 1Q72 Commission, the use of

federal specifications. That Commission called for commercial practices suffers from a dearth of

a"...shift in the fundamental (DOD) philosophy focused study. Accordingly, our research erarelative to commercial product procurement..." p'.asis here will be on the u• of commercial pracAlthough the primary emphasis during this period ;,"s by the Department of Defense.

was on the use of commercial products, the 1972 In the decade of the 1980s the defense reform

Commission seemed to have commercial ways of rhetoric has been building to a crescendo, with

doing business in mind as well when they stated, recommendations to "do business like business"

"T-he system we advocate will enable the executive as an essential element of much of the debate. In

branch to ensure thai procurement operations are 1081, then Deputy Secretary of Defense Fratik C, businesslike and otK' .rly and that goods and ser- Carlucci introduced a comprehensive reform

viccs are acquired ctticiently."I The "busiesslike" package known as the Acquisition Improvement operations referred to here are the forerunners of Program (although probably better known as the

what later came' to be known as "'commercial Carlucci Initiatives). This program embodied a

practi(ce." number of recommendations, many of which are

3
based ,n commercial business models, such as the The Congress apparently shares the belief that

(.all tot nmore responsibihity, authority, and there is potential payoff in DOD's expanded use

accourntability for DOD p,ogram manager,.." In of commercial practices, enthusiastically embrac1o83 President Ronald Reagan was so interested ing the findings of the Packard Commission. More

in the idea of running the government like a recently, Dr. Robert B. Costello, while Under

|,u,,me:,- that he asked indIli-t Iali.t, J. Peter Grace, Secretary of Defense for Acquisition, identified

to lead a stud% ot how to achieve that objective, commercial practices as an important element in

"Th,'. tudy, known as the President'" Private Sec- the far-reaching Total Quality Management

tor "Lirvv'V on Cost Control or the Grace (TQMN initiative for the Department. At this

Commiss-ion, came Lip with 2,478 specific recoi- point, it should be clear that there is a developmendations that would yield projected savings of ing consensus favoring the use of commercial

S42-1.413 o'vr 3 years ii implemented government- practices as a solution for some of the seemingly

Wide inot Ius-t )IX)l. In their report the Com- intractable problems facing defense procurement.

ni,,sion said these savings could be realized by Of course, this should not be viewed as a panacea,

applying "private sector management tenets" but rather a source of good ideas for selective apat. rov, the ,road Spectrum of the federal govern- plication within DOD.

nLen'-t.4 Sinilarlv. in 1J8o. the Prcsident's Blue Institutional Impediments to Adopting

Ribbon Commis.sion on [)etense Management (the Commercial Practices 1Lad~ard C ,rmrmi,,,ion ) strongly advocated the use, ot c d onier ipoduc Stheng wdvocatentdo tole us(, Given this developing consensus for the use of "lfI'en when cnlma er.Cial products are not suitable commercial practices in DOD, why doesn't DOD

Ior 1)D )'s prpose:., it can still u',e commcrcial simply adopt them and be done with it? Granted,

buying, practices to real advantage.' 5 A 1986 some laws and regulation, would have to be

I )et.nse So ienIC Board thai wa, chartered to fo(ci changed, but the lawmakers and regulators as paron the use o0 commercial products in DOD ties to the consensus should be willing to do so.

,tepped outside their charter to reach a similar In reality, however, many of the impediments to

fIndingy. They said, althoh thle increased use DOD's adopting commercial practices are not

o1 commercial equipment (in 1)O1)) is good, the based in laws or regulations, but are rooted

increased use of commercial j)ructicCs could be deeper, in a more basic, institutional foundation.

even ,tter.' Perhaps the most basic of these reasons is confusion over exactly what commercial practices are.

At the ma:ro level people seem to have a reason- FIGURE I-1. "DOING BUSINESS -__________ FIGUR 1-1 E ISIN" FIGURE 1-2. INSTITUTIONAL LIKE BUSINESS" IMPEDIMENTS TO THE

"Even when commercial products are GOVERNMENT USING Packard • not oultable for DOD's purposes, It COMMERCIAL PRACTICES

Commission can 911l1 use commercial buying 1986 practics to real advantage."

Defense D-Confusion over specifically what they are "...lthough the Increased use rf--hesieopuicitr

Science commercivl equipment (In DO[)) Is Shr size of public sector

Board good, Increased use of commercial -Inherent differences between the public and

1986 practices could be even better." private cector

PRIVATE SECTOR PUBLIC SECTOR

Grace ... apply "priv.1te sectof management

C.mmIsslon r tenets" across the broad spectrum of Single Constituency: Multiple Constituencies:

1984 the federal goverrment. "Shareholders" "StaKeholders"

Singular Focus: Mixed Focus:

Commlsslon on We seek to "enable the executive "Eficlency" EffIciency" & "Equity" Government branch to ensure that OD procure- Clear Measure No Clear Measure

Procurement ment operations are buginesslke."' of Success: of Success.

"Bottom Line"

4
abic understanding of what is meant by ' doing for iairness or equity in their expenditure, as well

businevs like business.' They tend •o think of less as the necu tor some level of efficiency. Most

bureaucracy. faster, cheaper development cvcles, American-, believe government funds should be

mnire ilexibility in decision-making, Amd, finally, expereded in a forthright, fair, and accountable

greater accountability for results. But these fac- manner. They believe all citizens should have an

tors arc' really benefits emanating from the ideal- equal chance to compete for a portion of tho3e

i7Cd commercial acquisition system, rather than government expenditures. This longstanding prinactual characteristics of such a system. V'hat then ciple of equity was reaffirmed by the Congress

are the specific business practices used in the comr- in 1984 with passage of the Competition in Conflier(ial sector that yield these desirable charac- tracting Act (CICA) requiring "full and open comteristics. W,'e must have this level of specificity petition" in DOD procurement. 8 However,

be'fore we can implement commercial practices in equity is sometimes achieved only at the expense

IP)O)D. but it is here that the detinition of these of efficiency. The two concepts often conflict. Propra(h(ces i, unclear. It is not surpriing that this curement procedures that ensure equity may' be

lack of definition has worked against DOD's patently inefficient." As Plato observed mran•,

wholesale adoption of commercial practices. centuries ago, a democracy is an inherently inefAnother factor that mitigates against adoption of f.icient form of government, primarily bccause it

commercial practices in DOD is the inherent dif- is a government of compromise and consensus.1°

ferelICe between a public activity and a cominer- CConsistent with that observation, in this country

cial one. A commercial activity has essentially a we routinely' trade off efficiency to ensure that

single con,,tituency 'the stockholders), uflI a equity is preserved in government spending.il

singlcness of purpose in pursuing their chosten An example might be the mandate that a portion

busine,,-, endeavor in the most efficient, effectivc of government business go to small business firms.

manner possible. They have the bottom line of While arguments supporting this mandate are

their profit and loss statement to objectively assess corcmpeling .rom a equity standpoint, buying from

their performance tward that goal. small business may not necessarily be the most

efficient way for the government to do business.

A typical government activity, on the other hand, Another example might be the CICA requirement

S.,rvs , multitude, of constituencies (the that most government purchases be competitive,

stak~t'hodersi, many of whom have different, since competition connotes the fairness and equity

otten conflicting, expectations of that activity. A the public expects. There are instances, though,

o,,,.vernment acttivitv does not enjoy the clarity and when a competitive purchase may not be the most

singularitv of locus customary for a commercial efficient, or even the most prudent way of doing

activity. Th,! tocus oi the government activity is business. Again, the concept of equity overrides

likely to bC ambiguous, and rapidly changing, with what might be the best business practice.

changcs made for political reasons rather than This is not to imply that the public does not want

, ltic•incy. It, addition, the service provided by efficiency in DOD procurement. Quite the conthe activity nav be abstract, making measurement

of that service very difficult.- As such, an acti%- trary, Dr. F. Ronald Fox, speaking of the Packard

s tCommission's 1986 survey of public attitudes, eaily by ,inge sad, '"he commission's survev made clear (that

quantitative parameter such as the. commercial LIrnL' iotat•, line but, rather, by a general feel- the public feels) that inefficiency in DOD spend- inr," ot gendries'f. ing is a problem of major propottions.'- 2 Many would argue that at this point in the defense

I:inallv. commercial and government at tiviti's cif- ielorni debate, the public is demiudiig efficiency

icr ,i:,nitiantly in the flexibility theiy have in ex- in dCefensI' procurement. However, they have not

pctnd ing tfnd,-. Thec omme, cial (t ivitv is abandmed their desire for equity in order to

priiniwrily (cnterne, dabout the etficiency of arn achieve it.

cxpcnditur,: in furthering the objectives of thal These institutional differences between private

a. ',vitv. (il thie o,ther hand, since a got'),rnment ai it,,,' d ,, with nulic nshWnd l pulir activities are indeed signit( ant; some

5
feel so significant that the government can simply Analytic Sciences Corporation and another by the

never do business like business. 13 Others, Rand Corporation suggest that given roughly

notably the Packard and Grace Commissions, equivalent project complexity (a large facility

recognize the deep-seated differences, but still project for example), the commercial sector does

believe there aie areas where the government can no better than DOD in delivering a project within

borrow selected business practices from the com- budget."4.15

niercial sector to great advantage. The Packard Commission said of these studies,

Commercial Practices: A System Worthy of "The good news... is that DOD is no worse than

Emulation? other large bureaucratic organizations in managFinally, it is interesting and instructive to look at ing major programs." However, Packard then

the actual performance of the commercial sector identifies a number of specific commercial yenthat the Department of Defense is being ericour- tures that were, in fact, "models of excellence"

aged to emulate. In doing so it is important to worthy of em.ulation.,,

recognize the technical complexity of many DOD Notwithstanding this conflicting evidence, the

acquisitions, with the typical program pushing the generai perception persists that the government

state-of-the-art in several technologies can benefit from adopting commercial ways of dosimultaneously. The findings of a study by The ing business.

FIGURE 1-3. COST GROWTH IN MAJOR PROJECTS

RAND TASC

PERCENT COST GROWTH

0 SO 100 ISO 200 2S0 300

I l C OMSAT1 9TILLrMl VUIMA•U S&C-1."

-. ; ,"- -O S~lll I UON'WAY PROJECTS PRNAT

0 PINN2YLVAIUA AVEI WOEVELOPUENT

..•,= - • S" AML RAPIDO TRtANIT os.-,e f VlR PLOOO CONTROL PROJECTS

0 \ RV PUOOvJCT IMPOIROVEmEm "4 MAJORi W&APON SYISTMS 1-C

1-00 WATERA PROJ&CIS

j1 CONG. O P4 @ULONGE

0~~ OP 015?o ~uf~ GAELUTSS

DULLI A00ORT

"4. 'PUSLC SWiLOibGE

- , , .4 ' EAA/P OF 00UMIC.CE RADARS

ut~~~o.~ ~ a- .ocb lkO mwa cosuco "000 I NUCLEAR PC70111 PLANT .'on. . In,. ""n-•:x,•N•ll 'l~l

.• *I 0,1 e.S tIII ,, O*O o'LARGE CONSTRUCTION - PROJECT I(0* 

"40 'DWR*UG PROPRIET ARY

.\N'. ~ Dq- OE: NEW ON.I CAL I/TMgI0

*42 * C", cILMICA&LS'

0)6 £NROY P*OCW PLANTS

0, NEW O*LfAN* SU~*S*OOM

0' CONCO"Of

•'O4V6.OPUEN COSTS DwON.

ODNUdIA Of C.AbU COEOCEMO AO TIJLTD PON QUAqrITI AD 0I NFLAT6O

co o ft" 1. O A .o ,J. w 00 50S0. V_(l0lat

6
Direction and Scope of Research Effort rience and opportunity to "kick off" our research;

It is with a sincere belief that selected commer- we were able to effectively immerse ourselves in

cial practices can be of benefit to DOD, that we the ways commercial companies do business.

embarked upon this course of research, Briefly Because our research objective is to import some

stated, our objectives were: of these smart commercial ways of doing business

1) To define commercial practices into DOD, we focused on commercial business

f unctions that were comparable to functions car2) To identify practices which seem to be ap- ried out by DOD. Specifically, we focused on how

plicable to, and offer high payoff in DOD commercial companies develop new products, and

3) To explore fuliy how to implement those how they acquire major capital projects. We felt

selected practices. these activities most closely parallel the acquisiOur approach in pursuing these objectives was tion of major military systems because:

partly driven by the nature and duration of the -Such products and systems require large cornDefense Systems Management College (DSMC) mitment of corporate resources with extended

research fellowship in which we participated. payback periods.

Early in that fellowship we attended an executive -They often incorporate new technology and

education program at the Harvard Business push the state-of-the-art.

Scho,- (The Program for Management Develop- -They require a comprehensive management menmi. This education program provided aca- -hyrqieacmrhniemngmn demL) 

dem This epureation the gates ineor d paca- system to integrate the efforts uf many people, ic exposure to the latest in theory and prac- eq i m n a d t ch o g es

tice of managirg commercial companies. In equipment and technologies.

addition to significant classroom experience, we Even with our focus constrained to new product

were sequestered during the 12-week program developments and capital projects, it became clear

with 135 ciassmates who were up-and-coming thdt the univeise uf coniniLcial piactices was exmiddle managers fr'm many of the world's most pansive. To conceptualize this universe, we

prestigious companies. The combination of the developed a three-dimensional model as shown

two forums proved to be a superb learning expe- in this exhibit:

FIGURE 1-4. RESEARCH MODEL

THME tPIVERS 0

UNRED" mITRY~ 000

--ftACT'-"ftnU CAllS POL.IC119

s...r. .. aa.r.. 

'UIcloam.ta.n aim 1fl I- / I-4-.I -- --- il SMALL.l I ¢ I I .V4AO 5Iff c• Mf

UsC..•~~ . l ?•,- .. '-, o....... .... ,, ] c....p

.llll~of cIfI" cm 11

17K1

S... .1w, .10K It* 10 Q.V0~tc% %Q UIA0

".10AA I.

7
We designated the axes of the model as follows: (DSNIC. They include seven discrete disciplines

on the X axis, the traditional measures of project under the umbrella of systems acquisition

success, on the Y axis, the functions or disciplines management; to wit: quality, systems engineerof acquisition; and on the Z axis, "commercial ing, production, contr,.cting, logistics, program

practices." Our objective hre is to show not only and businessfinancial management. Each inthe broad universe of commerciai practices, but teracts with the others, so that policy changes

to show their interdisciplinary and interdependent designed to improve one area may impact

nature. We will now briefly explore the variables another perhaps adversely. Each function has

that make up each of these axes. specific policy, doctrine, and culture, as well as

The bottom line of any management practice is multiple levels of advocacy within the acquisition

the degree to which that practice contributes to hierarchy. Any analysis of commercial practices

the success ot the mission, and the success o' a must, therefore, examine the impact across the en-

"'project," whether commercial or defense, is tire range of disciplines, although this re~earch is

judged on three variables: cost, schedule, and per- focused particularly on those of program manageformance. Accordingly, wc felt these success ment, quality, contracting and financial

criteria should be an integral part of the analysis management.

of any commercial practice. We include them in The final ais of our model is the crux of this

our model to reflect this importance. The three research effort--commercial practices. As a point

variables are so highly interrelated that the suc- of departure we used commercial practices idencess of a project is dependent not only on each tified by the Paci-ard Comiiission and the 1986

variable independently, but also on the effect that Defense Science Boai d (shown on the left side of

each exerts on the ethers. Mathematically,' this our research model). Our real target, however,

relationship would appear: was a level of specificity below those that the

S! = 1 (5, 1B, C) PIckaid Commission and the DSB identified. We

SI Successful implementation sought to identify management techniques,

strategies, and practices used in the commercial

S Schedule sector to develop major new products, or manage

P Performance capital plant/equipment projects.

C =Cost Again, our ultimate objective is 'lessons learned"

for DOD, so we constrained our focus to corn- The goal is optimization of the total equation mercial practices that: 1) seem to be consistently rather than its individual variable values, The sucsflan2)redfrntro thetyi

impediments to doing so lie in the complexity and successful, and 2) are different from those typiamorphous nature of the interrelationships, as many', ma ny in in fact, fact, for this for research effort of m limit.ed ited

well as the difficulty of traditional, functional duration and resources. Therefore, it became

organizations to work across organizational lines. necessary to concentrate our in-depth research on

While it is possible to optimize one (or even two) component(s) of the equation, it is practically a selected number of these practices. In choosing

impossible to optimize all three independently. 7 from among the many good ideas'for additional

The process of making effective trade-offs between study we used the following criteria:

variables is, therefore, critical to the overall suc- 1) Commercial practices that DOD could imcess of any project. We found stark contrasts be- plernent within it's existing authority

tween how this process is treated in the defense 2) Practices that offered high payoff if miacquisition environment versus the commercial plemented in DOD

world.

The second element of our model, depicted on the 3) Practices that complemented the diverse functional background and interst~st ot members

Y axis, is the array of functional disciplines im- of the research team.

plicit in acquisition. While many conventions

were possible, we adopted the approach used by This focusing process is depicted in the model as

the Defense Systems Management College a funnel yielding an output of targets for further

8
rcscarch. It is important to note that this research agement practices being used to accomplish like

eftort does not purport to be an all-inclusive study functions. The organizations that were the subof the commercial practices that might be applied jects of our interviews are shown in Figure 1.

to DOD. Rather. it is an in-depth treatment of -

several of those practices. The practices we chose FIGURE 1-5. RESEARCH

to develop offer real advantage if adopted institu- CONTACTS WITH INDUSTRY

tionally by DOD, but there was clearly an element of "randomness" in their selection. There are

many more commercial practices that are worthy

of further research, and we hope that this report •GTE WESTINGHOUSE * GENERAL DOw CHEMICAL• ELECTRIC

will cz;.ablish a framework for such research. - TEKTRONIX • PUBLIC SERVICE GAS •

EASTMAN KODAK * BECTON DICKINSON • It is important also to note that we did not find ROCKWELL • PACIFIC BELL '

nyv heretofore undiscoveied, "gee whiz" panaceas VALENTEC , BOEING •

MARTIN MARIETTA • UNITED TECHNOLOGIES * from among the range of commercial practices DIGITAL • GEHL •

that we examined. The term "commercial prac- GENERAL DYNAMICS • ATST •

tice really means "smart business practice." Mo-t BRITISH AIRWAYS * • HP •

are strongly rooted in common sense. Many are

already in use sporadically throughout DO[) - Interviews; * CommerciAl Case: • DoD Case

(reterence appendix G discussion of MSE for example). In keening with this perspective, recognize Based on the first round of interviews, several opthat our findings and are not novel or "inspired" portunities for program specific case studies

but instead seek to report for widespread im- developed. These are annotated on the exhibit,

plementation some good things we saw consistentlv in successful commercial programs. We

firmly believe the commercial practices identified FIGURE 1-6. COMMERCIAL

can and should be implemented by DOD. CASE STUDIES DEVELOPED

Research Approach and Case Studies ScoDe

We relied on a literature search and our Harvard C.a.s 1 2 3 4 6 6 7

experience during the early phase of our research co UTC HIP Dow Tektronix OE Pacell B0IS

to identify the range of commei-cial practices. We Prol PWO00 Severe' Several Several Seral Adv FAGassessed the various business practices in use in Engine Olgti Star

the commercial sector against the background of Nt.,

our individual acquisition experiences as Product Now 'roa Prod. Plants Planti Plants Prod Prod. Plants

Manager, Contracting Officer, Financial Manager. Technical Manager, Logistics Manager and T ,,, 4 byte I,-yr$a ,,, os ,-2yr, 3y'C 27mos 18,mo

Quality Manager in prior military assignments. Funds ,Si '6500141 '6o0aM ,loom-111100M Not ,ýS1G

By doing so. we identified several potentially high (on) Releseed

pay-off opportunities for in-depth research. Figure 3. 1986 DSB Commerclal Case Studies

Scope

Once this focusing process was complete and we

had specific targets for study, interviewing became CaseD A B C D E

our principle method of research. At that time we Co AT&T Boeing SBS IBM MITRE

embarked upon a course of face-to- face, intensive, nonstandardized interviews with personnel Prog. EES-4 767 Comm 360 FAA Nat'l

at various management levels in a broad range Switch Aircraft Satllte Computer Alrep Sys

of concerns. '

s These concerns ranged from com- All cases were new product development.

panies with purely commercial business, to companies engaged in a significant amount o( dl1fense Time 8 yrq 4 yrs 34 moe 3 yre Unk

businec,s, and finally to DOD program offices.

Thus, we were able to compare and cont,'ast man- Funding was not Identiflod in casea by D8B.

9
WP found the case study method for further data tion start-up and costs from several tens to several

gathering most appropriate in order to investigate hundreds of millions of dollars.

not only what commercial management practices 4. Six separate capital plant: equipment projects

were employed, but w'hy, how, and how well. were documented in the Tektronix case study.

Further, in examining specific cases we could Design and implementation of the following

determine the interdependencies of the practices plants is included: Integrated Circuit (C) developwithin each program. All case studies were ment and production facility (cost $53.4M; 21

developed without any preconceived bias as to months to completion in 1981); Gallium Arsenide

which practices or techniques to include for assess- (GaAs) IC development and production plant,

ment. The scope of each case study program is designed into the IC facility (cost $1.7M; 14

summarized below; the full ':ase study narratives months to completion in 1985); Automated

are in appendices. The cases cover a range of pro- Warehouse (cost S23M; 18 months to completion

gram siz.s and types that we feel are comparable in 1979); Cathode Rav Tube (CRT production

to defense system, programs (all the commercial plant; Hybrid Circuit production plant; and Circases 01-7) were financed privately). cuit Board production plant. The latter three

1. PM4000 is a high thrust, fuel efficient, turbofan plants cost between S20-50M each and were corneng:., f•r largoe, wde bk.2, wom,,,nercial aircidft pleied by the mid-1980s.

developed by United Technologies Pratt and 5. The "Factory of the Future" was designed and

Whitney Commercial Engine Business. Cost SIB built by General Electric Aircraft Engines. It is a

(approximnatelvi! 54 months from concept to fully automated machining facility for processdeployrm.nt. ing (i.e., turning, milling and drilling) rotating

2. The Hewlett Packard (HP) Computer Business components of high performance jet engines. The

Organization', new product development project required 3 ycais from concept to initidl

management process was studied and documented production start-up and cost ,52M.

in lieu of a specific case study. We discussed a ma- 6. The Advanced Digital Network (ADN) is a

!or program, the "Spectrum" which was the total new digital line service customer providing full

HIP 3000-series computer hardware and software duplex, point-to-point or multi-point service with

architecture development program conducted cuitomer selectable data rates from 1.2 to 64

from 1980-1985 and funded at approaching Kbps. It was impler-ented in 27 months from

C5001M. Spectrum was riot managed via the phase completion of concept development to deployrievie,.'v process. Also, we discussed a major new ment in 1989. Program costs are not releasable.

surtace mount technology facility program, now 7. The Fluorescence-Activated Cell Sorter

in process, in the HP~ M1icrowave and Com- (FACStar), an automated system, identifies blood

munications Instrument Group. This latter pro- and tissue cells in a flow stream, separates them,

gramn provides a state-of-the-art development and and collects them for further analysis. It is the lead

production facility. It is scheduled to last 3 years

and wilI cost several hundied million dollars. It new product of becton Dickinson Immunotoo, does not use the phase review process, which cytometry Systems (BDIS). The development proappears most applicable to Iproduct-line enhance- gram required 18 months and more than $1M. It

nc_.nt and custormer-uniqt, application projects. was completed in 1985.

8. Mobile Subscriber Equipment (MSE) is a major 3. The Dow Chemical Company's Michigan Divi- U.S. Army program to acquire a complete tacsion's new capital plant.equipment management tical telephone, mobile-phone and facsimile

proces, was studied and documented in lieu of a system for the entire field Army at Corps-andspec--ific -,,d-yt udL,'. The Michigan Division has below levels. The system is provided by GTE

tour or five major capita! programs underway at Govenment Systems Division. It is a S4.31 NDI

any point in time to build production facilities program requiring 10 years for system integration,

(e.g.. aspirin plant, plastics plant, etc.). The testing, production and deployment. The MSE

typical program is on an 138-month schedule, from was selected fo-r case analysis as a non-commercial

appr-v.i for preliminary engineering to produc- program to deiermine what commercial practices

10
were employed and how they fared. The Army 2. Note: A third concept that may also prove

Communications Electronics Command had been confusing is Commercial Activity Contracting by

directed to employ commercial management prac- the government. This is when the government

tices in the acquisition of MSE. contracts out a service that historically has been

The 1985 DSB Summer Study developed the performed by government employees. An examfollowing five major new commercial product case ple is the contracting out of aircraft maintenance

studies; we considered their findings along with services to a commercial company, rather than

the cases developed above: continuing in-house maintenance.

A. The EES-4 telephone switch developed by 3. Deputy Secretary of Defense Memorandum,

AT&T; 2 years from requirement to start of "Improving the Acquisition Process," April 30,

development; 8 years to deployment 1981.

B. The 767 aircraft developed by Boeing; long 4. "President's Private Sector Survey on Cost

conceptual development period; 4 years to Control: A Report to the President," January 15,

develop and deploy 1984.

C. Communications satellite developed by SBS; 5. "President's Blue Ribbon Commission on

14 monnths from requirement to start of develop- Defense Management, Final Report to the Presiment, 34 months to deploy dent," June 1986.

D. System 360 computer family developed by 6. Office of the Under Secretary of Defense for

IBM; 12 months from requirement to start of Acquisition, "Final Report of the Defense Science

development; 3 years to deploy. Board, 1986 Summer Study'," January 1987.

E. The FAA National Air Traffic Conirol 7. Under our system of government, the public

System developed by MITRE; schedule not sector steps in to provide a service only when the

pro v id•ci.. free market cannot, or has not done so. Good examples are national defense and police protection

Sethe "gu1s' of our research effort is contained in which simply cannot be provided effectively by

Sections II and Ilg of this report. There, we pre- the free-market system. These public services, by sent the findings of our research and make sug- their very nature, are abstract and difficult to

gestions vis-a-vis implementing certain commer- quantify.

cial practices ir. DO [D. Section II is dedicated to

the treatment of issues affecting program stabili- 8. Kirby, Wendy T., Esquire, "Expanding the

tv, Section III covers individual topics in acquir- Use of Commercial Products and 'Commercial

ing quality system.s, establishing buyer/selier rela- Style' Acquisition Techniques in Defense Procuretionships. and implementing certain regulatory ment: A Proposed Legal Framework," A Quest

ir-,ues, for Excellence: Final Report by the President's

e Ut r i or Commission on Defense Management, June 1986, ý,'e rrcognize that our approalch and methodology Appendix H.

to this, research may not be konsideted "rigorous" A n h.

from a purely academic standpoint. We do feel, e Musgrave, Richard and Peggy, Public Finance

however, that w': garnered sulticient evidence, in Theory and Practice, McGraw-Hill Book Comalbeit pr, maril' anecdot,,l, to .trongly support our pan,. New York, N.Y., Fourth Edition, 1984.

Idin-', and sugp,,:'std impr.ov,:ni(nts. particularly 10. Plato, The Republic.

when considered in the context of the broad 11. Georgetown University, Center for Stiategic

acqui-ition experience of the authors,. We believe and International Studies, "U.S. Defense Acquisi1)01) ca:, in fact. learn a great deal from the com- tion: A Process in Trouble," March 1987.

rercial sector, and thi,, report provides a blueprint 12. Fox, F. Ronald, The Defense Management

tor do'ni; so. Challenge: Defense Acquisition, Harvard Business

Eridnotes School Press, Boston, Mass., 1988.

1 . Rc,'ort of the Commioosion on Gozermcnit 13. Hartle, Terry W'., "Sisyphus Revisited: RunI'rocOVA'L.'nt, D)ecember 1972. ring the Government Like a Business," Public Ad11
minlistrationl Re',ew, March, April 1985. 17. Hayes, Robert G., Steven C. Wheelwright

14. Bierv, F., The Analytic Sc'ences Corporation and Kim B. Clark, "Dynamic Manufacturing,"

(TASC), "Cost Growth and the Use ot Corn- The Free Press, New York, Chapter 11, 1988.

petitive Acquisition Strategies,' The %'atioial 18. Non. standardized intei views are designed to

Esimnator, Vol. 6, No. 3, Fall 1985. elicit different information from each interviewee

15. The Rand Corporation, "Improving the by tailoring questions to the r individual

Military Acquisition Process--Lessons from Rand background, experience and placement.

Research," R-3373-AF RC, 198t. 19. The DSB study did not identify development

16. A Formula for Action. costs for the programs.

12
II

ENHANCING PROGRAM STABILITY

13
II

ENHANCING PROGRAM STABILITY

COMMERCIAL

PRACTICESPROJECTIPRGM MGMT

SYSTEMS ENGINEERING

LOGISTICS MGMT

- -CONTRACTING MGMT

ACQUISITION PRODUCTION MGMT

FUNCTIONS 'UCIOSQUALITY MGMT

-FINANCIAL MGMT

COST

* PERFORMANCE

MEASURES OF SUCCESS

A lundamental commercial practice in successful In this section, program stability is described; sucmajor new product development and capital cessful commercial business management apsystems project implementation is program stabili. proaches to stabilizing programs are identified;

ty. The 1986 Packard Commission report Department of Defense (DOD) policies and inhighlights stability as one of: hibitors impacting program stability and actual

"six underlying teatures that typified the practice are discussed; and specific improvements

most successful commercial programs"and are proposed for application via DOD acquisition

that "defense acquisition typically differs policy changes. The motivation is to institufrom the COMMercial model in almost every tionalize the use o( those good busines practices

respect .(but that several) successful DOD which enhance program stability in the DOD acprograms have incorporated some or all of quisition system.

these managem.nt features to a greater or Program stability features ripple across all of the

lesser extent.", traditional functions associated with systems ac15
quisiticn. The obvious focus of this section is on

program.project management functions, but our FIGURE Il-i. ACHIEVING

treatment of program stability must, and will, PROGRAM BALANCE

cross functional boundaries (i.e., engineering,

logistics, and financial management) to deal

effectively with the necessary. complexity of ,1..,LVIM..-

system programs. The criteria for measuring suc-..

cess in systems acquisition -cost, schedule and

performance-as impacted by stabilizing managehment techniques are the central treatment of AUTHORT•Y • . .,

Chapter 2. A.

The research model, introduced in Section I, is i

recast at the beginning of this section to highlight

the commercial practice, program stability. We , _ T

develop in Chapters 1-4 the principal management AU,1o,,TY : PPO

techniques impacting the stability of systems programs, major and non-major, which we observed

employed in highly successful major commercial

systems programs.

A Working Description The misfortune here is that defense acquisition The kcy attributes of program stability are professionals are all on the same team but often

steadiness of purpose, a firmly established plan act counterproductively and very inefficiently in

and a supportive system.- For a program to have both a micro and macro sense. Progr3m Manager

stability it must have a goal of sufficient per- (PM) perception is that DOD and Service funcmanence that it outlives the time it takes to im- tional organizations and staffs are ofter the prob -

plerrment the plan. The ,-rogram plan links the pur- lem rather than team members in achi. ,'ing propose to the resources ',time, people, funds and technoo gy)sneeded. It organizesthe tiegram resources success. These organizations and staffs often technology needed. It organizes these resources operate as though PMs should not be trusted. In

anda defines the process foI achieving consensus Section 1, we mention thdt cost and schedule con- and approval to implement. It then guides the ex- trols on major defense programs are no worse

ecution phase and provides for the integration of than on other public or private programs. We all

effort. The plan should be realistic and provide recognize that cost, schedule and performance

flexibility to adapt to unforeseen problems or accompishment ies syse e ms acquisitonci

modet inpuroseandresorceavala-accomplishment cangs in defense systems acquisition is

modest changes in purpose and resource availa- not what it should be. Especially in times of

bility. In a bureaucracy, such as DOD, the ap- decreasing budgets and increasing operations and

proved plan should be a product of systematic maintenance needs, DOD must do better it it is

consensus and a clear decision rather than the to continue essential force modernization.

result of continual incremental decisions.

From the PM's perspective. the essence of the Whats Wrong? problem i, instability. There are an inordinate

Figure 11-1 dramatizes the issue, it represents; the number of often conflicting requirements and

current imbalance of forces impacting program demands, coupled with a basic lack of authority

stability. This situation is the result of decades of (anywhere) to tailor them into a cohesive plan.

piecemeal regulatory efforts to ensure against And no one seems to remain in charge long

rec urrence of perceived (including some very real) enou~gh to see the plan through. It is the singulai

past transgressions. It shows DOD and Service intent of this section to identify and promote

functional organizations and staffs attempting to adoption of good business practices which can

ensure against ineffective arid exz:essively costly begin to bring our acqu.isition forces into construc

defense systems. tive balance.

16
Commercial Practices Enhancing ProgramF

Stability-- What Are They? FIGUREIV1-2. COMMERCIAL

Our research used literature search and interviews TECHNIQUES FOR ENHANCING

of practitioners of commercial practice in major PROGRAM STABILITY

new product development and capital systems

development projects. There is a wealth of

titerature in existence desczibing good and bait 1. Role o Top Management

business management practices; in general, this

material .vws useful to overview applicable (Chapter 1)

philosophy, but not particularly informative in

establishing how to implement the oncepts. The * Vision and Selectivity

best jeurces tor imiplumentatio techniqurs were * Active Involvement

those whit F. used the case stud, method based on * Supportive System

real examples or those which documented real

time iW.•us .3nd their resolution. 2. Cost, Schedule, Performance

,V,_e a1nt:cipated researchirg only comnmercial Prioritized (Chapter 2)

capital plant equipment programs due tt; their a Meet Schedule

functional similarity to defense v'eapons, programs S c

sze, hc.g. fundin.4, technology, purpose, conl- -Sufficient Performance

plexity, etc.; but found that ma'or new product- * Flexible Funding

lint. pr(,~grams were handled si ilarv\' We decid- hno- %er )!grni hnded iml~ly 1%': ecd- 3. Authority, Accountability, ed to uwe evidence from buth types ot programs.

On the surtace, (ine might initially question the Resource Control and

arpi(,alilty (it new prodi,.:t development cechri- ResponsiblIity to Line

qulW -;ncv commercial businesse. tend to execute Management (Chapter 3)

these programs internally versus cnntracting-out

to a pr;m(, co)ntractor--the typical defense,_vscem a Enable Line Managers

approach. ke also found that ai of the commer- * Focus Responsibility

(ial c.apitai progran-s we saw oere irternaily * Experienced People

managed a.]d integrated, using contiactort, for

(-omponent SL, bSystemS and supplies. W'e leave to

,oi. thr reader, the iinal call as to applicability

under these circumstances, bat expect you will Chapter 4 assesses several congressional and DOD

recognize that the management techniques policies which impact acros', program stability,

di,.,ussed he:re are n,) more than good manage- and provides some suggeste!d implementing steps

Tn,.n method,, appliiable to any large, cumplhx for institutionalizing these techniques into the

program within a laige bureaucratic organi,1ation. defense acquisition system.

Based directly on thi,. resarch, we tound that the Endnotes

.i()d busir:ess practices contributing most to program ,tailitv are. I] top management involve- . President's Blue Ribbon Commi.ssion on

mnnt, 121 on-time comopletion, and (3) the authori- 1)etense Management. A Qiwsr for E.Lcelhe'ice

Fitial 1sdn.Jn Reotth 00 p

tv and accountability of acquisition line manage- Report to the Presjdent, June 1986, pp.

40-51. 11nCnt. We als," tound the comm'rnc al techniques

)r mpl mentrig these prajCties; these arte out- 2. These derive directly irum delinitions of pt rolined in [igure 11-2. La.h is developed in Chapters g;ram" arid stability,' V,'ebster s New Collegiate

1 -3 along with 1)01) .nvironmental inhibitors, !.)ictiolmmry

17
I

THE ROLE OF TOP MANAGERS

FINDINGS a. Active involvement of top corporate managers is essential to program success.

b. The commitment to program success crosses organizational lines.

DISCUSSION OF THE FINDINGS cessful businesses identity customers needs/vwants

1986 Packard Commission: "At the outset and what they are willing to pay. they are also

ot a comnnercial program, a program very aware of what the competition is doing and

rnariager enters into a fundamental agree. li.kely to do.- These two fact.,,rs allow top

rr,,cnt or co.ontract' with his CEO on specifics management to determine when they must bring

Ot performance, schedule, and cost. So long in a new product or new capability to cover costs

as a prograrn manaver lives by this contract, and make acceptable profits before the competihik, C'O provides ,,trong management sup- tion catches up. For example, 'Nissan's highly sucport th Ough•o•t the_ life of the progiam. This cussful implementation of their truck and auto

givec., the program mariager inaxirnum incen- plant in Smyrna, Tenn., was, in part, attributed

Lto make rcaii:tic cetimat-", and max- to senior management's focus on a single, simple

imnum support in achieving them. In turn, goal: "To build the highest quality truck sold in

a CEQ does not authorize full-scale develop- North America.-3

ment for a program until his board of directors i., solid!y behind it, prepared to fund the Figure 1-1 diagrams the relationship of top

program fully and let the CEO run it within management to several key elements of program

the agreed-to unrding."' management. Basically, it shows the top manager

is actively involved with strategic planning and

',\c. nourd that uce,e,sful cajor systems iprograms decision making as it applies to major programs;

(i..,. new prodt th line, new capital plantvequip- it also shows top management commits to seeing

rnlnt) within the commercial acOnquisition environ- programs through. Top managers are personally

mvnt are the prdu-t of unecuivocal top manage- involved in making early trade-offs to get to a

m,-ict apprcval aid supplrt, Inl the ;rogrfrthe practical program baseline; and they select the

ciomay r .C e.' wsc'ce ' it nkage Co toi'/1hsi of the' PM. Not all proj,.cts, conceived and proven feaconip , there was clear linkage to organiza- sible in the bottom-up process most organizations

tijonal business strategy and dircct involvement use to identify new opportunities, will directly

ot the Chiet Lxctutive Officer. Involvement did support such vision; those that do are seized upon

nol i•carn micromanagement, but .,i awareness and made to work.

of the prigrain's current status, active questioning, and a willingness to commit organizational Active Involvement

r VS ,tift('i tt.; r.solve prb¶,,PPis. Our assessment of top management's role in the

Strategic Vision anti Selectivity case studies (Figure 1-2) is that the predominant

Best husines,, practite is to develop project plans role is active involvement: either they lead, actm, new product,,, and any necessary new pro- tively champion the important projects; or they

cr:s•t'i,, irom top ,ninagernents ,trtategic viaion of enable, ensure the system functions whereby the

wiat .llsi e'js wirit and when it must be there whole o,ganization actively supports, approved

to heat the olir),ti ion. Top management of suc. programs.

19
FIGURE I-1. ROLL OF TOP MANAGEMENT

MAJOR

COMMERCIAL BUSINESS

PROGRAMS

CUSTOMER NEEDS STRATEGIC ORGANIZATIONAL

& COMPETITION VISION IDEAS

iTOP MANAGEMENT

STAFF SUPPORT

"'SSELECT JOINT 7 DEFINE

PM COMMITMENT PROGRAM

BASELINE

FIGURE 1-2. COMMERCIAL CASE STUDIES

Case# 1 2 3 4 5 6 7

MODE Lead Lead Enable Lead Enable Unk Lead

#Prog 1 1,6' 2 2 2 2

MSs

Dcs'n Prog CO0 PM Gp Mfr Cmt'y Div

Auth'y Dir VP GM Pres

* Strategic Programs Had 1 Go/No-Go Decision

20
Although procedural methods of establishing pro- ject to program oversight by committee unless the

gram approval were not specifically investigated, approved baseline was expected to be breached.

we did note that such decisions were often based The environment was set for speedy and effecon intuitive judgment as opposed to detailed cost tive execution. In each of the companies visited

and benefit analyses. Top management actively there was a real organizational commitme'nt to the

participates in managing these selected programs success of approved programs. New product line

to ensure focus, focus of program objectives and development and capital acquisition programs are

focus of organization effort. strategic commitments reflecting the company's

A senior HP executive stated that the most damag- future direction and emphasis. Such program going new product problem is failure to bring in a ahead decisions are clearly communicated to all

new system once development has begun.' participants in the corporation. Along with vision

Major projects in all seven commercial case studies and active involvement in creating and pursuing

were limited to two or fcwer "go. no-go'" deci- strategically essential projects, top management

sions; typically, the first is a decision to create must establish the environment for success. This

a design and a mini-business case; the second is includes smaller projects which would fragment

approval to enter full-scale development and im- top management attention to oversee directly.

plementation. For example, UTC committed $1B Delegation of top management decision authorion a new jet engine deveiopment (the PW4000) ty and r.source control is the technique they use

based on market research and a decision to be to provide smaller projects the same opportunity

ready with a new proven product when the for success as major programs. Division presidents

market needed it. There was no further need to are the fioal decision authority on less-than-major

reconsider the commitment as the work was be- programs once approved for development /impleing done.5 Quinn went o,' to say that top mentation (e.g., BDIS case #7).

management should establish a "few critical As stated earlier, the commercial marketplace

points" for intervention (i.e., it cannot be a con- severeiy penalizes companies which do not bring

tinuous necessity) and not depend solely on new products on line once the decision has been

elaborate planning and control systems. The made to commit major resources (typically, ennumber of intervention points varies, but is try into full-scale or detail engineeiing). The funccharacterized by an acceptance of "chaos and tional staffs, operational and program managers

replication in early investigations.. (but at the) spoke of shared goals and direction. Functional

later stages, these managers have learned to main- organizations recognized that they were account..

tain flexibility and to avoid the tyranny of paper ab!e to higher management for support of those

plans."'• We found that early conceptual plan- programs. Managers of functional departments

ning is very decentralized to promote oppor- (e.g., VPs of marketing, engineering and manufactunities for good id'as to bubble up; whereas pro- turing) were responsible for providing resources

graromatic decisions following the approval for (the right people and technology) and assisting the

development, implementation were delegated to PM in solving problems. They were not involved

acquisition line management. 7 Smaller projects, with program oversight and direction. Corresponsuch as product-life extensions or customer-unique dingly, the program manager considered it to be

appliques were more rigidly controllod by a for- in his best interest to accommodate the recomreal, central decision process. Since these smaller mendations of departments such as engineering

projects wurv not central to the thesis of this and manufacturing because they bring the best

research, we did not pursue ihis area in most case technical knowledge and experience to bear on instudy eff()rt,,. dividual program objectives.

For example, Sony feels top management must

Supportive System. manage the value system and atmosphere not the

Figure 1-2 also shows that il six out of seven cases details of all projects; nor should their staffs.

a liner rnanavr had authority to make program l)epcnding on the scale of projects, PMs should

d'cisiom, following 1OI) program approval. Ap- report as closely as possible to the management

proved programs were, therefore, no longer sib- level making the critical decisions concerning the

21
project.8 However, no "best management stroc- A system that spreads program oversight and

ture" evolves out of the literature. It is situational; decision-making authority broadly, especially via

various alternative approaches are needed large powerful staffs and functionally segregated

depending on the projects, the market area and organizations, but that fails to hold them accountthe people involved, able for program success, is counterproductive.

As a result of his investigation of decision-naking Successful commercial companies recognize that

in large conglomerates, Richard J. Marshuetz staffs are necessary to manage ongoing business

points out that these organizations must separate matters, but line management must assume the

decisions supporting daily operations from those risks of change. In Chapter 3, the authority, acdetermining the future of the business (the same countability and oversight factors of stability will

people who manage daily operations are not be treated in detail. They are mentioned here to

necessarily the right people to manage essential establish the dependency on the environment set

change). To do that the program management by top management.

process must be simple and efficient. (Note, the

process must be efficient, not necessarily the pro- DOD PRACTICE AND INHIBITORS

jects; we'll take that up later.) Typically, "business In DOD, it appears that our large senior staffs

as usual" applies to daily operations but not perform many of the roles associated with top

management of essential ,.aange; that is the arena management in the commercial world. There apfor line management." There are sufficient layers pear to be major distortions between the role of

of line management in DOD that a hierarchy of top management in competitive, commercial inprojects can be implemented, within resources, dustries and DOD. In the former, the critical proif line management takes appropriate actions. grams are recognized and made to work; in the

FIGURE 1-3. DOD ACQUISITION MANAGEMENT ORGANIZATION

SF_9ýWc~l FU 8D(A)

J J

Vuu1. unc 6_

staff]. MatI 1 iJ Prore Pt

22
latter, it is often not clear which of the programs A typical, Services, commodity-oriented, buying

are critical. McDonough and Spital found three command is responsible for support of current

principle reasons for new project failures-- operations of fielded systems plus the designappearance that success or failure really doesn't through-implementation of new systems promatter to top management: slips are ignored; and grams. (The Air Force is a major exception in this

there is no reactionr from top management to respect.) On one hand, we should expect feedback

status reports.1 '' from current systems operating and support exHistorically, in the Services, systems acquisition perience would be helpful in new systems. On the

has been an ancillary function of logistics support other hand, functional organizations (e.g.,

to the operation forces. As such, top Service maintenance or supply-support directorates) must

management focused on other things; but, of prioritize and standardize procedures for effeccourse, had to approve major resource corn- tiveness and efficiency. They tend to institutionalmitments. This beginning appears to have evolved ly impose many rigidly interpreted, standard decito a defense management system devoid of clear, sior5 systerns optimized for dealing with support

CEO-like, top ,nwiagement. rigure 1-3 depicts of fielded systems. This latter tendency flies in the

DOD's organizational structure for acquisition, face of effective innovation on systems in

The DAE is on the OSD staff; the SAE is on the development.

Service 5tafi, both are without control over the SUGGESTED IMPLEMENTATION FOR DOD

personnel resources who work for the military Improvement in this fundamental area boils down

Chief. to estab!ishing who is in charge. Though layers

The implementation of the PEO-the SAE rela- of organization are a major complicating factor,

tionship was very different in each Service; i.e., the solution here is more one of delegation than

the Army PEO does not control personnel reorganization. The practical authority of the

resources and, the Navy and Air Force PEOs have DAE, in particular, is crucial. The DODD 500U.1

two ditterent bosses. and 5134.1 wuzt clearly provide the relationship

The point here is that it is not clear who should of the DAE to the top DOD decision-making

haveund communicate his vision as applies to ac- authority and DODD 4245.1 must similarly treat

quisition priorities; this inhibitor contributes to the SAE and the top Service decision-making

those covered in Chapters 2 and 3. Senior, ap- authority. If these positions, DAE and SAE, are

pointed managers in DOD and the Services are to be decision-makers, so state; if they are to be

often transients who may never have the time to staff advisors to the Secretary, so state; but don't

develop clear visionary strategy objec•ives which then confuse the direction with other names (e.g..

link to acquisition programs. One result is that Procurement Executive). This inhibitor is prothe bureaicracy, the uniformed military and civil bably the toughest to fix, for many reasons, but

staffs, function in the absence of a clear relation it must bE fixed if major improvement is intended.

to top management. These staffs and functional Suggested improvements in the following chapters

organizations have grown great institutional do not depend on this one, but will be much

power which contributes to the Chapter 3 in- enhanced if this problem is corrected. There are

hibitors. A second important result is that senior sufficient layers of line management in DOD that

leaders and staffs manarge via committee consen - a hierarchy of projects by priority/resources can

sus, versus personally-attributable senior decision- be implemented if a clear chain of authority for

making. This has bred a practice whereby in- them is established from the top.

diviciual decision-making is often ignored or

wattied down due to the continuous need to build

and r.iaintain consensus with the many heads of The 1986 Packard Commission concludes:

the bureaucracy, and committee consensus is rare- "fie (the PM) should be fully committed to

ly timely, especially when it must handle many abide by the program's specified baseline

diverse and complex projects on a continuing and, so long as he does so, the Defense and

basis. Service Acquisition Executives should sup23
port his program and permit him to manage 6. Quinn, p. 82.

it. This arrangement would provide much- 7. This term means the program manager up

needed program stability."'' through general managers to line vice presidents

or division"business presidents; not all these levels

Endnotes are present in any one company.

1. A Quest for Excellence, Final Report to thLe 8. Quinn, pp. 77-83.

President, p. 40. 9. Marshuetz Richard J., "How American Can

2. Quinn, James B., "Managing Innovation: Allocates Capital," Haroaid Business Review,

Controlled Chaos," Harvard Business Review, January-February 1985, pp. 87-88.

May-June 1985, p. 78. 10. McDonough, Edward F. III and Francis C.

3. Campbell, William H., CDR, USN, Ptoduc- Spital. "Quick-Response New Product Developtivity Using ]apanese-Styie Management, Any ment," Harvard Business Review, SeptemberDefense Industry Applications? p. 31. October 1984, pp. 52-57.

4. Interview with Carl Snyder, Director of Pro- 11. A Quest for Excellence, Final Report to the

gram Management, HP Computer Business President, p. 59.

Organization, Cupertino, Calif., March 21, 1989.

5. Interview with James Bruner, Director of

PW4000 Engine Programs, Pratt and Whitney,

East Hartford, Conn., April 14, 1989.

24
2

ON-TIME COMPLETION

FINDING Schedule is first among cost/schedule and performance.

DISCUSSION OF THE FINDING market share and the need to recover investment

The 1985 DSB Summer Stud, on Practical Fusc- and overhead costs quickly. Seven out of seven

tioniai Performance Requiremenzts found that in first-hand commercial case interviews (Figure 2-1)

5 successful, major commercial new product systematically established a "must" schedule and

development programs differed from the typical traded cost and./or performance features to meet

defense program, of which 26 were analyzed, as it.

tollows:

". Financial and market considerations made FIGURE 2-1. COMMERCIAL CASE

schedule top priority

" Performance requirements are tiaded to hold STUDIES COST VS. SCHEDULE

schedule; block upgrades, 1131 for new VS. PERFORMANCE

I .Il 4: 11tI C aseD 1 2 3 4 6 6 7

" Tendency toward proven technology as

schedule is paramount Prior- Sked Skad Sk.d Sked Skad SkOd Ski•d

Ity

"Quick reaction to mandatory changes. Ye Y Yes No No No

Of the primary criteria for success in major com- Tech

mercial capital investment or new product P.r ¥,,. Yes Y.e Yoe Yes Yes Yes

development projects, we found on-time coMple- Trades

tiopi to be the first priority. If the first entrant in RiOIk 10% 10% 10% 10'% 10% 10% ' 10%

a product field is considered to be a good value, eut or

it will sell. Product price and performance are the

next most important criteria since the competition must bring in its competing products later

at a better overall perceived value in order to take

away market share~ from the leader. Program stability both enhances and is enhanced

by a priority to on-time completion. First, a stable

Meet the Schedule program can be executed more quickly than one

l'ithout exccption. schedule was the driving which is continually changing or subiect to change

motivation, in the commercial acquisition en- in an unforeseen way. Second, a project comVironmnl, once a program was approved for pleted quickly is naturally subject to forces of

development and/or implhmentation. This is not change for the minimum time possible. Figure 2-2,

to imply performance or cost are ignored but, borrowed from Norm Augustine's recent book

rather, they are considered principle variables Augustine's Laws shows that the absolute length

which may be adjusted, following baseline ap- of the program development schedule beyond its

proval, in order to meet the schedtded introduc- approval point is directly proportional to the

tion. This pra tic!t is primarily market driven due likelihood of cancellation (left graph); and arty atto the implicationis u( late vnti y on long term tempt to change schedule (a,.:elerate or stretch

25
decision makers. It is a "chicken and egg" proFIGURE 2-2 blem. A short schedule facilitates mai'ntaining

tenure of management. Continuity in management reinforces rapid decision-making and thus,

so short schedules. If, as in DOD, system acquisi0 Ption schedules are too long and management

40 .,,E ,&,,,. T tenures are too short it becomes more and more

_ ,,,,difficult to acheive real program successes unless

, •the reinforcing negatives (i.e., long schedules and

~ short tenures) are broken.

Sufficient Performance U I, DATA BASE

10 INCLUDES ,,d Performance features were next in priority. SucCANCELED

PROJECTS otscessful non- DOD industry develops and proves- 0 out new technologies and then introduces them 2 4 PAO 10 into new products. Sufficient performance in

{YtARS AFTER INITIATION OF OEVELOPMENT) terms of mission capability, supportability, life-

._0 _cycle costs and unit costs, etc., was required. But .',o- y J stretch goals were also used, along with conSingeot7'y development to facilitate tradc-'-f'"

should the schedule be jeopardized or develop- . 1 ment costs become excessive. Typically, top cornmercial management recognized that not ail

technical goals could be achieved and delegated

0 o- - to program munagpfement. or first level general

z ] 1 5 - POINTS IS R REPRESENT INDIVIDUAL management, authority to make required trade- -- VELOPMENTPROORA I off,. The PM had authority to use the best i REVISIONS

-,0---, -,o '- ' technical support available in the company to

10 -20 --i0 '0 * 20 *. JO * *.O assess relative costs and benefits of performance SCHCOV'LE CHANOE.' PERCENT trades and to make timely trade-off decisions.

'TIM9 TO INITIAL OPERATION CA.-ADILITY Functional department chiefs supported program

managers on performance trade decisions and in

out) will always lead to increased costs for the solving technical nroblems in a cooperative mansame capability. ner. Their motivation was frequently enhanced

The Final Report of the Defense- Science Board, by pay incentives associated with program

1985 Summer Study, alse concluded, "Schedule success.

is paramount (in successful commercial progranms), and resources-in terms of money and It takes industry about 10-12 years to bring new

people-are planned to solve problems in an ef- technology into the market, so technology profort to bold schedule "' Two examples, previ- grams are usually separated from new product

OUsiy introduced are: development. Preplanned product improvement

-The I'W4000, a $1B jet engine project, depen- and evolutionary development were the standard

dent first on completing development and FAA approaches to pick up desired technology or

_ertification within 54 months of approval.2 teatures not available at planned schedulC cutoff

r on' tukadatplta points. T'he focus on new products is to get them

5Niss0n's Se ruyrra truck and afuto plant, a into the market last. This is done by applying

$600M eflort, require2 thd to bn full rate produc- available and proven terhnology. In this way,

lion within 42 months of groundbreaking.' commercial industry takes low cost chances on

In industry, sc.hedule is measured in onptrhs, not small, new techno_)logy projects but few technical

yarý-_ I his related observation is significant in chances on new products or production capability

te'rnms (of tenure of program managers and senior which are too expensi. - t- reperiment on.

26
Iilnning for siiccess`ful new priducts involves over funds alloation and expenditure (versus

avoiding early detail since the design process is funds contro! by functional management).' In

iterative and many decisions should be flexible so six of seven out of our first hand cases, acquisias to advantageouslv consider trade-offs as it tion line management had direct funds control (if

evolves. Our first hand interviews with commer- the PNM didn't have funds control, his line manager

cial firms established that seven of seven began did). This evidence reinforces the concept that

development and implementation with flexible fast, timely projects arc predictable in terms of

.ins-,; ,even oi the seven indicated that they funding needs, and do more for effective cost con

were prepared to. and did, trade off technical per- tainment than a priority focus on cost.

fornance requirements for overriding schedule or Of the twelve individual programs documented

cost reasons. in the seven commercial case studies we

flexible Funding documented, only two had overruns beyond 10

The commercial companies we researched had percent of the original estimated cost. The

11U~iress, planning systems not unlike our PPBS evidence strongly supports the conclusion that

i, most tuncti,'iial `aspects. They w-ere, barring meeting schedule reduces risks of cost overruns

by limiting expenditures for direct and overhead

ma;or rcvenu, e problems, less constrained than development costs.

DOD) in comimit• , . i i.nds over the full program

inve.,tment phase. The keys to successful integra- DOD PRACTICE AND INrIIBITORS

tin of business plarning and stable funding in Of the fundamental criteria of priiect success,

comnercial bu.iness enterprises ,are: I . realistic DOD, on the other hand. effectively prioritizes

tiflan..la' planning--using the bu-iness planning performance (over,,tated mission and adpr,,cc,-- in a dis,_ipir'cd manner to accurately, minig, trativ'e requirements and overly detailed

hrecast revenues and expenses, thus capital fun- specification,), and acquisition cost ( or price) over

di,; available 2 . selective advancement of pro- ,C..... 1 'o,, e -,,, an :nti -,ti, n! villinguess to:

)iram opportunities to 1301) approved status - trade time for added funding or performance. Getcnourirrir that all approved pr ograrm, were attor- ting che 'most bang for the buck' is not nec-essarily

J+.!bi- bsed on bu-iness planning: and 3i com- bad: but. it can be and is counterproductive If perpl't"mg ,j'prp ved proi;rams on sched-ule, thus sup- tornmance is optiinited independent of c,_,st and

port n;, The program assumptions used in the .schdule bjectives. Our historic ailuretimeet

bjsn_'.,s plannin); process. Schedule objc,.' ,.,es also promotes excessive reqUirements. Users must wait extremely long

L, t.i P' !L) b,' !,,,' '',. " ' in th c o,,t- periods betore their needs are satisfied; the turd l. pte ,rrmanf . t . ,ieria for measurement ther out requirements must be projected, the more

t., p'oict smeaeSs in (onn'imrcial industries. That te :hnoloically impractical they will be. If, in

.n'i incan co, is unmanaged; rather, practice, systemn performance requirements are exI..d. ctin ,:is(..mcl to ,,kri tcd co ;. and fhc. 7i Ih ty 'vs5iye th.y drive c osts unnecessarily high and

. pll, , ) viild to acq1,is:tin line n) anag.'- stietch out schedules.a'

m tr t t ) p r , ,c e d ,s,, l ,,g a s c o s ts a rt' %,i, th in 10 p e rcent •t tl. apiprTw)%'d budLge. Robert N. Anthonv 1 ,pica] D©)D prograrn, take 10-I5 years to corr.-

ml I )a'vJ VV Y's' i %,orng m ,, n describing manage- pl'tu dev|'lopment, production and initial deploymen t ( witrorlI in rin-prof it oigani.:ations, iden- ment. This is about twice as long as it takes to

titced tw, subactiitiv'e--accounting and perfur- see fundamental changes in defense strategy,' goals

1It1, V . II'lk. alt _Ibut.' best at('rounting practidce witli unique types and quantities of forces required

t 1, (i ,udi e, tabi 1t 1g ,.}:m ent uide'linsc and nit to suppw it: and m ore than three times longer

t,, Incus on tietaiheil resour(t' bteakdowrn (U.;,. than line managers hav' to commit to executing

ravel v,.r- s Ialarif*, Versa s m1aterMi ds 5 versus, (.o-, approv'd prog'ra , r.1 t ('\ m 1 t O.h0 st'srnething to

trutt., etc.,. B .est paui t ' in , '. , iu.maxv ieflt turn this drn-.nd ,r foregi necessary force moder-

:tii ttin r atiulaccown itUIbilht.to t r,.t projec.t giils rization in a cinstnraimn d resourc' envn ironntent

,!!id th'.'.i;Iatv to change' plan,, it needed. I hey It is gen('rally understuod that l)Ol)'s systems arc'

,'W,, atit'd line manag('tnnt must have control more complex ýhan comrnt'ruial, lius, they tendI

27'
to suffer lower mean time between failure (MTBF) We have an institutional aversion to budgeting

and availability, larger O&M costs and are pro- for risk and contingency. Though the Congress

duced in smaller quantities. The higher complex- has acted to permit a 15 percent cost growth in

ity and smaller quantities are sometimes development on Defense Enterprise Programs (5

unavoidable; but unnecessary complexity together percent in production), as part of its milestone

with less mature production techniques (due to authorization process, the PPBS decision process

smaller quantities) may impact availability and doesn't provide such flexibility. Typically, any

O&M cost- too much. Despite the obvious intent risk buffer is pu!led out and committed elsewhere.

of functional departments and staffs at all levels Thus, when needed, it requires contributions from

of DOD to protect and "help" program managers other "bill- payers," which ripple down through

deal with the complexity of new systems, they ac- programs. Perhaps more important is our avertually complicate the process and confuse PMs sion to committing funds more than 1 year into

.Figure 23). the future, thus, limiting flexibility to change

priorities annually. This latter destablizing effect

is well documented and is above DOD's authoriFIGURE 2-3. MANAGEMENT ty to direct change.

VIA DETAIL POLICY, PROCEDURE SUGGESTED IMPLEMENTATION FOR DOD

AND REGULATION The DOD can simplify procedures and facilitate

p Se * * success in executing essential programs. We can

* , ' simplify all programs, major and non-major, via

disciplined, program specific decision-making

SRegs (i.e., establishing priorities among prcgrams and

internal program objectives) from the top-down.

"The milestone decision process must establish the

".0 ,> -00 , U essential cost, schedule and performance criteria Do'DEo-., for the program. Best commercial practice sugPM 6PM frteporm etcmeca rciesg 4M " gests that: 1) performance should be treated with

INTENT IMPACT minimum detail, not reems of standard "-ilities"

references; 2) a realistic schedule should be

established; 3) with funding guaranteed for the

The impact oi innumerable functional directives duration of at least the development phase: and

and regulations (many of which are countermand- 4) the funding commitment should provide a bufing of each other) is to dump more requirements fer to the program manager to give him some flexon the programs in the form of excessive single ibility to perform trade-offs and optimize the total

interest "-ilities' which drive the total performance equation.

envelop, thus the time and cost to implement. Figure 2-4 portrays several interrelated features

The job of trading-off counterproductive elements of what could be our PPBS and acquisition

of performance is exi.remely difficult for most management systems. The diagram is adapted

DOD PMs. The typical DOD PM is a colonel or from one seen at HP's Computer Business

Navy captain; whereas the "-ilities" functional Organization. We need to link decisions made in

specialists have, and use, their senior executives the acquisition management process to constrain

(who are usually generals, admirals and SESs) to future decisions in the PPBS process. To be fully

support them. Thus, performance trades are forc- consistent with successful commercial businesses,

-d up into "Flag Officer" channels or are not ac- approval occurs at what effectively is our MS II

complished. We should not become slaves to for developmental programs (MS III for NDI prounrealistic schedules; but we will perform better grams). The diagram shows PPBS driving funding

it we have an achievable schedule objective which availability up to MS II, then being driven by acis not compromised by infiexible, bureaucratic quisition program decis;ons at MS II and beyond.

proc edures. Implementation of this improvement would en28
i

tail phasing in Defense Enterprise-like Programs Practical baselining of new systems requires a proat all levels (major and non-major) with milestone- fessional, disciplined organization and process.

authorized stable funding for clearly essential pro- The suggested improvements of this chapter and

grams. Key to this implementation is disciplined Chapters 1 and 3 are so interdependent, a fuller

decision-making based on realistic planning and treatment is provided in Chapter 4.

programming, and institutional follow-through Endnotes

based on commitment to and communication or

strategic priorities. 1. Detense Science Board 1986 Summer Study,

FIGURE 2-4. LINKING DEFENSE STRATEGY, PPBS, AND

MAJOR SYSTEMS ACQUISITION MANAGEMENT

Objective: Provide capable systems to our usairs, efficiently and on time.

oefense PPBS System Systems Milestone Review Process

Strategy

Planning Programming BudgetinfA 0 1 2 3 4 5

"* History * Users * initials F Systems

"* Internallonsl * A -..- airles PEO SAE DAE OAE/ PEO PEO

Trends a Prioritize SAE

-Economic * R - .. rces Systems

.Social

-Technical e Missions e Resource

-Political Estlmations

*Strstegic Us

Position uNer

* W orldwide eudgst /t

Expectations Technology Usei*lne I t yr

strategic Needs 2-5 yro

issues 5-15 y 15 yri

The MS II (MS Ill for NDI programs) is the critical Use of Commercial Components in Military

point in the life of a program where the baseline Equipment, January 1987, p. 10.

is defined and committed. The PM/PEO should 2. Bruner interview.

be given flexibility and authority to make tradeoffs to achieve an optimal mix of cost, schedule 3. Campbell, p. 30.

and performance within flexibly defined limits (the 4. Anthony, Robert N., and David W. Young,

MS II baseline agreement). This improvement Management Control in Nonprofit Organizations,

depends on how the program authority, account- pp. 537-541.

ability and resource control aspects of Chapter 5. Cohen, Barry L., CMDR. USN, and Stewart

3 are handled. L. Manley, CMDR, USN, An Evaluation of the

The key policy directives applicable are DODD Packard Commission Recommendations En5000.1 and 5000.45 which should be revised to couraging Commercial-Style Competition and Exemphasize stability and flexibility. Many lower panding the Use of Commercial Products, p. 2.

tier directives and procedures detail how to do 6. A general conclusion drawn from the book by

many of the "-ilities;" these need to be consistently Robert P. Haffa, Jr., Rational Methods, Prudent

treated in order to emphasize objectives and Choices: Planning U.S. Forces, December 1988.

facilitate effective, tailoring to individual program, acquisition strategies.

29
3

PROGRAM AUTHORITY,

ACCOUNTABILITY AND RESOURCE CONTROL

FINDING Program managers are afforded significant authority and resource control, and

are held personally accountable.

DISCUSSION OF THE FINDING or general manager (GM). Program authority was

1Q86 Packard Commission: "We must give not shared with functional managers. Acquisition

acquisition personnel more authority to do line managers generally are "captains of their

their jobs. We must make it possible for peo- ships" held responsible and accountable for the

ple to do the right thing the first time and success of the project but given the authority to:

allow them to use their common sense."1 1) make timely decisions and, 2) control critical

1956 Dresources (especially participating personnel). This

Dor Summnaer has vTery commtahrcial finding is intrinsically tied into the findings in

program manager has veryý great authority Chpr1.Orfstan and responsibility. His review levels are very Chapter 1. Our first-hand interviews (see Figure andresp2onsibilty is. revi3-1) established no consensus on (1) absolute

Sor 3 at i authority to the project manager (PM), (2) who

We found that program stability in successful has absolute control of program resources nor,

commercia! projects is fundamentally dependent (3) showing clearly the "best" project management

on clear delegation of program responsibility, organizational approach. The best commercial

authoritv, accounn.ability and resource control. practices in this area of authority and accountaAccountability as used here, includes line bility go deeper.

management's accountability and the accountability of all program participants (e.g., functional FIGURE 3-1. COMMERCIAL CASE

specialists, functional management and senior

staffs) for program success. Resource control is STUDIES AUTHORITY AND

further narrowed to mean control of participants; RESOURCE CONTROL

funding stability is not a central focus of this study C110 1 2 3 4 5 a 7

due to the reality in DOD that funding is not going to be independently stabilized without PMO D Matrx& Mix Matrix& Mix Mix Matrix

statutory changes. materials are not a central Dad. Mix

focus for DOD acquisition programs because most Type PM PC or PM PC or PM PC" PC.

of that is provided by the prime contractor in- PM. PM PM

volved. The other primary resources, time and

technology. were addressed in preceding Res. Pu QM o" PM VP or PM Matrix PM

•Auth'y PM PM

paragraphs.

p PC no control; PC- mome control. PM full control

Enable Line Managers

Program management authority in commercial

w'vtem,, programs is, assigned to a clearly visible Best commercial practice is to place authority and

acquisition line manager whose title may be pro- resource control in the hands of acquisition line

6ram 'project manager -PM), vice president (VP), managers; then, they are fully accountable for

31
program success. Career success of the PM in the (e.g., VPs of marketing, engineering, manufaccompany is linked to his project, but bad news turing, etc.) are charged with providing support

is not punished. Problems discovered as the pro- to line management but not direction of lowerject progresses, if reported quickly and accurate- line program management. The primary support

ly, do nr reflect poorly on the manager. Hiding they provide is experienced, professional personproblems, even if the project is deemed a success, nel to give the PM every opportunity to get it done

would result in separation from the company. At right the first time.

Tektronix, for example, there was a 50 percent Quinn observed that bureaucrats require many

overrun in a critical, major capital project which approvals in the "name of efficiency." Successful,

was not reported by program management to cor- competitive, commercial businesses know that

porate rnanagement; responsible line managers such "efficiencies" are not affordable in a cornwere replaced, but the company philosophy and e sysem prjec f athoitvandreoure tta cn- petitive marketplace. Some inefficiencies are

system of total project authority and resource con- directly attributable to the way a specific program

trol to acquisition line management was not is run but the concern here is the inefficiency

changed. The real issue was not the overrun; it systematically imposed on all programs by a large

was the. matter of line management failing to bureaucracy if it is not held accountable for proreport a cost problem, thus surprising top ject success; nor is it accountable for the overhead

management when it was too late to consider costs it embodies.t

aiternatives.' This example applies as well to the environment (Chapter 1) for program success; the In another recent example, Goodrich announced rulesvwrenm t changed justor because smceonhe the elimination of many vice presidential positions disobeyed the old rule. and staff; the new CEO observed that "The company had VPs of every function imaginable" when Jerry L. Chapin, in comparing major program he joined the company. He systematically went

management at John Deere, HP and Boeing with about eliminating most of the people in "approvDOD, attributes small central staffs and line ing" types of jobs. He recalled that when he had

management authority and accountability as best been a division general manager he had to obtain

business practices. 4 In a recent example, McDon- corporate approval for $25,000-plus purchases.'

nell Douglas Aircraft Company was reorganized

to remedy a burgeoning $26B backlog in orders As seen in Figure 3-1, matrix management or a

to "end the fingerpointing and frustration caused mix of some dedicated project staff with matrix

by lack of authority and accountability." The support is normal. The way industry provides the

solution included elimination of all five senior vice professional work force to the PM is to focus the

preidents and provided each aircraft program responsibility cf matrix functional managers ard

with departments for engineering, finance and make them accountable for program success. The

procurement. The latter change was made to result is they provide responsive support or must

avoid delays in ordering parts, hiring people and answer to top management directly. Companies

getting other necessary support.5 The lesson her. visited seemed not to require frequent top

is to enable line acquisition managers, management intervention to solve people problems because everyone understood the vision and

Focus Responsibility top management's commitment to successful proSuccessful t.ornmercial prograni,, are also deperi- jects. As well, these functional departments are

dent on focused decision-making up the line; PMs given no project oversight role; they are a resource

Of major systems have and use direct access to provider. '[heir only means of contributing to protop inanagt'nient aa•mn to ao keeupeep the CLO . up-Oorsuroatenongfut or surrogate ject success is to be responsive to acquisition line

(for example COO, a VP (;r GN) up-to-date and management, not by finding fault.

to r'solv' problems beyond the capability :f the During our interview with the PW4000 Program

PM. Staff review of the program prior to PM ac- Director, he was asked about the role of senior

Cess to the CLO is unusual since it would frag- functional nmanagement; specifically, what reports

taunt line maragcnw'nt\ responsibility and ,oV. ;.ere required of him to assure them of proper exdown (le( ision miaking. Senior funmtional ofiicers ecution in their iunctional area? His answer was

32
in line with that of other companies visited but The best available people are recruited for the prostill surprisingly concise; it was: 'I don't; they gram support positions and they are accountable

assure me!'i Successful commercial companies to only ihe PM. Their best efforts are orchestrated

typically minimize project reporting requirements by the PM and compromise among competing into t-ose essential to keeping upper line manage- terests is handled at that level, not by the corment informed. The companies we visited did not porate functional staff. Senior level (corporatu

formally involve functional management in the staff) expertise is invited by the PM, not the suppost-approval program review and decision porting functional specialists, if help is needed.

process. Though virtually all companies were matrix

Experienced People organized, with many functional specialists

1986 Packard Commission: "Generally, assigned to programs in a task organized fashion,

commeruial program management staffs are all functional personnel assigned to support a promuch smaller than in typical detense pro- gram look only to the program manager for programs, but personnel are hand-selected by gram direction and decision-making. Program

the program manager and are of very high managers, in turn, depended on the expertise and

qualiyl Program staff spend their time recommendations of their assigned functional

managing the program. not selling it or specialists.

defending it. DOD PRACTICE AND INHIBITORS

'They involve, above all, trust in people. A key difference between best commercial pracThey involve the belief that people in an tice and typical DOD practice is that commercial

o~rganization want to do a good job, and projects encourage compromise and consensus

they will, if given the opportunit ... building up to the poini that the program is apA kcy prcrequis"ite for decentralized manage., , nt, proved, then all participants stipport the solution.

control is an experienced professional acquisition In DOD, typically, the functional specialists conz'ork force. Successful businesses appear to tinue attempting to optimize according to their

employ such a work force on projects which are special interest and are supported in doing so by

determined necessary to the future of the business, policy !e.g., each OSD functional staff office

Project manager selection criteria varied across publishes detailed procedures for all components

the companies visited. But there was a strong to follow; these are translated and "enhanced" by

tendency to appoint a technically oriented PM for Service and command level regulations) and

the early ' sell" phase leading to project go-ahead reporting structure (OSD, the Services and all

decision and then replace him with a strong levels of command have staff functional chiefs, ".organization- (busiriess or production) oriented some of which are entitled "advocates"). ResoluI'M to implement and initiate operations. tion of confhcts over functional issues often deCo¢mmercial businesses (e.g., GE, P&W, pend on the Secretary's personal involvement and

Tektronix, HP and Nissan) also focus much at- decision, one case at a time. This is very impractention to prequalifying and selecting the right tical due to time constraints on the Secretary, so

people into support positions on project dedicated many counterproductive compromises are agreed

staffs or from matrix departments. They also in- to if only to get on with something; lost is the optentionally kept the skill categories few, prefer- timal, tailored solution. The DOD acquisition

ring generalists who can appreciate the project culture has become one of extremely strong cengoals over the narrow disciplines traditionally tral control of the details of execution via comavailable from functiona! depar.ments. Mr. mittee consensus. The overwhelming strength of

Quinn also observed (during several years via our senior functional staffs has robbed: 1) PMs

many industry case studies, including Sony, IBM, of any significant discretion in making program

AT&T, Intel, HP, 3M and Honda) that a clear execution decisions and, 2) functional participants

long term vision by top management will attract of opportunities to corrilromise in the best interest

quality people, fCcus creativity and channel ac- of the program.

tion to 01he high payoff opportunities.'( Functional and special interest advocates eert

33
significant influence over the systers acquisition Figure 3-2, for example, represents the impact of

process. They often can stop or delay actions to compromise between a program manager and a

en'-,ure their particular interest is accommodated: special interest advocate or narrowly defined funcand the deiense bureaucracy is constructed so the tional participant. The graphs are simplified to

senior advocates outrank many PEOs and most show performance versus schedule indifferencr at

PI's. This latter feature causes PM' PEOs. who a constant cost. Here, performance is a composite

may disagree with senior advocates from time- of mission performance and all "-ilities" which imto-time, to have to consider career-risking, "fall- pact the work effort on the project. The left graph

on-your-sword" encounter., with top acquisition shows at point O(PNM) the optimal intersection of

line and staff management every time (it could the program budget line with the PM's utility

be often) there are disagreements, function at U=4. The right graph shows that the

Economi, utilitv theory provides a useful means same budget line applied to a functional

Of analysis of our advocacy situation.'' it specialist's utility function yields an optimal utility

stipulates that each program participant has a at O(F) where, coincidentally, his U=4; Fis inunique set of indifference curves which , for ex- difference curves are significantly biased toward

ample, represent his willingness to trade off pro- some added performance feature(s) and a willgram performan(ce dnd schedule tcost is held con- ingness to trade schedule as necessary for it. Atstant for this example). The participant is equal- tributing such bias ma' seem unfair but it is

lv satisfied anywhere along a curve, but feels bet- typical in DOD given the direction of accountater ofi on a higher curve. The point of tangency bility of many functional specialists. The O(C) is

between the program budget line and the highest a hypothetical compromise along the budget line

utilitv curve provides the optimal point for the between the PM and the functional specialist. Of

participant whose indifference curves are course, compromise yields less utility for each parvmplovpd. ticipant, U(PMNI) =3 and U(F)-=3, in this case. This

compromise process is healthy if concluded prior

The dilemma is to identify the participant who to program approval; but is unhealthy if it conis best able to evaluate this trade-off. Whose utili- tinues following that point.

ty function should be maximized?

FIGURE 3-3.

FIGURE 3-2.

High • ' : i H igh • :•.

HighlhP I, '{ 0(PU) P 010)

I'N.

U - I- ,

P -LC ._ .

Long Short

S

Low U•

Lonn Short SS

Functional Utility (F)

34
Considering the impact these advocacy offices The "segmentists" approach, where the subunits

have on the program decision process, it is im- are kept separate from each other, causes hostiliportant to understand their genesis. They large- ty and difficulty in achieving consensus. 13 The

ly evolved in response to some real or perceived segmentist attitude pervades defense acquisition.

problem. we have evolved to the point that most DOD parConceptually they can be considered like a fire ticipants in systems acquisition are checking to

alarm system:12 see what the other guy is doing wi:ong. Compromise is required continuously in ol'der to overcome the short memories of transient participaFIGURE 3-4. FIRE ALARM tion at all levels. The incentive for ma.ny seems

to be, "How can I keep anything from going

A wrong on my shift7" Instead, it .1rnald be, "How

T MAN, can I help thi5 program succeed?"

I ,ACTUAL FG Another important inhibitor to professional funcL j tional expertise to PMs in DOD is the civil serE vice system which requires people to be promoted S

to earn more money. Promotions are tied to

N .A- SMOorganizational positions; the higher grade posiT tions are on headquarters staffs, not in program

H or functional operations offices.

E Fw C-_ _The myth that fewer functional people can acA I.A CIAtE 6MOKE complish more in a part-time, indirect, consulting

H NO R E ,SHOAT role has further reduced the effectiveness of RESPONSE rIME defense acquisition. All programs are not alike;

to effectively tailor standard solutions to program

unique situations requires functional knowledge,

program experience and an ability to trade-off.

This graph shows the trade-off between the alarm Typical, offsite matrix management approaches

sensitivity setting (which represents a special in- preclude functional participants from gaining proterest being advocated) and response time (repre- gram experience and from feeling a part of the

senting the impact that failure to accommodate program they must support. It boils down to there

the special interest may trigger). A low alarm set- being no positive motivators for such matrixed

ting (greater sensitivity) provides more response personnel to do their best and to accept some

time in the event of a real fire but also may result risks.

in false alarms; false alarms tend to reduce attention given to the alarm system.

As problems are identified in the defense acquisi- SUGGESTED IMPROVEMENTS

tion system, alarm settings have been made more Following approval for a program to enter fullsensitive to prevent possible reoccurrence. How- scale development, the PM and PEO should be

ever, in doing so, the effectiveness of the system empowered to use the best expertise available to

to identify real problems or make practical trade- them to solve problems and perform trade-offs

offs between conflicting special interest demands, as necessary to complete the program within

has been reduced. baseline constraints and without independent program oversight and direction from functional staff

Rosabeth Kanter, in her 1983 book, The Change managers. The SAE or DAE should be kept inMasters, defines two different organizational formed of progress and problems, directly by the

cultures: 1) the "integrative" organizations which PM, on a quarterly basis. The SAE or DAE should

minimize conflict between subunits; whereas, 2) then be the link to the DRB and the Congress

the "segmentist" organizations which are anti- should there need to be a significantly altered prochange and compartmentalize issues and people. gram baseline.

35
Implementation of this implovement would en- proach should reverse the growing trend in some

tail the decision-maker, at MS II, committing to commands to place functional participants (even

the program baseline with all subordinate acquisi- those full-time on specific programs) under the

tion line managers and ensuring the baseline ob- control and evaluation of the functional matrix

jectives were sufficiently prioritized that acquisi- manager.

tioni managers had flexibility to solve problems Endnotes

encountered during execution.

Professional functional support to program 1. A Quest for Exceilence, Final Report tc the

managers should be strengthened and the need for President, p. 42.

staff functional oversight of program execution 2. DSB 1986 Summer Study, p. 10.

greatly reduced. Professional functional expertise 3. Interview with Alan Patz, former Director of

should be assigned in direct support of program Finance and Operations at Tektronix, Beaverton,

management. The thrust of this improvement is Ore., March 30, 1989.

to implement, within DOD, a system whereby top

functional executive staffs are primarily focused 4. Chapin, Jerry L., Government and Industry

on creating and managing a system to educate, System Development Modcls: A Review and

train and govern the careers of acquisition pro- Comparison, p. 33.

fessionals. Such a systern would provide PMs and 5. Valenr'te, Judith, and Roy J. Harris, Jr.,

PEOs the functional expertise they need to plan, "McDonnell Douglas, Flush With Orders,

organize and direct programs right the first time Overhauls Management of Aircraft Unit," Wall

and be much less dependent on program review Street Journal, Feb. 15, 1989, p. A6.

by functional managers at all levels. A collateral 6. Quinn, p. 77.

benefit is that programs wi)uld be less exposed to 7 Deutsch, Claudia H.,"Goodrich Finally Gets

the diffusion of responsibility associated with It Right,' The New York Times, March 12, 1989,

committee deciion-making. pp. 1, 8 (business section).

Matrixed, functional, program support person- 8. Bruner interview.

nel should be dedicated to programs through

organizational alignment and incentives. To the 9. A Quest for Excellence, pp. 42, 50.

maximum degree possible, matrixed personnel 10. Quinn, p. 78.

should work full-time for, and be rated by, the 1 Browning, Edgar K., and Jacquelene M.

PM. In some of the Services and many subor- Browning, Microeconomic Theory and Applicadinate commands, functional acquisition tions, Boston: Little, Brown and Co., 1983,

specialists and PMs/PEOs have different chains Chapter 2.

of command. The thrust of this suggestion is to

provide PMs and PEOs the functional expertise 12. The convention was suggested by Dr.

they require, and deserve (dependent on program Elizabeth Pate Cornell of Stanford University in

priority) to plan and execute the program. The several articles dealing with building codes for

policy should be in the form of principles and earthquakes and the dangers of nuclear waste.

goals, not directives, due to the need to provide 13. Dean, James W., Jr., Deciding to Innovate

flex bility to local commanders to optimize the use - How Firms Justify Advanced Technology, pp.

of scarce personnel expertise. Adoption of this ap- 25-27.

36
4

DOD ACQUISITION POLICY

WHAT IS IT?

HOW SHOULD IT BE IMPROVED?

1986 Packard Commission: "The program tion commitments, (3) Elimination of the need to

manager finds that, far from being the follow policy and regulations and reduced reportmanager of the program, he is merely one ing channels for PMs of designated major proo' the participants who can influence it. An grams; (4) the need for a plan for improving proArmy of advocates for special interests fessionalism in acquisition managers; (5) buffers

descends on the program to ensure that it in cost threshholds and milestone dates; (6) limits

complies with various standards for military in SECDEF authority to stretch out programs solespecifications, reliability, maintainability, ly for budgetary reasons; and (7) direction to

operability, small and disadvantaged busi- SECDEF to review all programs transitioning from

ness utilization, and competition, to name development to production by 1993 to minimize

a few. Each of these advocates can demand the demands for very limited funds. These are alh

that the program manager take or refrain statutory attempts to get DOD to stabilize major

from taking some action, but none of them programs. Limiting aspects of these laws include

has any responsibility for ultimate cost, the emphasis on independent Cost Estimating and

schedule, or performance of the program. Operational Testers. Though these latter conNone of the purposes they advocate is straints do run counter to best business practice

undesirable in itself. In the aggregate, as they impact DOD leadership, the general thrust

however, they leave the program manager is for DOD to implement stabilizing features in

no room to balance their many demands, major programs. Some of the committee language

some of which are in conflict with each accompanying the acts indicates congressional inother, and most of which are in conflict with tent to ultimately mandate more stability yet, to

the program'i cost and schedule objectives, wit: (1) HASC and SASC desire for all major proEven more importantly, they produce a dif- grams to be milestone funded; (2) joint authorizafusion of management responsility in which tion conferees desire for SECDEF to make recomeveryone is responsible, and no one is mendations to reduce test time and eliminate

responsible."! philosophical problems in current test approaches.

In this chapter we look at recent congressional (3) The SASC enceuraged SECDEF to develop a

guidance and statute as applies to program sta- system whereby I'Ms and contracting officers

bility then assess DOD's major applicable direc- have appropriate decision -making authority and

tives and instructions, greater impact on the I'B3S process; (4) the Congress chided 1)01 for not linking programs to

s strategy, policy and operational concepts. 2 If the

.ongre.sional Guidance. Though there are s,,everal latter is not considered fair criticism, then DOD

statutes, and implementing regulations (ontrolling; should clear up the appearance of lack ol coninuirelatively detailed aspects of procurement pra(c- ty between strategy, policy, operational concepts

tic(, recent congressional guidance and statute are and sbstem acquisition programs.

riottcably in line with our previous des,-:riptions TD,

of best commercial pra.tiaes as appli's to program [he D)I) Policy

stability: (1) baselining; (2) multiycar authorizea- Next, w. evaluate the key D)OD) acquisition policy

37
which tends to promote instability despite its recommendations to the USD(A) thence to the

stated goal of facilitating stability. The top two SECDEF ensures time is wasted while line manageDOD policy documents dealing with acquisition ment is put through a wringer. These committees

are DODD 5000.1, "Major and Non-major should be reduced and redirected to review and

Defense Acquisition Programs," and DODI advise the DAE but not have any directive power

5000.2. 'Defense Acquisition Procedires." The over programs. For example, they should not meet

former captures, fairly concisely, the essence of with the PM/PEO!SAE prior to and separate

congressional guidance, but with many counter- from the full DAB. Senior functional staff, freed

stabilizing measures. The latter is, as entitled, a from these committees, could then be assigned to

procedures document. We will not repeat the con- proactive work in managing the career system for

tents of these documents but critically identify acquisition specialists, or to PM and PEO staffs.

aspects which appear directly contrary to the ef- (6) The Directive subordinates Acquisition Decifective adoption of best commercial practice in sion Memoranda (ADM) to the PI'BS without

defense acquisition. qualification; PPBS shou!d be subordinated to

(1) Th( 1DO)D 5000.1 directs the policies, pin- ADM baselines trm MS li-on.

ciph and objectives in managing major DAPs be The DODI 5000.2, the second acquisition policy

applid to non-major DAPs. However, the prin- in precedence, is a procedure. If a staff procedure

ciples and objectives are not stated; they should is necessary, and it probably is, it should be an

be, as lower-level staffs tend to overapply detailed internal OUSD(A) SO"; it should not be appolicy and procedrce, when in doubt. (2) The plicable directly to the DOD components. The

DAE is described as an advisor; the SECDEF is bulk of the document directs procedures for

the decision-maker. This appears contrary to the milestones and the preDAB process for which the

Packard Commission recommendations. With the latter should be discontinued. Those enclosures

SI•DEF, USD(A), Service Secretary and SAE in which would still be revelant to the DAB main

the chain of command and authority for defense decision reviews (MS II and IiI only) could be apacquisition, there are six levels of acquisition line pended to DODD 5000.1.

managemnent in DO1) from the PM to the The DODD 5000.45 and 5000.52 are key policy

SECDEF; each layer has a staff checking on the directives directly impacting the culture of defense

efforts of lower managers and staffs. What's ac.uisition. The former establishes baselining,

wrong with SECDEF and Service Secretary per- whereas the latter establishes certain objectives

rnanently delegating acquisition systems decision for acquisition career management. They both

authorily to the DAE and SAE respectively? (3) need strengthening to establish the entnh ty proFive phases, with six DAB milestone reviews are vide authority, accountability, resource control,

directed. This conflicts directly with best business and reasonable flexibility in the management of

practice of two; or fewer go/no-go program deci- defense acquisition programs.

sions; these should be our MS I1 and MS Ill at

maximum. Wl cannot afford, any better than in- This criticism has been brief and direct; there are

dustry, to ecconLdithird/fo~urth/etc.-guess our ap- at least 50 second- and third-tier DOD directives

proved programs. 'I he MS 0, MS I and MS IV and instructions (and hundreds at lower tiers) that

reviews are appropriate but should not be DABs. add excruciating detail to OSD acquisition policy

These reviews should be left to the PEO and user and cascade down to Service staffs who must imcommunities. The MS V is a duplication of MS plement via service directives, regulations and

0 and should be eliminated. (4) Affordability procedures. All these should be reviewed keepshould not be reconsidered at each milestone, only ing in mind to eliminate or redirect are procedures

on"ce; MS I1 ik optimal with adjustment at MS Ill for internal OS1) staff.

if necessary. (5) The ten DA13 acquisition corn- For DOI) to emulate best commercial practices

mittees diffuse responsibility from line manage- will be difficult because tht true solutions will cut

ment and set an example for lower executive deep into our bureaucratic organizational

staff%. ' lue requirement that they use senior staff overhead. Successful commercial companies are

consensus to identify program issues and make lean; 1)O1) is fat. To begin providing effective

38
authority and accountability to acquisition James Ambrose, prior to the aforementioned conmanagement, functional staffs must be removed gressional acts, but which incorporated many of

from program oversight and direction roles, their features. A look at the features of the MSE

"case is instructive to see what good business prac-

"The fundamental intent of the (Packard) tices were employed and several that were not (see

Commission's recommendations is to Figure 4-1). Many techniqu_•c like those attributed

simplify the acquisition system by COn- to best commercial practice were used in MSE

solidating policy and oversight, reducing with the -esult that it has been much more stable

reporting chains, eliminating duplicative than most major DOD programs. However, we

functions and excessive regulations, and will focus on commercial practices that were not

establishing an environment in which pro- employed as they illustrate the essence of some

gram managers and their staffs can operate remaining problems. Do not miss the point that

as centers of excellence. This should allow MSE is exceptional in the degree that innovative,

for a substantial reduction in the total good business practices were used. A reading of

number of personnel in the defense acquisi- the MSE case will underscore the institutional diftion system, to levels that more nearly com- ficulties MSE encountered in emplcying many

pare with commercial acquisition counter- good business practices even with top-level comparts. Eliminating a layer of management by mitment and support. Unfortunately, just because

moving the functions and people of that practices (see Figure 4-1) were used to advantage

layer to some other layer clearly will not in MSE, it would be wrong to assume DOD has

suffice." 3 institutionalized them. Rather, the good techniques used in MSE were due to extraordinary Thus, stability in defense acquisition programs top-management efforts and an unusually long,

bull dwii tu the prtsence of strategic goals which Stdble tenute of key program management

top management has committed to-a full organ- personnel.

izational commitment to on-time completion, and

the clear delegation of top management's authority to acquisition line management to get it done. FIGURE 4-1. COMMERCIAL

Congressional impact upon DOD system acquisi- STABILIZING FEATURES OF MSE

tion is probably exaggerated. Yes, the Congress

does overly micro.ananage projects; but it is less ACQUISITION

likely to step in if it, too. can identify the strategy

goals of the project and, most imnportantly, it is 1. Those employedconfident that the project will deliver a satisfac- o Schedule prioritized over performance

tory product, on time and within cost allowance. * Top management (SAE) Involvement

* Freedom from policy, regulation

An Example, Mobile Subscriber Equipment o Fewer Go/no-go decisions (effectily 3) * Flexibility to use program savings

It can be inferred from our comparisons of suc- * Test schedule flexibility

cessful program management in commercial com- * Competed or,ce for life of program

panies and in the DOD environment, that there * Used nvailable production technology

is room foi improverment in DOD acquisition 2. Contrary practices emgloyed:

policy. Without enumerating all problems (that @ Special Interest and functional staff oversight would take more room than appropriate here), * No buffer to bottom line cost (Congressional cap)

a PM/PEO continual fight for people and travel funds an example of a major Army program ultimately ____________________

designated as a Defense Enterprise Program may

be illustrative. As part of our research, we investigated the Mobile Subscriber Equipment TIhe Under Secretary of the Army made the uni-

(MSE) program and a case was developed which que acquisition strategy work for MSE. The PM

is included as Appendix G. The MSE acquisition and later th. PEO, once appointed, are more like

strategy was arn experiment by then U nder project coordinators than directors. Due to the

Secretary of the Army (USA), the Honorable Army's implementation of the PEO concept and,

39
within AMC, the simultaneous restructuring of "'now" and that top DOD management must

the functional matrix, there was a need for the decide which ories must be accomplished a,,d

PM, with PEO support, to continue to fight for when, and communicate these decisions to the

people resources and travel funds and with senior field.

functicnal and special interest executives to stay Our recommended authority and resourcing apwith the p. oyrdail baseiine and acquisition strategy proach demand that all program participants be

decisions made by the Secretary of the Army directly accountable to an acquisition line

when he approved entering full-rate production manager. These acquisition line managers are few

in 1985. The DEP designation helped force prac- by law; they are: the Project Manager, the Protical trade-off decisions, but they had to be made gram Executive Officer, the Service Acquisition

at the major general level and above (the PM is Executive, the Service Secretary, the Defense Aca colonel; the PF1O is a brigadier general) to over- quisition Executive, the Secretary of Defense, and

ride the institutional biases of the lower-level ac- the President (the SECDEF and Service Secretaries

quisition bureaucracy. These lower-level func- could be eliminated via proper delegation of

tional staffs continue to try to standardize the -- authority). Staff executives and staff officers, by

illities" aspects of the program rather than pro- definition, are not in the line-management chain;

actively applying their innovative, functional ex- therefore, they must not have power to influence

pertise to optimize program success. The PM, Col- programs e -ccuted at lower organizational levels,

onel John Power, has committed to seeing MSE except through line management and then only

through deployment. In doing so, he provides the via policy, not program specific, direction. This

continuity essential to a management system recommendation would remove staff elements

which quickly forgets earlier program decisions. from any review or approval role as pertains to

His tenure as PM, MSE is expected to be 5 individual programs. Staff responsibility must be

years --about twice the norm for PMs and key to create and maintain concise policy so the acprogram participants in the Army. 4 quisition system works for line management, thus

Conclu~ion facilitating the accomplishment of the programs

and the strategic goals which are the domain of

If we in DOD can clearly link each major acquisi- line management.

tion to the strategy supported; if we can show the Each Service has implemented the PEO concept

product being acquired is a practical, sufficient differently, but each approach can work, and

product; and we remain on a practically achiev- work well, if the following inhibitors are removed:

able schedule; we should expect the Congress to

recognize the need to continue necessary funding.

If 1)OD top management can prioritize systems -Staff executives who have direct program imneeded and plan around reasonable funding levels pact such as resource control (i.e., personnel,

for all pi ograms, then the project managers of funds, schedule and other equipment) or program

thorpe truly essential systems can focus on system approval

capabilities and on-time delivery. The authority -- Functional personnel resources assigned and

requirements for acquisition lire-management suc- accountable to other than acquisition line managecess are really just good people-management ment (e.g., directorates of the Services' materiel

techniques. It i* through our people that we con- commands or subordinate commodity

ceive, plan and implement projects. commands).

We have recommended that acquisition line To effect such changes in DOD, which has grown

managers be given clear authority to implement a large number of executive staff directorates, the

approved projects without the intercession of in- executive staffs must be reduced and functions

dependent review authorities and senior staff limited. Also, the Services' commodity or product

bureaucrats, and bc given the functional person- divisions and headquarters, which provide the

nel resources to get the job done right the first functional participants to programs (e.g., engitime. Inherent in this recommendation is the neers, contracting officers, logisticians, testers,

understanding tl. t riot all programs are needed controllers, etc.) must allocate their personnel to

40
acquisition line managers for the duration of need- with more laws, more regulations, more ined services without imposing additional layers of spectors, DOD should concentrate on those

program oversight. The key to an effective tran- things that are done right and use them as

sition for such functional staff elements from pro- models."5

gram oversight roles to program support if to ensure professional development and experience of

such personnel and program managers. This can

be done without major reorganization by the

senior functional staft at each organizational level, Endnotes

once properly led and directed. 1. A Quest for Excellence, Final Report to the

A good beginning would include a total rewrite President, pp. 46-47.

of DODD 5000.1, elimination of DOL, 5000.2, 2. OffiLi of the Under Secretary of Defense (Acand review of all DODDs and DODIs with the quisition), "Legislative Guideline- Data Base,"

intent to eliminate most. Our recommendations January 1989. An analysis and summary of

to senior defense acquistion leaders for enhanc- 1986-&8 Sciiate and House legislation and public

ing program stability are provided in the executive law.

summary. 3. A Quest for Excellence, p. 55.

In conclusion, the 1986 Packard Commission 4. Interview with Colonel John R. Power, USA,

report points out: Project Manager, Mobile Subscriber Equipment,

"Instead of concentrating on the things that January 18, 1989.

are being don,. wrong and trying to fix them 5. A quest for Excellence, p. 42.

41
III

INNOVATIONS IN THE

SOURCING PROCESS

43
III

INNOVATIONS IN

THE SOURCING PROCESS

The previous section dealt with program stability as fundamental property of many successful FIGURE 1ii-1.

commercial practices. The focus was on how CMPA"-

companies internally manage a project in order P-ACTICP

to enhance the project's stability, and correspond- sysTms EN!NMNGo

inglv, the project's chance of success. The manage- LoISn¢C ,Wu

m erit practices described w ere applicable to ,OMATkO -, T

ACOUMI lOft- P001DJCT"O ~ON

projects performed in-house as well as those QUAUTY MWT performed by an external concern (i.e., M'PIVAL'WO

contracted-out). Differentiation between in-house

and external projects was not relevant in Section C

I1, because thIe foLus thtle wa& on piojtct nandge- ___C E

ment practices internal to the company; practices -"- O

found to be surprisingly consistent regardless of

the -ourrp of the project', ..,:,cution. This change, perhaps best described as an evoluIn this section we direct our focus external to the tion toward a more cooperative buyer/sailer relacompany, to the processes by which companies tionship, will be explored fully in this section.

go about procuring or sourcing from outside ven- Specifically, the nature of the commercial

dors, suppliers, or subcontractors (terms which buver/seller relationship will be examined, then

will be used interchangeably throughout). Like some lessons will be drawn for import into DOD's

program stability, this area is a fundamental com- way of doing business. Chapter 5 examines the

ponent of successful business management. In the relationship as it pertains directly to the governcontext of our research model, this change can ment purchase decision, with particular focus on

be characterized as a shift from focus on the how quality is made a viable factor of that

stability 'slice" of the model, to other "slices" sourcing decision. Chapter 6 wili drop a level, and

representing various other commercial practices. examine the relationship as it pertains to purely

Several factors are at work in today's business commercial companies and DOD contractors

environment, making this focus on external alike, as they make sourcing decisions.

sourcing particularly relevant. First, companies Finally, Chapter 7 provides a brief discussion of

are increasingly giving suppliers a greater "share the pervasive influence of government regulation

of the action." In the manufacturing sector the on sourcing, and all other decisions, of defense

amount of "action" placed with suppliers is cur- contractors.

rently 60 percent and rising.i

Second, the entire area of sourcing has been Endnote

extremely dynamic over the last decade, with 1. Leenders, Michael R., and David L. Blenkhorn,

some fundamental changes, particularly in rela- "Reverse Marketing - The New Buyer-Supplier

tionships existing between buyers and se!lers in Relationship," The Free Press, New York, N.Y.,

the commercial marketplace. 1988, p. 8.

45
5

QUALITY SOURCING

FINDING Price is but one element in the purchase decision.

DISCUSSION OF THE FINDING quirements process. In systems programs, the

The Packard Commission, identified the dif-~ ultimate source selecting authority was the proferene inapproacktoward ,icbetiiee porms the i gram manager. Firms tended to employ strong ference in approach toward price between the technical (engineering) background in the purcommercial and defense decision processes and chase department so that they not only knew the

suggested that industry practice could be adapted marketplace but also could understand the

as follows, requirement.

Commercial procurement competition

simultaneously pursues several related ob- Quality in many firms is becoming a total comjectives: attracting the best qualified sup- pany commitment with access and input to suppliers, validating product performance and plier quality data base information being made

quality, and securing the best price...Defense available to more organizations in the company.

procurement tends to concentrate heavily on Firms are developing systems to factor quality perselecting the lowest price offer, but all too formance into their source sejection decisions and

often poorly serves or even ignores other im- are communicating their use of these systems to

portant objectives.' their suppliers.

Throughout the United States there is renewed Purchasing involves a complex ranking and

emphasis on the importance of quality in all evaluation of objective and subjective factors.

aspects of the manufacturing and production pro- These factors may be addressed explicitly in the

cess. Within the Department of Defense, this em- form of objective criteria or implicitly based upon

phasis has been shaped within the framework of judgment or taste. Personal, commercial/inTotal Q•uality Management as developed from the dustrial, and governmental purchases all adhere

works of W. Edwards Deming, Dr. J. M. Juran to the "classical" definition of the purchasing

l r.B .- ..- - th'is concep 'V bjectiP. =o

successfully applied first in production and Buy materials and services of the right qualimanufacturing organizations, it is not as clearly ty, in the right quantity, at the right price,

defined to defense purchasing. In defense pur- from the right source, and at the right

chasing there are countervailing forces based on time.2

law and regulation which restrict its full The extent to which selection of the "right source"

implementation. may be based on subjective factors accounts for

lVe found that ownership costs and dependable the differences in personal, comnmercial/industrial

quality are the dominant variables in commercial and government purchases.

buying decisions. Purchase price was not ignored, In personal purchases, in contrast to those in the

but it was a variable which would be traded off commerciali industrial and governmental environfor desirable features, uniformity and ments, selection may be completely subjective

dependability based upon a mental evaluation of how a given

Purchase decision-making in support of systems product meets the personal requirements of the

programs was decentralized and geared to the re- individual. The selection process is likely to be

47
unstructured, may change over time, and only Recalling the concept of competing utility funcneeds to satisfy the individual. tions from Chapter 3, we can see the potential of

By comparison, in most government and indus- competing functional goals and objectives which

trial offices, purchasing is structured in method, may lead to compromise solutions.

centralized to some extent to provide consistency. The flow of information becomes complex: it is

and open to audit and review. In government and difficult to design a ieedbac.k loop which allows

industry, the purchasing office takes written re- the user, purchaser and quality assurance inquirements from the requesting office. matches dividuals efach to accommodate each other's functhem with available suppliers, and negotiates the tion and incentives. As organizations become

most Id,-'orabie terms for the purchase. Their suc- larger, with centralized purchasing, the distances

cess in selecting the right supplier is important to and barriers giow. In the study of government

the efficiency and effectiveness of an. firm or contracting officers and industry purchasing

government agency. However, despite certain agents previously cited, there was a definite corcommon procedures, there are fundamental dif- relation between the size and centralization of pu,--

ferences hetween government and cormmercial chasing and the quality information which the

organizations in terms of theL,: .- accounta- purchaser had at the time of making the source

bility, process complexity, and objectives.' selection.

These ditferences result in a significantly different

approach to value of quality and the role it plays Within this model, purchases are based upon the

in the purchase decision. purchaser's evaluation of price, quality and

It is useful in looking at the sourcing decisi(,n to ownership costs. Price is a concrete decision

develop a simple. conceptual framework of an measure, bugtQaiyanlieylecsdrtosa- which represents an outflow of today's

organizational purchase decision. Such a simple budget. Quality and life cycle considerations account for later year expenditures which may not

model includes only a user, purchaser, vendor and be visible at the time of the particular purchase

quality assurance inspector. The loop begins and decision. Incentives placed on the purchaser in the

ends with the user. The purchaser and the quali- form of business practice are extemely important.

tv assurance inspector act as the user's agents. This3 If such incentives emphasize price reduction, this model is diagrammed below: reduction may come at the expense of quality or

ownership costs. Trade-offs made by the purchaser among pi ice, quality and ownership costs, FIGURE 5-1. THE FORWARD may conflict with user preference. This problem

PURCHASE FLOW is compounded because often no accepted measure

of quality exists.) By comparison, price can be

Purchaser easily and accurately measured.

Recognizing problems associated with obtaining

User -- Quality Assurance --+ Vendor a workable definition of quality, competing utility

functions for the players in the model, and the

need for a systematic approach to improving

Each individual in the purchase flow has multip!e quality, the following convention is developed.

obje( tives and inmentives For ,simplicity, we con- Along the X axis is the sophistication in the quality

side ,only the most significant. The usinfo mation available. The Y axis represents the

(Iqiremene. a budget S" and is responsible for the ~use of the info~rmation in rmaking source selections.

(osts ot oUvning the item. The purchaser must conform to established organization practice, convert In Quadrant I, the organization has a limited

the requirement into contract terms and evaluate quality collection system and no objective way

bids received from vendors. The vendor must of evaluating quality when it makes source selecunderstand the requirement, produce the item and tions. It must rely on subjective emphasis on

be paid. Quality assurance inspects the item to quality and hope that its suppliers will provide

ensure that it meets the terms of the contract, adequate quality.

48
in data collection and a willingness to use it.

FIGURE 5-2. APPLICATION OF Unlike Quadrant II, the bid factors are based on

QUALITY DATA a wide range of integrated data, closely monitored

and updated. It seeks to systematize the professional evaluation discussed above into a method

..- which is objective and perceived as fair.

, • .For most large firms, it would be preferable to

o . S""'- operate in Quadrant III, however for the reasons II Ul • _ already discussed most firms fin hmevsi

, ,- - - - Quadrant IV. The following are some examples

S I IV ® of systems in use.5 *I I

-Company A

_, This large firm has a significant quality-control

lo ' organizat:on and a large centrally-managed pur- 000o,1MM M ,O 0•.•,V,• chasing department For most purchases,

historical quauity information is available in

In Quadrant I!, while there is an a :nce of corn- addition to price information for review by the

prehensive qual ,y 'nformation, there is a com- purchasing department official. Selection of a

mitment to use that which is available to make higher-priced item can be made only with the

future selections. Such systems are generally tied approval of the purchasing supervisor.

to a single measure such as schedule or are based In one division of the business, a comprehensive

on inspections of supplier facilities and pro- supplier qualification and rating program has been

cedures. BIecause they are based on limited or establishcd. It looks at the quality cotriol

incomplete information they may measure and documentation and system which is installed at

emphasize measures not accuiately reflecting the suppliers' plants. Based on an annual review the

quality of the material being received. Type I vendor is given a rating factor which is then

cases, however, provide a strong indication to applied to all purchases from that vendor. The

suppliers that quality is important and the firm

will u,,: the data available to discriminate between price basis is adjusted by this quality factor.

its suppliers. -Company B

Quadrant I%" reflects an objective quality data col- This large organization has an elaborate quality

lection system, but little use of the information collection system which records the results of

In making selections. There are two primary facility certifications, on-site inspections and probreasons for its lack of use in making selections. lems reported on receipt or users. Purchasing is

First, this information is often collected in different a separate organizational entity. Source selections

parts of the organization and not integrated in a are made based upon competition with only

fashion which permits easy application in pur-- limited prequalification of the suppliers, and withchase decisions. Second is the queLstion of profes- out consideration of past history.

sional competency and relationship to suppliers.

An experienced purchasing agent knows the -Company C

market, coordinates with the manufacturing The company implemented their quality system

elements of the firm, monitors the performance in the early 1980s and following several refineof suppliers, and enjoys ihe confidence of manage- ments, 40 percent of its production purchases are

mnent in making the subjective evaluation of which made through the system. It is based on an onsupplier will be selected. Such experienced pur- line computer system which contains information

(hasers rnay not need a systematic quality-based provided by vendors as well as past company purselection system because they subjectively make chase data. It concentrates on items with a signifiqu..'ity-basud seiections. cant dollar volume or for commodities which

Quadrnt !11 shuws a high lcvel ot sophistication when taken together are significant. A value

49
analysis approach employs commodity-teams -Company F

early in the requirements process. These teams This large firm is developing a vendor perforinclude people from engineering, purchasing, mance improvement system which stresses immanufacturing, and marketing as well as vendors, proved communications between buyer and seller.

end users and customers. The result is a total Early involvement in new product development

systems approach for those items which meet the projects by potential suppliers, supplier process

crteria for inclusion in the system. Th- company controls including statistical qualification of probelieves that it is achieving cost savings and ob- cesses, and delivered performance measurement

taining better quality items, are included. It is ar. integrated system which will

provide the firm with the a'-ility to rate a sup-

-- Company D plier's performance accuratei y. However, it does

This large firm has long collected quality infor- not employ a bid factor to adjust the relative

mation from various sources. Recently, its efforts prices between suppliers. Placing the six comhave focused on the integration of this informa- panies on the conventional diagram, most fall in

tion into a computer data base which is jointly quadrant IV. The ability to use quality informamaintained by purchasing and quality and which tion to adjust prices is not common. The efforts

can be used by the purchaser when making a made by Company D to move in this direction

source selection. The system produces a supplier seem to provide the most promising example for

evaluation rating ranging from outstanding to government procurement since the m1•ethod of

unsatisfactory. Elements factored into purchase selection will be open and objective.

decisions include past delivered performance and

a gaduated assessment of any problems with the

suppliet. Theassessment becomes progressively FIGURE 5-3. APPLICATION OF

more severe as problem discovery moves from the

supplier's self-identification to a problem reported QUALITY DATA

in an installed piece of equipment.

Presently, the rating system requires substantial Y

justification if a source selection is recommended

for a marginal or unsatisfactory vendor. Likewise, ,

substantial justification is required to select other 0

than a low bidder. It is planned that weighting • II III

factors which will adjust the price basis to account 1.

for past quality performance. I

-Company E

A vendor rating system was established to LOW loom

systematically evaluate price, delivery and quali- W•S,,,•, A ,,,

ty. Its goal is to allow the purchasing agent to

select the best vendor based on past performance.

It is purposefully simple to ensure that suppliers

understand the requirements. Each bid price is INHIBITORS

adjusted by applying evaluation factors to The policies, pressures and practices of governestablished prices. Evaluation of delivery ;• 100 ment purchasing places the DOD source selection

percent is based upor, receipt plus or minus 7 days process in a unique environment. Individual

of the established date, 75 percent if received 8-14 source selections must be made fairly and opendays early and 50 percent if received 8-14 days ly with each being defensibly based upon legal and

late. Quality adjustments to this rating are based technical criieria which can be demonstrated to

on sampling of incoming p;,rts, and input from auditors, unsuccessful bidders and other interested

the company's quality control department. parties.

50
A definition of quality in the purchase decision "quality audits," is next to useless. Unless the

is murky. vendor is a complete and obvious disaster

Defining quality is complicated because in many area, it is impossible to know whether their

organizations, including the Department of quality system will provide the proper conDefense, quality organizations have been separate trol or not. You can only know by being infrom line management. Major advocates of quali- side of the vendor's company." 8

ty have focused on the importance to overall cor- The solution he posed to his problem was that

porate goals of a strong quality organization and quality control personnel should get involved

economic/profit benefits from a directed approach earlier in evaluating key items that will be bought.

led by these quality organizations. Such an ap- Such actions are evident in many commercial

proach concentrates primarily on improved firms.

manufacturing methods and the need for top-. Dr. juran's definition of quality is "fitness for

management support and has a twofold objective: use." 9 This determination is made by the usei,

(1) The scope and authority of the quality con- based upon features the user recognizes as

trol organization should be expanded. beneficial. His development of the concept of

(2) Top management must become personally "fitness for use" is quite comprehensive. He

involved in promoting quality, describes the interrelation of quality parameters

Since this emphasis is primarily outside the pur- in a "tree" leading from fitness for use through

chase function and organization, it is not surpris- quality of design, quality of conformance, availing that hathprniladoaepridonya the principle advocates provide only a ability, of twelve and comoonents.'° field service to a further breakdown

minimal treatment of the purchase function.

Mr. Crosby, in his book Qualify Is Free,6defin- The comprehensive nature of Dr. Juran's work

ed quality as "conform ance makes specific application complex. Represen- to requirem ents." H is t t v f t i i e m st ef l o i g

major thesis was that the cost of scrap, rework, tative of dilem at asis t following

service, warranty, inspections and tests which For important purchases it is well to use

result from "non-conformance" cost much more multiple sources of supply. A single source

than efforts to produce products which "do not can more easily neglect to sharpen its comfail in the field." However on the subject of pur- petitive edge in quality, cost and service.

chasing quality goods, Mr. Crosby devotes only Despite the evident advantages of multiple

two pages ,)f his work. He describes the futile ef- sources, there is an enormous extent of use

fort as follows: of single sources .... These operations are quite successful in using monopolistic "Traditionally purchasing's job has been to quite sucsl incusi monopolistic takean rdercontruced y soe ohersources of supply because they solve their

take an order constructed by some other quality problems through a combination of department and place it. The operation has managerial tools."

not usually been involved in whether the

item specified offers the best purchasing Dr. Juran's all-inclusive approach typifies the difopportunity. The shortest time lag in the ficulty in quantifyinF and measuring quality in

operation is usually spent searching for the purchased goods and materials. In a later book,

best supplier in terms of quality, cost and Quality Planning and Analysis,' 2 he includes a

delivery. Most of the time is spent in prod- chapter on how to foster cooperation with the

uct development or conceptual design. Pur- vendor without offering suggestions other than

chasing has little opportunity to do a selec- two inspection sampling techniques. Dr. Juran is

tion job, and quality doesn't really know perhaps the best advocate of the importance of

how to help them."7 a strong quality control organization, but like Mr.

Mr. Crosby's assessment of the utility of the tradi- Crosby, used in purchasing he provides quality no objective supplies. measures to be

tional audit and inspection approach was equally

pessimistic: Dr. Deming is perhaps the most widely-known

"A tour of potential suppliers, conducting and respected person in the field of quality. He

51
is credited by many for the successful implemen- attribute possessed by a product. As in

tation of a tota! quality approach in Japanese the amount of cream in ice cream it can

manulacturing.;3 He does not try to provide an be assessed objectively and is based on

operational definition of quality. Instead, he views more than preferences alone.

the concept in terms of who should judge quali- The User-Based Approach begins with

ty. The closest he comes to defining the term is the premise that quality "lies in the eyes

in describing the difficulty of the task. of the beholder." Through maximizaThe difficulty in defining quality is to tion of the composite individual

translate future needs of the user into mea- preferences a "proper" quality is detersurable characteristics, so that a product can mined. It is subjective and rooted in

be designed and turned out to give satisfac- consumer preferences.

tion at a price that the user will pay... .The The Manufacturing-Based Approach

quality of any product or service has many focuses on engineering and manufacturscales. A product may get a high mark in ing practice. It identifies quality as

the judgement of the consumer, on one scale "conformance to requirements" and it

and a low mark on another. 1 is equated with meeting specificatloib

Dr. Demings thesis is that only a total approach or making a product right the first time.

to quality will be successful. In his "14 Points for l-he Value-Based Approach defines

Management." a comprehensive cultural change quality in terms of costs and prices.

in operations is advocated; however, the method Quality provides performance at an acof accomplishing the change is left to the manager. ceptable price. The phrase "affordable

Dr. Deming's focus has been on the benefits to excellence" summarizes the dilemma.

top.,anagement of adopting a total quality man- There are no defined limits and no

agement program. While he fails to provide a means of application.

specific process, the success attained by firms

which have adopted hs methods make it The five approaches often conflict and, depending

on the perspective taken, lead to disparate conOf Dr. Deming's fourteen points, two deal with clusions. Under the product-based definition of

the purchase of items from suppliers. They state: quality, we expect to pay more for quality because

# 3. Require statistical evidence of process we expect better materials, workmanship and

control alonv with incoming critical parts. inspection were applied to achieve this quality.

# 4. Thu requirement of statistical evidence Theoretically, from the product-based paradigm, f Tprocess control in the purchase of critical there should be a positive correlation between the

parts will mean in most companies a drastic price of a high quality item over one of lower

reduction in the number of vendors, with quality. This is a marketable attribute which,

whom thev deal. regardless of whether it is based upon fact, reputation, or simply impression, can be applied when

David A. Garvin in a 1984 Sloan Maniagement marketing under the user-based perspective. The

Review article' 5 reviewed five approaches to lack of precise information on the true attributes

defining quality. His definition framework is sum- of the product encourages managers to set higher

marized below: prices to "imply higher product quality.'"lb

The Transcendent Approach is the Within the user-based paradigm, quality is art atphilosophic concept of "innate ex- tribute by which consumer goods are marketed.

cel!ence" which is both absolute and Many products are labelled iising adjectives such

universally recognized. It cannot be as "choice," "select," "prime," "superior," or

analyzed but is recognized through "distinctive" to demonst-ate the perception that

e'xperien:ce. quality is important and valuable. Perhaps

Tric Product-Based Approach focuses nowhere else is quality more extolled than in the

on the quantity of some ingredient or automobile industry. For reasons beyond the

52
scope of this research the American automobile provement, abandoning "minimum acceptable"

manufacturers lost considerable market share to quality, are phiiosophical shifts which have mathe lapanese and German auto makers on this ior implications for defense acquisition practice.

issue."' However, slogans such as "the quality The operational definition of quality which was

goes in before the name goes on," and "quality used to develop a plan to implement Dr. Costello's

is job 1" indicate a focus on thk manufacturing- approach in DOD, was:

based definition of quality. Ford Motor Company

adopted a "detect prevention" approach to qual- Conformarce to correctly defined reity which while manufacturing based, has yield- quirements satisfying customer needs.2"

ed dramatic improvements and boosted Ford's This definition closely resembles a combination

standings in consumer quality ratings.' 8 of those of Mr. Crosby and Dr. Juran. It was also

Numerous studies have shown that in many coin- the most commonly cited definition by industry

suier products people ,.vill pay a premium for reai and government contracting officials in a survey

or perceived quality." In such simple items as a conducted during the Summer of 1989

pen or a pencil, suitable value-based products can Cooperation and Competition Are Mutually

be found for under a dollar, while there are also Exclusive

many value-based products marketed at a much Companies are dealing with fewer suppliers. This

higher price. Production management and qual- is not an abandonment of competition but a

ity sampling, techniques which operate under the r,,,.onitin of its limits Practices such as Just-inmanufacturing-based detinition can ensure that Time ()IT) and Material Requirements Planning

the established quality standards for both the (MRP) depend on reliable deliveries of uniform

Number 2 wooden lead pencil and the precision quality from suppliers. Performance information

drafting pencil are maintained. However, the is being collected on suppliers and is beginning

nrernium that will be paid for quality is deter- to be used in the purchase process.

mined by the market mechanism within the user- In an interview with Dr. Broedling.23 she ex- based definition.? na ntriwwt D.Bodig.' h x pressed the conflict in terms of the bi-polar model

No concise view of defense acquisition quality illustrated here:

emerges, rather one can infer, based on organizational structure and implementing policies. Dr.

Robert L. Costello, former Under Secretary of FIGURE 5,4. VIEWS TOWARD

Defense for Acquisition, in establishing a Total

Quality Management Program for the Depart- ACHEIVING BEST VALUE

ment argues that efforts toward a continuous improvement process are necessary. The following

excerpt from Costello's speech to the Defense VALUE

L.ogistics Agency' Commanders' Conference in

November 1987 establishes his desire to push for

a change in focus:

For much too long we have been following COMPETITION COOPERATION

the concept of "minimum acceptable" quali--

ty. America's manufacturers and our maintenance depots have pursued this concept One pole is centered on competition and the

with the placid resignation that a persistent positive effects it has on price and the other

level ol errors, perceived as irreducible is a cuntered on cooperation as the most important

way of ifet .... The process should continu- in quality decisions. The benefits of each can be

ou,,iy strive for improvement rather than illustrated by analogy to team sports. Individuals

accept a predetermined level of on the team must cooperate rather thar compete

imperfection.', with each other to be successful while they are

simultaneously competing rather than cooperating

The con(ept of continuous efforts toward im- with their opponent.

53
Dr. Deming views competition on a much larger curement overemphasizes the importance of price

scale than an individual purchase decision. Corn- intensified. While not criticizing the intent of

petitiveness in the international arena requires CICA, the Packard Commission identified three

cooperation in the many small purchase decisions problems with its implementation by the Departwhich impact a firm's product. What emerges is ment of Defense:

nut wide-open competition for each item but a (1) Interpretation that the government must

limited compctition in which repeat business, buy from the lowest price bidder

stability and product improvement are emhsie.4 (2) The notion that CICA precludes qualification criteria, consideration of

There is a definite conflict between free and open technical expertise, or life cycle costs

competition (required by law in government pur-

.hasing' and the cooperative concept. Dr. Deming (3) Tc e resulting focus on the number of

esplained the justification for limiting suppliers competitions rather than the succeso the

a' tollO's: competition achieves in terms of reduced

W prices for current items or better products. e c a n n o l on g e r l e a v e q u a l i t y a n d l p r i c e t o h C o m s i n c C IJ C t a t e f u l p e -

the Ioices of competition -- not in today's The Commission concluded that the lull potenrequirements for uniformity and reliability. tial of CICA could not be realized until these probPrice has no meaning without a measure of lems were overcome.'

qtulit'.' kving ptrchast-d. American industry Recommendation F of the Packard Commission's

and the U. S. Government are being rooked final report was to "Increase the Use of Competiby rule,, that award business to the lowest tion" which was explained as follows:

bidder.-` Federal law and DOD regulations should

The recent awakening of the importance of quality provide for substantially increased use of

in Atnerinan products has greatly expanded commercial-style competition, emphasizing

writings in the field. Most authors, in discussing quality and established performance as well

quality, focus on application of one or more of as price.

the principles discu-ssed by Mr. Crosby, Dr. Juran

and Dr. Deming and adopt a "conformance to re- In the government, procurement awards are made

quirerents" type of definition. Those attempting within an environment influenced by history,

to deal with the role of purchiasing focus on reduc- social legislation, budget pressures, a distinction

ing the number of suppliers and increasing the between price and cost, specification complexilvel of cooperation between the requiring and ty, a definition of what distinguishes suitability

supplying comnpanies." from gold-plting, a preference for fixed-price

contracts and a preference for competition. InThe dominant role that price plays in government dividually and collectively, these environmental

purchascs stifles creativity and innovation. Ob- influences may skew any procurement decision.

jective evaluation, as practiced in government purchasinig, requires that there be little innova- It is apparent that the theoretical foundation for puchsig euiestatthr b ltteinov- obiective quality measurement is riot established-- tion in the suppliers' approach because the corn- oicieqaiymaueeti osalse petitive decision procrss becomes one that is based well enough to facilitate objective evaluation of onpriv-, lir. arry becdesrie this based quality factors in either the government or com- onpric. Dr. I larry Page described this process mercial/iridustrial environments. The principle as follows:

authors in the field of quality: Mr. Crosby, Dr.

It has b'come traditional practice in goern- Juran and Dr. Deming fail to provide obje( tive

mont to write pur(.has' specifications in such methods of obtaining quality purchases. Current

a wav that any, potential tupplier can pro- conventional wisdom in obtaining quality is to

(luce the iteni, and award can be based upon work toward development of long-term symI,,west price.,'; bionic relationships with suppliers. Such relatiorStice d--,,s,!ge of the -ompetition-In-Contracting ships are impossible to attain under the current

/,\.t ý(_I( A/ in 198,t the view that defense pro- environment of government rules and practice.

54
SUGGESTED AREAS FOR IMPROVEMENT DOD also contribute to the need not only for an

On-Line Contractor Performance History File on-hire contractor performance file but irnThe first sCp in1 usiig cualjt, information 1n mak- provements in quality data feedback. However,

Te, source su tepion I-, to iualty itoavaila tion te - several examples of attempts within DOD to ing,, source slcletions i, to make it available to the apply quantitative past performance to source

contrOictnh ol ice. The elements of the iile need selections should be noted. For example, the "Blue

t, be established and should inqude indices for Ribbon Supplier" systems being established in the

price.e delivery, and reported quality problems. Services and DLA recognize a supplier's past perSecond, the ability to input and access the tiles formance and apply a percentage cost bonus in

throughout DOD must be estibhished. A partial subsequent source selections."

net will not be sufficient, since it will fail to pro- A Variable-Incentive Specification

vide the! objective information needed eventually to make source selections. The current method of establishing a minimum

TI.hird, nce the network is tun( tioning, quality SpCification Which, it satisfied, permits the selec-

-atir', bce he estwrblishd to adjust bid prices to tion to be made based on price, should be selec1flCt, the Va.LI' associated with variations in tively replaced by a method through which perCledLd.'C. quealie aoroather puth vmariefeatures. in formance specifications define the value of I variable features. Performance feature variations

"lheret are several innovative tec1hniques being would be evaluated using a preestablished and

tried to implement such a system. We are aware published cost,' performance criteria.

Of efforts being sponi-()red by the Defense Logistics Such a method would preclude the need to "gold

.6 .n( ,'v., and the Services: but. they are limited "itf plate specifications. It would provide incentives in scope, not exploiting the potential for mo'e a.- for contractor who have better ways of meeting

widratesprread ur,,dnent, aridh ieentiaand their the requirement to be selected over contractors widespread acceltance arm aiplicatien and their who barely meets minimum requirements at the

ahilit,., to vi h',tand administrative protest. lowest cost. Presently there is little incentive for

Quantification of Non-Price ractors a contractor to innovate or exceed the

There is a need for a method to quantify evalua- minimum. 32 Such a focus on low price makes the

tio•r of factors in addition to prike. Adapting the rules of competition easy to apply, focusing prindimensions of the quality tramework established cipally on price, with results such as those

by David Garvin, ii is possible to segment qual- reported in Thi' Washingtoti Post:

ity into dimensions which could be weighted,

raned and evaluated. A quantifiable. auditable The DIeferise Department inspector general's

and defensible means could be dcveloped for the, (Afice, testing random samples of parts

001) contracting oftiicer to use when evafluating bought by the Air Force the past two years,

s,,ur(.e selec.tions.-"-' The challenge is to develop estimated that as much as 98 percent o.' the

an ,)bj(e(tiv(. quality system wvhich Car, operate ef- money spent for the spare parts surveyed

Wc _ n t..'eyhe delen',.' acquisition ..rv•irr'nment went for items with majnr or minor defects. ' A revie'.' ot the regulatory and policy directives

(",talhisi, ed n,)specif..il, prohibit;on to tihe use ,)1 (j uatlit ied no rie lac p- to , 1 he ' l' spc ii( ally .' () ,hilt the i'mpihasis from price competition, it

si ti'set lhit soru' sletlc J on', are to) be nah.de based is inmpoi tant the vendor recognizes that something

m• pri(t.e ard other facito s. "Ieli foas tt r, th i Ii than prici will go into the 'jourc.e sclV tiollack of appllcatior is :he Li. (it ao ;c(nerally ac- th~at there iwill be an incentive provide, for

ceptable, theoretical (:riteria for quality. Measure- du'liveiing a Ibetter product even at a higher 1; ;(i..

munt ot quality is identilied consistently as a What makes a product better must be established

majonr 't uinbling blh.k. As discussed earlii,, thi, clearly in the solicitation, as must the valuIe of the is bI'Uau'e any system rn'quit ing inf)rmation can incentive. This (an be.- viewed it terms of percent

Oniy b'e as gooud a, the iiform.ation input. The improvement in thi designated performance e.ei'roblems assucialedl with quality feedback ito ment for a percentage difference in price with an

55
PERFORMANCE QUALITY FACTOR SPGUREC5.ATIO E An aircraft program has a need to reduce weight SPECIFICATION of installed equipment. Assume the current standard communications radio weighs 10 pounds and

costs $100, and there is some value for a reducP tion in its weight. The current contract method

El would specify 10 pounds or some lighter weight. R I

F - I Contractors would then seek to minimize costs

0~ I v to meet that specification, perhaps ignoring weight

"M savings which might cost "a little more."

N X Simplistically, the proposed quality factors conN

C 'tract would be structured as follows:

QUALITY FACTORS CONTRACT

% ,COST T MAX SPECIFICATION

All other performance specifications are unchanged. An incentive of 10 percent of total

price for each pound less than 10. Maximum

price incentive is 40 percent.

upward bound as illustrated in the following Assuming that three bids are received which

figure. satisfy all the specifications as follows:

This can raise the specter of "gold plating" and Company A Company B Company C

too ,nuch subjcctivc judgment, l lowvti, di..uS- W'eight 10 8 6

sions with senior DOD contracting officials con- $150

firmed that, provided the relationship was clearly ,ld in the solicitation and applicable to all Selection would be for Company B, because its

vendors, there is no impediment to its adop- price is within the range specified for the incention." The following examples illustrate the tive and beats the cost/performance trade-off

concept. ratio. The product proposed by Company C

would not be selected because the preestablished

weight/price relationship is exceeded and it proFIGURE 5-C. VARIABLE rides less relative benefit per extra unit of cost,

SPECIFICATION RELIABILITY QUALITY FACTOR

Reliability improvement may also be desired for

the same ratio. If the current ratio has a Mean

% Time Between Failures (MTBF) of 100 hours, a

c i T similar relationship could be set where a 10 perE " "4 cent improvement in MTBF would be valued at

F 5 percent of the acquisition price. The contract

R. . solicitation would be structured as follows:

A1 QUALITY FACTORS CONTRACT

c- -- SPECIFICATION

E-jA. i All other performance specifications are un-

____... -' changed. An incentive of 5 percent of total o16MAX -50 ACOST price for each 10 percent improvement in the

MTBF up to a maximum of 60 percent price

incentive.

Assuming that three bids are received which

56
satisfy all required specifications, they would be to understand the relationships proposed and the

evaluated as follows: evaluation criteria.

Company A Company B Company C Endnotes

MTBF 100 110 200 1. The President's Blue Ribbon Commission oit

Price $100 S115 5150 Defense NManagenment, A Quest for Excellence,

Final Report to the President, Washington, U.S.

Using this specification, the selection would be Government Printing Office, June 1986, Sec. F, Company C's product, p1.

2. Dobler, Donald W., Lamar Lee, Jr., and

FIGURE 5-7. VARIABLE David N. Burt, Purchasing and Materials

Management, 4th Edition, New York, McGraw SPECIFICATION Hill, 1984, p. 15.

3. Sherman, Stanley N., Government Procure-

% ment Management, 2nd Edition, Gaithersburg,

P I Woodcrafters Publication, 1985, Chart 1-1. E/

R 4. Many specific models exist; one prepared for

F I shipbuilding was done by George N. Sideris, Life

R Cycle Cost Guide, Oct. 22, 1986.

M i .

A " 5. Due to the critical assessments of these ex- N are ot/ir.

C ' arnples, they are not dire.

l 6... Crosby, P.B., Quality is Free, New York,

* MAX McGraw-Hill, 1979, pp. 12-20.

% .• CO8T 7. Ibid, p. 73.

8. Ibid, p. 74.

9. Juran, J.M., Quality Control Handbook. 3rd

GENERALIZED APPROACH Edition, New York, McGraw-Hill, 1974, p. 2-2.

10. Ibid. p. 2-9.

From examples discussed, the contract proposal

process has become more complicated for the sup- 11. Ibid, p. 10-5.

plier. No longer will attainment of the minimum 12. Jurzn, J. M., and F. M. Gryna, Qualtiy Planspecification be sufficient. A product which ex- ning and Analysis, 2nd Edition, New York,

ceeds the specification in a quality factor con- McGraw-Hill, 1980, pp. 227-247.

sidered valuable to ihe requestor may be selected 13 Siegel, James C., Managing with Statistical

over one which meets the specification. The ex- Methods, SAE Technical Paper Series, Warringamples cited are simplistic but not impractical for ton, Pa., 1982. Through the Union of Japanese

application. Of course there is the potential or Scientists and Engineers, Dr. Deming became a

adding so many incentive systems that the pro- national celebrity in Japan. Japanese manufaccess would become one of linear programming: turers created a national competition for quality

but, even in this case, the evaluation of the criteria and named the award after him.

would b(' based objectively. It provides a means

to change the focus from lowest price to one of 14. Deming, W. Edwards, Out of the Crisis,

best value. Cambridge, Mass., Massachusetts Institute of Technology, 1986, p. 169.

One of the major distinctions between the governmnent and commercial purchasing practice is that 15. Garvin, David A., "What Does 'Product

this relationship must be clearly stated in the re- Quality' Really Mean?" Sloan Management

qucat for bids. Because of the absolute require- N,•icz,., Fall 1984, pp. 25-28.

ment for fairness, all interested parties will need 16. Riesz, P.C., "Price Quality Correlations for

57
Packaged Food Products," Jouraal of Consumer 25. Deming, W. Edwards, National ProductivAffairs, Winter 1979, p. 234. ity Review, Winter 1981-82, 1, 12-22.

17. Callahan, J.M., "The Deming Era Arrives in 26. Sloan, David, and Scott Weiss, Supplier InDetroit, Automotive Industries, Vol. 191, provement Process Handbook, Milwaukee, Wis.,

November 1981, pp. 45-47. American Society for Quality Control 1987, and

18. Dyer, Davis, Malcolm S. Salter and Alan M. H. James Harrington, The Improvement Process,

Webber, Changing Alliances, Boston, Mass., Har- How America's Leading Companies Improve

yard Business School Press, 1987, p. 234. Quality, New York, McGraw-Hill, 1987, Chapter

19. Milgrom, Paul, and John Roberts, "Price and 9.

Advertising Signals of Product Quality, The Jour. 27. Page, Harry, Public Purchasing and Matenal of Political Economy, Vol. 94, August 1986, rial's Management, Lexington, Mass., DC Heath

pp. 796-821, and J.T. Penttinen, "The Role of & Co., 1980, p. 194.

Price in the Perception of Product Quality," Ph.D. 28. Ibid, p. 2.

dissertation, University of Michigan, 1981. 29. Interview with Mr. Cheasa, Director of Pro20. Johnson, Marvin M., and Ruoh-Shin Lo, "An curement, Defense Logistics Agency, April 21,

Investigation of the Effects of Quality Deter- 1989.

minants," 1985, Annual International Industrial 30. Perkins, Charles A., "Identifying, Ranking

Engineering Proceedings. The authors studied the and Evaluating Quality Factors for Use by Navy

relationship of consumers in their perception of Contracting Officers in Making Source Selection

quality. Decisions," Ph.D. dissertation, The George

21. Costello, Robert E., Defense Logistics Agen- Washington University, 1989.

cy Commanders Conference, Homestead AFB, 31. Demers, W.A., "Grading Contractor PerforNov. 4, 1987. MCaZIL.," M:litary Forum, May 1988, pp. 38-42.

22. Joint National Security Industrial Association Avationa ind Industrial y Association 32. Groocock, J.M., The Chain of Quality, New and Aviation Industrial Association Workshop, York, 1986, p. 182.

"DOD Total Quality Management Strategy,"

Dec. 16-17, 1987. 33. Moore, Molly, "Report says Air Force Was

23. Broedling, Laura, Ph.D., Interview Nov. 11 Cheated 5, 1989, on p. 3.Parts," The Washington Post, Nov.

1987. Dr. Broedling is a career civil service

employee who has the lead in the Navy's im- 34. Interview with Mr. Richard Moye, Acquisiplementation of Total Quality Management at its tion Policy Analyst, Office of the Assistant

aviation depots. Secretary of the Navy for Shipbuilding and

24. Buffa, Elwood S., Meeting the Competitive Logistics, May 6, 1988.

Challenge, Homewood I1, Dow Jones-Irwin,

1984, pp. 33-34.

58
6

SOURCING BY DOD CONTRACTORS

FINDING Companies are adopting more cooperative relationships with their suppliers.

DISCUSSION OF THE FINDING partnerships, etc.), but the central elements are

kWe have examined, in some detail, the nature of common. All are long-term arrangements with a

the buyer/seller relationship in the commercial small number of high quality suppliers; relationmarketplace, with particular emphasis on how ships characterized by mutual dependence and

that relationship is evolving to improve quality, open communications.

This chapter continues that examination, look- Note that our focus in this chapter is exclusively

ing specifically at the buyer/seller relationship in on relationships between companies and their supthe context of commercial companies and their pliers. What we do not discuss is the "teaming"

suppliers and subcontractors (a.k.a. sourcing). We of major companies to spread the risk and return

established the prevailing commercial practices in of a major development effort. Also not discussed

thi. ar,-a. an_ examined hcw they may differ for is a company's interna! "make-or-buy" decision.

companics operating under the umbrella of a While "make-or-buy" is a critical element of any

DOD prime contract. Our premise at the outset sourcing decision, we examine here relationships

was that defense contractors are uniquely con- external to the company.

strained or inhibited from using certain innovative To fully understand the forces driving companies

commercial practices in sourcing. toward cooperative relationships with their supOne need not look far to discover evidence that pliers, it is important to understand first the forces

commercial companies are definitely changing that drive the traditional way of doing business.

their relationships with suppliers. They are mov- Traditional, Competitive Buyer/Seller

ing down the continuum toward more cooperative Relationship

supplier relationships and away from the traditional, competitive way of doing business. The dependence theory of bargaining (Bacharach

and Lawler, 1981) provides an excellent concep- This new relationship goes by many names (part- tual framework for understanding the traditional,

nering, strategic alliances, comakers, value-added competitive approach to the buyer/seller relationship, a relationship often referred to as "competi- FIGURE 6-1. tion". The dependence theory asserts that the

power of buyer or seller is based on the degree

of dependence the other party in the relationship

Competition Cooprmtloni has on the first. This degree of dependence is

driven principally by two factors -commitment

"__ __ of each party to an outcome, and the degree to

,COFOPAOAoiV mkwý which each party has alter:iative means of satisI wi a ILROS SupftR w~m a LJMrT'K RUPPUU

@Agau c at " a " o" fying that outcome. 1 In the nnrmal course of the

A*MSkV.GTH to COuW^ic.",oH a mu. I buying/selling process, each party seeks to maxflaOR,1,,.1 'M O.•. .o NO '0,, imize their power by making the other party more

dependent on them (in reality or perception), and/or making themselves less dependent.

59
Traditionally, most relationships with suppliers damental element of our free enterprise system.

have followed this competitive model. Companies With multiple buyers and sellers in the marketgo to great lengths to avoid being trapped in a place, the laws of supply and demand make price

sole--,cr'-e position with its associated loss of essentially self regulating. This is the situation

bargaining power. They feel the pressure of com- most buyers desire. Conversely, if there is only

petition is the best tool to avoid becoming over- one seller (a monopoly), or one buyer (a monopcommitted to a supplier, thereby maintaining sony), or if the marketplace is not "free" (regulated

parity in the bargaining process. If this com- or collusive), then the laws of supply and demand

petitive pressure is lost, companies fear their sup- cannot be relied on to determine price effectively.

pliers will exploit the power of sole-source status, This traditional approach to the buyer/seller relaand take advantage of them. Chester Karrass, a tionship is by no means passe, but is still the

noted expert on practical negotiation techniques, favored approach by many in industry, and by

sa',s of this sole-source •;ijiaticn, "Buo'ers fold most in the government. However, there are an

lik( a tent in front of a seller who has no increasing number who are employing, and

competition."- benefiting from, more cooperative approaches in

Conversely, suppliers go to great lengths to dealing with their suppliers.

maneuver them-,elves into a sole-source position Innovative Trends in Commercial Supplier

so they can take advantage of the power differen- Relationships

tial. I1hey employ what the Wall Street journal relti ips

calls a "get-it-while-you-can strategy"; recogniz- The current literature of manufacturing science

ing that .%hen the tables turn, as they inevitably is replete with examples of the "new" supplier relado, their profits will be "cut to the bone.'- Each tionship. Hayes, Wheelwright, and Clark of Harside inherently distrusts the other, and an arms- yard Business School found that one important

length, often adversarial, relationship develops, characteristic of what they termed a "world class

mainufacturer (i.e., a mrn-utacturer able to compete on equal footing with the Japanese) was a

FIGURE 6-2. DEPENDENCE redefined relationship with a small cadre of top

quality suppliers. Specifically, they assert: THEORY OF POWER IN BUYER/

SELLER RELATIONSHIP "it is essential that suppliers change from

arm's-length adversaries tc co-makers.

High Buyer highly Buyer & Seller nighly Under the co-rriaker view, the buyer edeandent tdepedent on organization seeks close working relationIon aeller each otner

(sol-ource) (stretegic alli-nce)_ ships with a few key vendors over '.he

Power Shifts to Seller Powar Balanced long-term. "4

Buyer uV-r Seller Buyer's -- _..• e___ 

Degre Elwood Buffa of U.C.L.A. made a similar find- of -

Dependen;e No dependence Seller highly dependent ing in Meeting the Competitive Challenge:

between buyer & on buyer

seller

(null A open

(lcomutllit&on) _ monopsny telligent, cooperative bul r-seller relationI Power Balanced Power Shiltls to Buyer ships .... which may even result in single

Ssr sourcing with the supplier located close to

Suyar• _-- ,• the buyer." 5

LwHigh Finally, Richard Schonberger, a noted manufacSeller'a furing consultant, said that a world-class

Degree of

Dependence manufacturer found one good source of supply

for each part, and then treated that supplier as

Classic economic theory is useful also in a comaker." These expert opinions are represenunderstanding this competitive approach to the tative of what can be found in the current

buver/seller relationship. Competition is a fun- literature.

60
They are also consitent with our findings after long-term, sole-source relationships with suppliers

visiting an array of commercial firms for this are the answer.

research project; every firm visited was attempt- Another commercial practice contributing to

ing in some systematic %%ay to reduce their sup- redefined supplier relationships is the increasing

plier base. and many were trying to fundarnen- use of Just-in-time (JIT) manufacturing. The JIT

tallk redetine their relationship with suppliers. is a material management philosophy borrowed

Purcnasing, a journal of the commercial purchas- from the Japanese designed to reduce inventory

ing profession, found in a 1988 survey that 68 per- and its associated costs. This is done by placing

cent of respondents use some form of partnering greater reliance on suppliers to deliver the item

with suppliers, and another 10 percent said they to the production site literally just-in-time for that

planned to do so in the next year.7 item to be incorporated into production. Since

safety stocks are minimized (or non-existent), the

reliability of supplier's deliveries are critical. As

FIGURE 6-3. SEEKING PARTNERS such, just-in-time systems require closer, "open

kimono" relationships with sources and tend to

(% respondents) rely on a ,,,iial number of highly-reliable sources.

The evidence is clear, mor- commercial firms are

recognizing the long-term benefit of concentrating

purchases with one or a limited number of

sources, and substantially altering their relationship with those suppliers. They find a supplier that

can meet their quality and schedule requirements SIn partnering and enter into long-term buying relationships with

22% that supplier. Without competitive pressures on

each purchase, the instant unit price may be

partNoeing higher, but that price is typically offset by improved quality, schedule performance, and/or

lower life-cycle cost. With one vendor supplying

a firm's total requirement for an item, quality

should become more consistent, causing fewer rejects and lets rework. Similarly, a single vendor

should be more consistent and reliable in deliveries

allowing the firm to maintain smaller inventories

of the item, hence saving money. If a firm concentrates their purchas-, with one supplier they

There are a number of innovative commercial should enjoy greater influence over that supplier

practices that are, at least in part, responsible for since they represent a significant portion of the

this trend toward a closer, more cooperative rela- supplier's total business. The level of communicationship with suppliers. One practice, as discussed tion and cooperation between the firm and the

earlier, is total quality management or TQM. One supplier should increase, as each has a greater

aspect of TQM that is parti,.ularly relevant to this stake in the success of the other.

discLission-TQM ohilosophy with regard to the In these cooperative arrangements, the buyer and

supplier relationships. The Godfather of TQM, seller are agreeing .o become more dependent on

Dr. WA. Edwards Deming, rejects the idea that each other for the overall success of both corncompetition in the marketplace gives everyone panies. Some would argue that this refutes the

the best deal."f He argues that he leverage of corn- dependence theory of the buyer., seller relationpetition may get the best price in the short term, ship, the cornerstone of which is minimizing your

but at the cost of reduced quality, which in the dependence on the other party. On the other

long-term reduces value. Dr. Deming argues that hand, proponents of the cooperative approach

61
would argue that in the Iong-terrm, power is max- (Chapter 1 contains a more through treatment of

imiZed on both sides of the ledger when each the concept of equity in public spending).

beconics dependent on the other. Graphically, this bO lie, sepenenn asanhift ther. ( upper h ic hths Consequently, at least since 1809, the government would be seen as a shift to the iIpper right has favored using competition in its purchasing.

chaptrt toThe Armed Service Procurement Act and the

chap'ter. Federal Property and Administrative Services Act

it appears that commercial firms are realizing m,,- require that government procurement be competijor benefits from adopting more cooperative rela- tive to the maximum extent practical, The July

tionships with a limited base of suppliers. Har- 1984 Competition in Contracting Act (CICA)

z',rd Business RcLiew attributes partnering with broadened the requirement for competition in

suppliers av a maijor factor in the recent turn- federal purchasing, and reaffirmed this need for

arounds of both Ford and Chrysler.i The P',r- equity in defense spending.

chas:ng survey cited earlier found that 80 percent Benefits of competition from an economic and an

of the respondents who uwe some form of part- equity standpoint can be compelling. The equity

nering. fould it met their ,,oals of reduced inven- consideration alone is so compelling it is unlikely

tory. cost (ontrol, dependable supply levels, and the U.S. Government will ever abandon competireduced lead time.-." tion as the preferred method of government procurement. It should be recognized, though, that

in the commercial environment the need for equity FIGURE 6-4. PARTNERING GOALS becomes much less compelling, and compeiition

must stand on economic merits alone.

What are your goals when you enter

a partnering agreement? INHIBITORS

(S,% o0 respondenta who use partnering agreements) Clearly, commercial firms are increasingly using

Reduced Inventory 76% new, cooperative supplier relationships to advanCost control tage. When the commercial firm is a DOD contractor, however, are they able to take full adDependable supply levels 70% vantage of these innovative commercial ways of

Reduced lead times 67% doing business? The answer appears to be 'no."

0 20 4.0 6 0 .. Research did not indentify even limited cases

where a defense contractor sought sole-source

alliances with suppliers, regardless of arguments

for doing so. It is clear these contractors feel, to

some degree, inhibited from entering into this type

Government Attitude Toward the Buyer/ Seller of arrangement, so they avoid them. All had supRelationship plier reduction programs, bu, never with the inLike man. other organizations with large procure- tent of reducing to a single supplier for a given

ment budgets, the government is interested in the item. A typical arrangement was for the defense

eco.-,omic merits of bargaining parity and a self- contractor to partner with several sources for each

regulated price offered by competition. It is a item, thereby preserving conmpetition, but potenwidely-held perception in government circles that tially at the cost of watering-dcewn the benefits

competition does, in tact, !ead to a superior prod- of partnering. Alternately, defense contractors

uct X a low-ver pric'. Beyond these economic con- might have a sole-source of supply, but with

-,id,-atons thouugh the government emrbrac:: periodic (annual) competition. Again, the full

competition because of another important benefits of partnering are not being realized.

dimension--the connotation of equity it convevs. On the othtcr hand, purely commercial companies

Full, open competition conducted at arm's length (i.e., those with little-or-no DOD business), were

gives the public a perception cf fairness arid in- not reluctant to enter into long-term, sole-source

tegrity in the use of their tax dollars, since arrangements when the business situation wareveryone is able to compete equally for a portion. ranted it. Interestingly though, Dr. Dening and

62
the current literature to the contrary, these fit ins to emulate the methods and procedures it uses in

(stmne k, whom have industry-leading quality awarding prime contracts, including the use of free

r-c ord,,: typically d( not use sole-source ar- and open competition. To maintain this oversight

r.-ni-cmeni, on a whole:<lc, across-the-board and control, the government uses the Contractor

basis. Rather, they tend to use them ver. judi- Purchasing System Review (CPSR), the subconi,,ouc,,ly--,mly for the procurement of selected tract consent and notification requirements, and

items ot strategic importance. In a majority o! the the subcontract plan requirement.

c.- s the_• companit.es, )1, to their >upplier re- A CPSR is designed, "to evaluate the efficiencv

Quir,'mlcnt. becausek it iý, in their best bu,iness judg- and effectiveness with which the contractor spends

merit to do mo. Unlike DOD contractors, however, Government funds and complies with Governthey seem uninhibited in using whatever supplier merit policy when subcontracting."ii In conductarranvment the business situation dictates. ing a CPSR, a team of government specialists

W : wi ,. esxanin,, what scCm to be iht major critically examines a prime contractor's purchasiiibitir, g tict )rs to D)OD) contractors. ing system, with the objective of approving that

The )(01) lIntrvention in Contr.ctor's Internal system if it meets government requirements. The

Nlana,. ',Vvnt degree to which the system "provides for full and

open competition, or obtains competition to the

Ono' c•old orguC that a D)Ol) prime contractor. maximum extent practical ' are central to the

a, a c~ommercial firm. Jhwuld !',av\- complete flex- government's decision to approve or disapiiivdral irg, internally, and exter-nally with othcr pro.ve.!7 Where competition is not obtained, the

'I Il;-,crPial iirms.} I poethvr, tois is not ic case. system must ensure that its absence is fully

"I he. I )()l imposes a plethora ot requirenwnts dic- justified. 1

t,, ting, ]I, ', it's contra's t,,-, co~nduct their business. Lit,' oI these i esuiccmrtents flowrthrou thtrouh e. If a contractor does not have an approved pur- Siii' ,.,ijtalr,, dH;-t O thr W i'.mntroaughor c.hasing system, each individuail subcontract

,ipld appliers. The DeftnIe Science Board ob- action tails sublect to the su-., u <ict o.L.asent or

served il i 9bb, "A t uit al military contract con- notification requirements. "1,. -.sent requiret . -2 t. gei ral and! spectial provisions, 144 of nment means the prime contr,,et), must obtain

wi'Chf.hoiw down to subcontractors."i' Osten- prior written consent from zhe government before

'-jbly, cadh 3(e prc-isiuri has some impact they subcontract for work that i:, particularly

inll IIowv that (.o.panw cir subcontractor) conducts (iornplex or of high dollar value. Subcontracts for

liU.irI,.,,. In contrast, the IDetense Science Board less complex purchases are subject to the less

lI lid tiat in J purely wminvercial environment, stringent notification recuirement. Notification

a 0complex .ontrat would more typically means the prime contractor must notify the

have ,jbott 45 (it th.s.,e typet, of provisions. Of government of certain '-contract awards; no

coLLIrsP 1, Y)s rcquiretnents, on its, clntractoi5 are prior written consent : -essary.

Ii,,t iipl,,ised arbitrafly; eali t requirement is The subcontract plan -eq-,rcment is levied on a

desitned ti, iicit dhircd behavior on the part of corntract-by-contract basis, usually only on major

hte ttlieiiIor (hiring from areas of high contracts. It is often tailored to the specifics of

0ili mnploylcnt, fh; exa mph: The l weigijt of the situation, but typically requires contractors

roan'y rrtuiirementr , when laken in aggregate, to submit subcontracting plans up front for eval-

.. ve~veri. (i halve tilt _p,_rs1,ite eflect and el( it uation during the source-se!ection process. The

Utidc¶,irahle b'lia virC r LsuchW a', bureair.ratic degree of competition expected is often a critical

let. ii, .1i resistaice to i rin,.',vation. element in the evaluati,-n of such plans

The purchasing system review, consent and

lu I1)0) Inter vention into Ctu ractor'. not iication processes, tnd subcontract plan

•, ,urcing I~tisions requirement provide a systematic framework

",i. I)()l) i ', lrti( lda ly inter est('d il homw it, under whbi I)OD can have a direct influence on

li, (litiiraetor- y< rrV t thuir smi,,-cing,: it.i.- how primet contractors do business with s,.ibi onIJw. li-ally. I)I 1) "'i'tn, to% want it,, co, rctiv s tractors and suppliers. The degree to which DOD

63
exerts that influence to advocate competition in tors including an evaluation of the data available

awarding those subcontracts will inevitably affect on subcontracts awarded... This interest in data

the degree to which DOD contractors pursue is significant since any effort to expand subconmorc cooperative relationships with their sup- tract competition must start with a quantifiable

pliers. Accordingly, a closer examination of the baseline from which to measure success. While

nature and degree of DOD's advocacy for sub- the government collected data on competitive excontract competition is called for. penditures at the prime-level for many years, there

has not been a reliable way to collect data on comGovernment Attitude toward Subcontract petition at the subcontract level. In response to

Competition congressional interest, DOD began capturing

As we established, the government has compelling some data on subcontract competition, an action

reasons to be interested in competition at the some predicted would be a precursor to actual adprime contractor level. They have established vocacy for subcontract competition. This prediccompetition advocates through various levels of tion proved to be true.

the government to maximize prime-contract-level The U.S. Navy is on the forefront in actively adcompetition. and annually estabhlish specific com- vocating competition at the subcontract level. It

petition goals for each department. Beyond this, charges buyers wo analyze carefully a prime conthere are reasons why government leaders have tractor's make-or-buy decision to ensure they are

also become interested in the once neglected area maintaining "competitive pressure on cost or

of competition at the subcontract level. On one quality." The Navy's Competition Handbook

hand they are faced with tremendous pressure says, "Subcontractor competitions.. .can have

rrom the Congr_, s to increase the use of competi- dramatic cost savings," and cites examp!es where

tion as a panacea for the ills of the procurement they have done so. The Air Force, Army, and

system. On the other hand, less and less of DOD's DLA are less aggressive in advocating subcontract

procurement bmijdg't is staying .%.'Fh primc co n- _omnpetition, but all seem to do so subtlely

tractors, but rather, is flowing through the primes through the CPSR process which evaluates and

to subcontractors. Recent estimates place the approves purchasing systems based on that

percentage of subcontracted content as high as 75 system's abili'y to ensure "adequate price cornpercent and rising; this is up from about 50 per- petition," among others. High-level DOD officials

cent in the early 1960s.?' With an increasingly resisted attempts to mandate subcontract competismaller percentage of DOD's procurement budget tion goals or have advocacy institutionalized

actually subiect to prime-level competition, it through legislation, but they do advccate comcould be argued that the government should, petition at the subcontract level on any prime contherefore, subject all subcontracts to competition, tract awarded without competition. In some ina,, wvell. Therein lies a major impetus behind stances, this advocacy manifests itself through

DOD's burgeoning advocacy for competition language on a specific contract that provides

below the prime contraci level, monetary incentives to the prime contractor based

,., 1984 the l)eputy Secretary of Defense in a on the extent to which he attains subtier competimemorandum entided, "Increasing Subcontract tion. This approach is, by definition, very narCompc:ition" identified crcurStUIces where sub- row in application since it must be applied on a

contracl cornpetition should be of particular in- contract-by-contract basis.'-'

tercst, int.luding instances where large quantitics The primary inhibitor to effective supplier partof high priced c omponents were being subcon- nering by defense contractors is DOD's advocacy

tracted. The Corgress began showing an interest for free and open arms-length competition for subin subcronlract compcetitioa in 1983 in the law contracts under defense contracts. While the

reauthorizing: the Oftice ot Federal I'rocuremncnt strength and form ot this advocacy are somewhat

IPolicv (Fi''Pi. In that legislation, they specifically amorphous, they seem to be sufficiently clear to

required the administrator of the OFI'I to, "cOn- signal defense contractors on the desires of DOD.

ducIt studies...on the extent ()I competition in tihe Since, for most, DOD is their dominant customer,

award of subcontracts by lederal prime contrac- they react to those desires. and use partnering only

-I I I I I I I ! -- • r i • - =1 •64•
on a limited basis, stopping short of entering into expected to fully implement new ways of doing

soic-source arrangements. business like TQM.

SUGGESTED AREAS FOR IMPROVEMENT

Adopt a Po!icy of Neutrality Regarding Endnotes

Subcontract Competition 1. Bacharach, Samuc- 13., and Edward J. Lawler,

Because competition connotes fairness and equity Bargaining, Power, Tactics, and Outcopnes,

in expenditure of government funds, it will likely Jossev-Bass Publishers, San Francisco, Calif.,

be the preferred method of government procure- 1984.

ment for years to come. The need for equity is 2. Karrass, Chester L., Give & Take--The Comnmuch less compelling at the subcontractor level, plete Guide to Negotiating Strategies and Tactics,

however, and the degree of competition or coop- 1974, Thomas Y. Cromwell. Publishers, New

eration with suppliers is a business decision. In York, N.Y., p. 152.

many or perhaps most cases, prudent business 3. Tre Wall Street ]ournal, "Shopping Around -- judgment w.ill w,,.arrant using some form of corn- 3 h alSreora,"hpigAon - Seeking Better Prices, Firms Haggle a Lot, Afpetition: but, in others, the benefits of improved Inflation Hate," Dow ]ones& Company, aect Vol.

quality or reduced total costs will call for a solesource, cooperative arrangement. The DOD CCXI1 I, No. 73, p. 1, April 14. 1989.

should not restrict its contractors Irom using the 4. Hayes, Robert H., Steven C. Wheelwright,

best business practice; then, as always, hold them and Kim B. Clark. "Dynamic Manufacturing.

strictlv accountable for ultima-e results. Creating the Learning Organization," The Free

Press, New York. N.Y., pp. 193-208, 1988.

Two opposing arguments typically arise. One is, 5. Buffa, Elwood S., Meeting the Competitizo,?

DOD doesn't idvocate subcontract co;mpetition, Challenge. M 4nfartU ring Strategy for U.S. Cornthey just track it"; the other, "DOD only wants panies, Dow Jones-Irwin, Inc., Homewood, Ill.,

subcontract competition in cases where they dont Chapter 8, 1q84.

hav, prime competition." Both are tantamount 6. Schonberger, Richard J., "World Class

to adv\,:cating subcontract competition across-the- Manufacturing: The Lessons of Simplicity Apboard. Tracking conveys the perception that plied," The Free Press, New York, N.Y., Chapter

D)01.) wants it. the contractors react accordingly. 9, 1986.

Requiring it ._:n a single contract results in the con- 7. PrrchasiI.9, "Partnering with Suppliers: It

tractor adopting a single systi m to ensure competition on a!l purchase'- (reference Finding 7;.

Further, the move toward partnering, TQN'1, etc.. 8. HBR, July-August 1988, "Beyond Vertical Inrequire-, a fundamental philosophical shift that tegration - the Rise in Value-Adding PartnerScannot readily be turned on and off on a contract- ships."

by-contract basis. 9. Purchasing, July 28. 1988.

Notwithstanding these arguments, it is c,.,ar that 10. Final Report of Defense Science Board 1986

D)OD) contractors w,-hen making business, judg- Summer Study entitled, "Use of Conmnercial

ments vis-a-vis relationships with suppliers, are Components in Military Equipment," January

factoring in DOD's rca! or perceived desire tor 1987, Olfice of the Under Secretary of Defense

subcontra.t competition. Accordingly, if DOD for Acquisition, p. 46.

wants the benehit of business judgments without 11 Eederal Acquisition Regulation, 44.301.

this bias, it shmuld adopt and communicate a

policy oi cutmplete neutralitv with regard to com- 12. I'rokupy, John A., "Contractor Purchasing

petition al the subcontract level. The degree of Sy>stern Review: What ls It?'" Contract M-1wauagecmirp.titon or cooperation with aupplierscvoult menit, The National Contract Management

tht n, lik-, other business judgments, be Met to the Association, p. 43, October 1988.

dscretion of the prime contractor, Onlkly ,grant- 13. Federal Acquisition Regulation, 44.

ing this ilcxibility car the defense industry be 202-2(a)(5).

65
14. Department of Defense. Defense Systems 15. Johnson, Elizabeth Ann P., "Incentives for

Management College, Establishing Competitive Subcontract Competition: A Case Study," ConProduction Sources, A Handbook for Program tract Management, p. 8, December 1988.

Managers, August 1984.*

66
7

SOME REGULATORY IMPLICATIONS

FINDING Companies Adopt Uniform Administrative Systems.

DISCUSSION OF THE FINDING pose the defense requirement on itself so it would

Discussion of business management approaches not lose certification of its process, This has a

with several firms which conduct both military significant policy implication because we may

and commercial business (i e., General Electric, consider that relaxing the requirements for a good

United Technologies, GTE and Westinghouse contractor will allow cost savings to be applied

Electric) showed that generally, these companies to the contract. This may not be the case where

segiegated their business units so commercial and a contractor has other government business which

rniltary business was not collocated or coman- will not be affected, or may wish to compete for

aged. In an advertisement, a Washington-based other business for which the waiver of the requirelaw firm highlighted the reasons for such barriers ment may not be granted.

as follows:

-Minimizing the cost of necessary controls INHIBITORS

gcertification requirements The discussion of the finding has, in itself, been

a discussion of the inhibitors. The regulatory

-Localizing cost accounting standards aspect of governmental purchasing is recognized

compliance in industry as a fact of life in doing business with

-- Using exemptions from cost and pricing data the government. The problem highlighted in this

disclosure section is the difficulty in selectively applying

-Limiting access to company records good ideas. In our research, we spoke with several

individuals from programs designated as Defense

-Protecting rights in technical data Enterprise Programs (DEP) which, theoretically,

-Narrowing exposure to suspension and could be excluded from governing policy direcdebarment. tives. Unfortunately, viewed from government

In addition, there is a strong preference to employ and industry, DEP designation made little difone set of administrative procedures. If the firm ference in the management and operation of these

was producing a military item and a commercial programs. Simply stated, trying to gain accepitem on the same floor, they would adopt the tance of the exempt status from the functional

military approach to sourcing, inspection and staffs and organizations in DOD became more difquality control for all items on the floor. For ex- ficult than simply adhering to the policies and

amples of this, look at the MSE/ITE, and GE regulations.

cases in the appendices. The cost of managing two The need for uniformity in industry/government

systems was deemed too expensive and confus- dealings is based on sound principles. It was largeing to the work force. We also found that relax- ly responsible for the consolidation of procureing a standard for a specific DOD contract was ment regulations into the Federal Acquisition

counterproductive because a firm would not want Regulation. Uniformity on the other hand, does

to be penalized for using a commercial practice make selective relaxation of requirements theoon a subsequent military buy. Generally, if a com- retically feasible, but extremely difficult to implepany had other defense contracts, it would im- ment in practice.

67
SUGGESTED AREAS FOR IMPROVEMENT ment and prime defense contractors are working

Use the Contractor's Cost Accounting System from the same status data base. They are excepThe original intent of the Cost Schedule and Con- tions to CSCS requirements and we believe they

TrolSys intem (CSC t t s tost S duse oradtor- provide a more effective system for joint fro! System (CSCS) was to use contractor- government-industry program management. A

piovided data to monitor the performance under successful example is highlighted in the MSE/GTE

the contract. In intent and design it is not case; a Defense Enterprise Program (Appendix G).

significantly different from the systems described

as in place to monitor commercial capital im- Policy or Reporting Requirement Deviation and

provement or new product development pro- Waivers Should Be Granted Only for an Entire

grams. Unfortunately, the CSCS system has Commercial Activity and Only for an Extended

become a source of contention between the Period

government and the contractor in its application. We investigated commercial and defense

Despite observations about the extra costs of businesses ..,id it became obvious that commermultiple control systems, it can be advantageous cial entities and the miiitary departments could

to the contractor to maintain two cost account- use similar standards to advantage. Policies ening systems-one for internal management and couraging perception of uniqueness in defense

one as a CDRL requirement under the contract. systems management are counterproductive,

especially if the different administrative systems

Commercial program managers find that the serve only the burgeoning DOD bureaucracy. As

CSCS system provides too much information, discussed in the inhibitors section, each Defense

They use a system providing summaries of cost Enterprise Program (DEP) prime contractor conand schedule progress, timely (i.e., actual, vice tacted (i.e., General Dynamics and GTE) indimassaged data) and accessible on a daily basis. cated there is little difference in the requirements

Detailed backup information, available on an under which they and other non-DEP defense proquery-response basis, is used to investigate prob- grams operate. Commercial business leaders felt

,ems highlighted in the summaries. The CSCS it was "too expensive" to operate parallel systems

reports, a data-deliverable rather than a real-time that must meet different policy or reporting

management system, delay status reporting and requirements.

focus too much time on extreme details and for- We believe policy or reporting changes need to

matting. Consider again the fire alarm conven- be implemented company-wide and for an extion introduced in Chapter 3. The CSCS system, tended period if positive results can be expected.

as currently employed, provides too much detail The target company must be convinced the rules

about what happened weeks or months before but will not be changed often so it can have confidence

has become useless in real-time management. to employ best business practices across-theThere are unique instances in which the govern- board.

68
IV

CONCLUSIONS AND

SUGGESTED IMPROVEMENTS

69
IV

CONCLUSIONS AND

SUGGESTED IMPROVEMENTS

CONCLUSIONS applicable to how we do business. These are:

Our opportunity to research systems acquisition Finding 1. Active involvement of top corporate

and purchasing management has been unique; for managers is essential to program success.

7 months, we assessed private industriy's manage- Finding 2. Commitment to program success

men' of systems programs and purchasing. The crosses organizational lines.

field of study we chose is great. The allegorical

analogy is that of a 7-year old child given $10 to Finding 3. Schedule is first among cost, schedule

spend at a toy store. In our case, there was so

much to investigate. Though time, our main Finding 4. Program managers are afforded

resource, seemed substantial at the start, it ran significant authority and resource control, and are

out long before we could satisfy all our research held personally accountable.

desires. Finding 5. Price is but one elemeitt in the purWe approached this research to find good ideas chase decision.

and techniques; not more problems; the Press, Finding 6. Companies are adopting more coopGAO, and the Congress have done enough of erative relationships with their suppliers.

that. Instead, we sought to build on our experience in program offices, buying commands Finding 7. Companies adopt uniform adand at Harvard Business School to improve the ministrytive systems.

defense acquisition process. Focusing on commer- Each chapter oi the report supports these

cial practices permitted detailed investigation of individual findings from published sources, our

various topics and scoped the potential for fur- inJustry interviews and the case studies.

ther research in the field. The findings aic not unique; with some differences

The scenario of major commercial new product in approach or emphasis, they parallel those of

development and major capital plant/equipment the Packard Commission and other studies of

programs closely parallels the acquisition of ma- government acquisition. To underscore this comJor defense systems. Such programs involve many monality, reference was made to specific sections

years; major expenses upon which the suture of of the Packard Commission report as the findings

the company depends; often new technology, and developed.

comprehensive employment of people, equipment Our contribution is not that we discovered

and services into an integrated whole, something new but, rather, we have assessed

Building on our defense acquisition experience and inhibitors to easy implementation within the

the Harvard "case study" method, we invec.tigated defense acquisition environment and vonerated

literature f10 %; , ýzS P-:_,z -. z, , :,pplicable some practical, implementable, poiicy-level sugto systems program management. Then we gested improvements The suggested improvedeveioped cases based on program examples ments that follow have been provided to senior

offered by industry contacts. We found several Department of Defense and military departments'

commercial management practices definitely acquisition leadership.

71
WVe do not believe defense acquisition is beset with program baselining process, to maintain schedule

rampant fraud, waste and abuse. Rather, it is a and solve technical problems.

huge, bureaucratic system operating in an environment evrnetof oUnless conflicting objectives and expec- admtcnitnlw our program schedules ilcniu can be shortened ob

tations and, thus, uracceptably inefficient. Also, and met consistently, we will continue to be

we reject thc naive perspective that all answers unable to generate real teamwork so essential to

can be found in private industry because problems program success. Top defense leaders, program

can also be tound in many failed products. Look- managers and functional specialists must operate

ing at how industry acquires capital and develops as teams, with confidence in each other attained

ing new products. we fthrough focused on successful programs, demonstrated, on-the-job performance.

identified contributing management practices and With long and still unrealistic program schedules,

recommended adoption of these practices for use few reach this level of shared confidence; thus,

in deferse acquisition. teamwork suffers. Obviously, this aspect of improving systems acquisition is heavily dependent

SUGGESTED IMPROVEMENTS on the protessionalism and experience needed on

Improvement 1. Establish at MS II (XIS Ill the part of all team members; Improvements 5 and

for NDI programs) the 6 are key to implementation of this one.

relative priorities of pro- Improvement 2. Subordinate PPBS funding

gram cost, schedule and decisions to DAB or

performance in the SSARC approved program

baselines. baselines at MS II and

-Give the PMPEO beyond.

flexibility and authority to -Recognize approval at

make trade-offs within ',S 1 as a commitment for

baseline constraints, the life cycle.

-- Ensure there is maneu- Commercial companies we researched had

ver room between stretch business planning systems not unlike our plangoals and practical, mini- ning, programming and budgeting system (PPBS)

mum requirements. in most functional aspects. They were, barring

At MS II, the baselined schedule should be as major revenue problems, less constrained than

short as practically achievable via prudent DOD in committing funds resources over the incost; performance trade-offs made during the pro- vestment phases to new programs. The keys to

gram planning process. Performance features successful integration of business planning and

should be designated b tween minimum require- stable funding in commercial business enterprises

ments and stretch goal . "Performance'" means all are: 1) realistic financial planning-using the

features directly influencing design, engineering, business planning process in a disciplined manproduction, opera' n and support of the product ner to forecast revenues and expenses, thus capital

or system; thus, it includes such things as unit funding available; 2) selective approval of

cost, life-cycle cost, reliability and maintaina- program opportunities--ensuring all approved

bility, a', well as mission features (i.e., speed, programs were affordable based on business planrange, ;icuracy. etc.). Stretch objectives should ning; and 3) completing approved programs on

be incororated if technology permits, or reserved schedule, thus supporting the program assumpfor evolut ionary upgrade if technological availa- tions used in the business planning process.

bility threatens the schedule. The PIvI should have Implementation of this improvement would

authority to use and the best functional support entail:

available, and his judgment, to assest- relative costs and benefit:; of performance tr,. des and to ] • Phasing in Defense Enterprise Program- cost an f beefiý; promane t-de an to like (DEP) programs (major and non-major) with

make timely trade-off decisions. A cost buffer of lke(LP)porams(ajor andino

10 percent should be made available to

I'Ms,'PFOs, without need to revisit the PPBS or 2) Subordination of future PI'BS decision72
making to program baseline decisions at MS II Large commercial programs had only one or two

and MS III (too often budgetary cuts are applied go/no-go program decision milestones. Typical-

"across the bcard" as though no priorities exist). ly, the organization conceived of many

Key to this implementation is disciplined technological or market-driven opportunities

decision-making, based on realistic planning and which were winnowed down by committee acprogramming; and institutional follow-through, tion, advance business planning and feasibility

based on commitment to, and communication of, studies to a relative few. Based on strategic vistrategic priorities. sion and resources available, top management and

the Board of Directors (BOD) approved selected

This Figure portrays the point that PPBS drives programs for development and implementation.

funding available to programs prior to MS II, then If substantial technological uncertainty existed,

it is driven by MS II and beyond program deci- a second milestone was required to ensure there

sions. Thus, Mfilestones 0, 1 and 5 would be subor- was sufficient likelihood of success before major

dinate to PPBS, while [PBS would be subordinate r to -4 Mlesone ecisons TheFigre aso up- esources were committed. The initial committee

to Milestone 2-4 decisions. The Figure also sup- screening of program possibilities was done at low

ports aspects of the next improvement to reduce levels within the organization as part of periodic

the number and level of program milestone business planning; line acquisition management,

deci sions, without staff or committee oversight, was then

Improvement 3. Reduce the number and fully empowered to execute the program. The

level of program decision CEO, or CEO-surrogate, stayed informed and

milestones assisted line management as necessary throughout

the life cycle of approved prog.ams. --Only MS II need be a

DAB-level decision. Implementation of this improvement within DOD

FIGURE IV-1. LINKING DEFENSE STRATEGY, PPBS, AND MAJOR

SYSTEMS ACQUISITION MANAGEMENT

Objective: Provide capable systems to our users, efficiently and on time.

Defense PPBS System Systems Milestone Review Process

Srategy Planning Programming Budgeting o 1 2 3 4 5

" History e Users 0 Initiate -I

"* International * Adversaries PEO SAE DAE DAE/ PEO PEO

Trends 9 PrIoritize SAE

-Economic a Resources Systems -Social

-Technical 9 Missions • Resource -Political Estimations

" Strategic User

Position Needs -7 

-- " Worldwide Technology • Budget Beln-•Ip~ Impact

Expectations Techn o 1-2 yrB Nees2- yr Strateg9c 5-15 yrs 15 yre

73
would entail limiting DAB oversight and decision budget buffer is essential to success of this

to MS II only, for DOD major programs (SSARC improvement.

II only fcr component programs); accordingly In DOD, our large senior staffs perform many of

reduce the preceding and succeeding milestones the roles associated with top management;

one level; and delegating all other milestone deci- systems acquisition is an ancillary function for

sions to the PEO in ,oordination with the "user" senior defense leadership, providing logistics sup-

(surrogate user). port to operational forces. We have evolved to

Improvement 4. Empower acquisition line an acquisition system devoid of clear, CEO-like,

managers (i.e., PM, PEO, top managers. The DAE and SAE are staff

SAE and DAE) to make elements, both are without control over personprogram decisions, within nel resources (who work for the military chiefs),

approved program baseline and without full decision authority over all acconstraints, without in- quisition functional directors within the Departterfe.:cnce from furctional ment or Service, respectively. The result is transtaff advocates at higher sient leadership, temporary policy, and a huge

organization levels, functional bureaucracy which manages by conThis improvement augments Improvement 1. In- tinuous committee consensus.

dustry PMs and their first-linp general manage- Improvement requires clarification and simplificament are empowered to execute their programs tion of who is in charge. We must establish who

without external interference as long as baseline (singular) has program decision authority over the

requirements are met. whole acquisition process, once a program is apFollowing program approval as discussed in !m- proved at MS II. The DODD 5000.1 needs reviprovement 3, to enter full-scale development, the sion to define, clearly and simply, who (singular)

PM and PEO would be empowered to use the best can make program specific decisions involving

expertise available to solve problems and perform trade-offs, personnel assignments and priorities.

trade-offs as necessary to complete the program Improvement 5. Strengthen the professional

within baseline constraints and without indepen- functional support to prodent oversight or direction from functional staff gram managers and reduce

managers. The Service Acquisition Executive the dependence on staff

(SAE) or Defense Acquisition Executive (DAE) functional oversight of proshould be kept informed of progress and prob- gram execution.

lems, directly by the PM!PEO, on a quarterly -Change the focus of

basis. The SAE or DAE would then be the link functional staff managers

to the Defense Resources Board (DRB) and the from involvement in proCongress, should the program baseline need alter- grams to the professional

ing. Should "fact-of-life" strategic events occur, development of acquisition

such as a major force reduction, the DAE and specialists.

DAB should act to implement applicable changes spcialp sts. to the baselines of impacted programs. Successful commercial programs were remarkable

in the degree of organization commitment to proImplementation of this improvement would en- gram success noted. Our discussions with protail the decision-maker (SECDEF, Service gram and functional managers showed strong,

Secretary, or manager with delegated program ap- mutual, shared goals and commitment to success.

proval authority depending on program scope), This is due partly to recognition of the importance

at MS II, committing to the program baseline with of specific programs to achievement of the corall subordinate acquisition line managers, and en- porate business strategy, and partly to the

suring the baseline objectives were sufficiently availability of professional functional expertise in

prioritized so that acquisition line managers (PM, direct support of program management. Though

PEO, SAE and DAE) have flexibility to solve virtually all companies were matrix organized,

technical problems during execution. A real with many functional specialists assigned to pro74
grams in a task organized fashion, all functionai matrix). This improvement is intended to augment

personnel assigned to support a program look on- Improvement 5 by extending implementation to

ly to the program manager for program direction the acquisition and materiel commands of the Serand decision-making. Program managers, in turn, vices where, in many cases, the functional acquisidepended on the expertise and recommendations tion specialists and PMs/PEOs have different

of their assigned functional specialists, chains of command. The thrust of this improveThe thrust of this improvement is to implement, ment is to provide PMs and PEOs the functional

within DOD, a system whereby top functional expertise they require, and deserve (dependent on

staffs are focused ptimarily on creating and program priority) to plan and execute the program

managing a system to educate, train and govern right the first time. We must get away from the

careers of acquisition professionals. Such a system climate in which senior military and civilian

wouid provide PMs and PEOs the power to make leadership tolerates, even encourages, PMs to

essential personnel and program decisions and the compete with each other for adequate resources,

functional expertise to plan, organize and execute and accepts the divided loyalty engendered in our

programs right the first time. A collateral benefit special advocacy system. These senior leaders

would be less exposure to the diffusion of respon- should stop acting as "judges" of programs and

sibility associated with committee decision- actively manage the acquisition system.

making. Our policy should be in the form of principles and

This approach to matrix management is used ef- goals, not directives, due to the need to provide

fectively in military combat units where the "head- flexibility to local commanders to optimize the use

quarters commandant" (consider like a functional of scarce personnel expertise. Adoption of this

organization manager) provides staff assets to unit approach should reverse the growing trend in

commanders. The commanders make mission some commands tc place functional participants

decisions and the staff members art not authorized even those full- time on specific programs) under

to disagree. In the acquisition arena, the PMPEO the control and evaluation of the functional matrix

must act with the user as "advocate" for the manager, thereby taking authority from the

system up to MS II. Following MS II, the "sell- PM/PEO and diffusing responsibility for program

ing" aspect of advocacy can end while the success.

PM;PEO and user shift full attention to !eader- Improvement 7. Develop an oA-line contracship of problem prevention and solution. This can tori performance history file

work only if real program execution authority which is available to the

rests solely with the PM, PEO, SAE, DAE chain contracting officer (source

of command. selection official in systems

Improvement 6. Ensure matrixed, func- programs).

tional, program support This improvement is directed at procurement of

personnel are dedicated to non-system equipment and services which usually

programs through organi- do not rate a source-selection-evaluation process.

zational alignment and Some elements could, as well, be applied to maincentives. jor system acquisition, for example, the excellent

-To the maximum de- initiative of the Air Force Systems Command's

gree possible, matrixed per- Contractor Performance Assessment Report

sonriel should work full (CPAR).

time for, and be rated by, The first step in using quality information in makthe PM. ing source selections is to make it available to the

Program managers in successful commercial pro- contracting officer. Implementation of this imgrams have the full, dedicated support of func- provement should be phased. First, elements of

tiorial specialists. The PM has hire-and-fire the file should be established and should include

auth,,)rity and evaluates the performance of the indices for price, delivery and reported quality

specialists assigned (dedicated and functional problems.

75
Second, the ability to input and access -ihe files Improvement 9. Adopt, communicate, and

throughout DOD must be established. -A partial enforce a policy of comnet will not be sufficient, since it will tail to pro- plete neutrality with regard

vide the objective information needed to eventual- to subcontract competition,

IN make source selections. including a cessation of

data gathering.

Third, once the network is functioning, quality Because competition connotes fairness and equity

factors can be established to adjust bid prices to in the expenditure of government funds, it will

reflect the cost oi schedule or other problems. (In likely be the preferred method of government prosystems programs, past performance, including curement for future years. The need for equity

quality, w,,uld be evaluation factors indepen- is much less compelling at the subcontractor level,

dently considered along with price cost.) however, and the degree of competition or

cooperation with suppliers is a purely business

There are sev'ral evolvin~g approaches to i decision. In many or perhaps most cases, prudent

plementi a business judgment will warrant the use of some plmning aspects (), such a ý,vsteni. We are

aware of efforts sponsored bv the Defense torm of competition; but, in others, the benefits

Lo~gistics Agency, and the military seiices to move of improved quality, or reduced total costs will

in this direction. These are limited in scope and will call tor a sole-source cooperative arrangedo not exploit the potential for more accurate ment. The DOD should not restrict its contracmeasurement. This is essential in the acceptance iiL from uiii, tue best business practice; then,

of such systems and thir ability to as always, hold them strictly accountable for

administrative protest. ultimate results. Only with this flexibility can the

defense industry be expected to fully implement

new ways of doing business like TQM.

Improvement 8. Establish a variable specification method of contract Typically, two opposing arguments arise. One is,

source selection for non- "DOD doesn't advocate subcontract competition,

system procurement. they just track it"; the other, "DOD only wants

subcontract competition in cases where they don't

The current method of establishing a minimum have prime competition." Both are tantamount

specification w hich, if satisfied, perm its the selec- ta v ocati ng c ontra c Bt m eti t ac oss t

to advocating subcontract competition across-thetion to be made based on price, should be selec- board. Tracking conveys the perception that

tively replaced by a method through which target DOD wants it; the contractors react accordingly.

performance specifications are set. Variations Requiring it on a single contract results in the conaround this target will be evaluated using a tractor adopting a single system to ensure compreestablished and published cost performance petition on all purchases (reference Finding 7).

trade-off formula. For example. life-c\'cle cost

elements of performance, quality (i.e., reliability, Improvement 10. Use the contractor's cost acmaintainability. etc.) could be quantifiably related counting system and

to adjustments to the price basis for award. 'I he eliminate duplicate reportU.S. Army Communications Command has been ing methods.

doing this successiully for several years in their The ir.ent of the Cost Schedule and Control

non-developmental item (NDI' program to ac- System (CSCS) was to use contractor-provided

quire commercial electronic test equipment. data to monitor the performance under the. conSuch a method would prec.ude the need to "gold tract. In intent and concept, it is not significantplate" specifications, ai'd would alter the incen- ly different from the systems described as in place

tive systems for contractors. It would provide to monitor commercial capital improvement proincentives for contractors who have better ways jects or new product introductions. Unfortuof mceting requirements to be selected over con- nately, the CSCS system has become a source of

tractors who barely meet the specification, as writ- contention between the government and the con

ten, at the lowest cost. tractor in its application. it can be advantageous

76
to the contractor to maintain two cost-accounting Commercial entities need arid employ consistent

systems-one for its internal management and a standards for administering activities. Policies that

separate one as a CDRL requirement under the encourage a perception of uniqueness in defense

contract so as to limit exposure to external revi,'v, procurement are often counterproductive because

"Taken trom the perspective ot the commercial commercial business administrative systems have

program manager, the CSCS system provides too difficulty adapting to tnem. Each of the prime

much information. What is truly needed ic a Defense Enterprise Program contractors contacted

system which provides top-level overview of cost indicated they saw little difference in the

and schedule progress and which is timely (i.e., requirements under which they operate and that

actual, vice massaged data) and accessible on a of other programs. Similarly, in the commercial

daily basis. The detailed backup should be avail- environment, it is felt to be just "too expensive"

abic on an 'as needed'" query response,, basis to to operate parallel systems which must meet difinvestigate any problems highlighted in the top- terent policy or reporting requirements.

level document. Presently. the time delay in Policy or reporting changes need to be companyreporting is too long, and too much time is spent wide and for an extended period if any positive

investigating particulars of the reporting system, results can be expected.

Improvement 11. Waivers of policy and

reporting requirements

should be g'-anted for an

entire commercial activity

for an extended period of

time, not on a contract-bycontract basis.

77
APPENDIX A

UNITED TECHNOLOGIES CORPORATION CASE

PROJECF NAME: PW4000 Engine

COMPANY: United Technologies Corporation. Pratt and Whitney

DATE OF VISIT"INTER"'iWS: 14 April 89

PERSONS INTERVIEWED:

Mr. James Brurner, Director, PW4000 Engine Progrdms, Pratt and Whitney

Mr. Roger Chericoni, Vice President, Group Product Integrity, Pratt and Whitney

Mr. James Ward, Manager Internal Audit United Technologies Corporation

DESCRIPTION OF SYSTEM SCOPE OF PROJECT

The PW4000 is a high thrust ( 50,000-t5,300 1. Timeframe. Study Phase - 1981

pound), fuel efficient, turbofan engine for use on BOD ipprovai: rall 1982

large wide-body commercial aircraft. The FAA Certification (PW4000):

PW 4000 wab initially designed, developed, and Jun e 1986

FAA certified to cover a broad spectrum of air- June 1986

craft applications. It was then adapted to, and 2. Funding. Up to$1B were invested by Pratt and

recertified with, each ai-',raft type it powers. It Whitney to design, develop and certify the

i' u to power th(e Airbus A300 and A310, PW4000 and its principle aiiriaft zpplicatiort. Of

Bucir-g 767 arid 747 arid MD 11 airliners. The this, approximately 60 percent was fo" '-*gn,

(.ngine devclopm(nt goal!, compared with its development and certfication of t, iic

lprcdcc('ssor engine ] F-9D-7R4, were lv.' fuel con- FW4000, with the remaining 40 percent ,, apJurTir)tion (7 percent less), low maintenance co.ts plications and improvements.

(25 p(e-ccnt Iess) and low manufacturing cost (50 ACQUISITION MANAGEMENT

pJc,-(ent less). Thz thrust Lo:,l of &0,000+ poucid', TLCHNIQUES EMPLOYED

was cstablislhtd 4s , result ot forecasting efforts

in 1981 o predict ,,inmercial aircraft f(eds of I. Program/Project Management

the 1990s (the) )'I1O thrust was 56,000 #). T"he June a. The PM ftermed Program Director at P&W)

]'Qb FA/ certiticalion dcadlin_'- was establi:,hed vsa,, given "cart- blanche to do things different

ti,, n,.ure avilihlilisy 0f a mature engin.: system ly" if nece.,sary to imeet th. program goal. This

il time to ,ieet airlii, ccmipany' needs, and air- was interpihod to include coordination with, and

frarr. ,.,uy , Ic'ing', ;ofjf', ted f or 19j7. I'itt ,,l it itat ion oi, suppl,,iers; such as inducing them

and Whllil-Y (J'W& ; ,clsoilunncl rtxdlhi'ld thlit it to "buy in'" to the future business opportuunities

t,-4 , dil J a:ne 0111l.!1iM', , 11ll0Lit 3 y,.'ar I todevelop Co a ]ong-terml stratel'gi, alliance; anolher "sacred

1 fit'" It libi.r ,)itl 1 5 years to dcv(.0l11 a net I LOW' attac ked in the l'1'4000 program was "inc'n. it. s,, t~ivy ,.d lo start betumr.' the airline.rs bnrics debign and developmen."- that is, maxi.

W'erc dc',s.ý,ncd nhi/ing (on1currert enrgineer ie', 1,6 "osibihly and

A l
authority to circumvent "business as usual" f. The Director, Mr. Bruner (referred to as the

attitude and procedures was driven down to the PM throughout) reports through the VP,

lowest level in the organization. Engineering, to the President of the Commercial

b. Dedicated project team of 1,200 persons, Engine Business Division, thence to the President

including matrixed specialty support, as required. of Pratt and Whitney and finally to the ChairThe PM's office was staffed by 250 personnel who man of UTC.

perfor.ned business management, design (120 g. Mr. Bruner indicated that hiscareei has been

mechanical designers), management of develop- principally in project management which includes

ment, management of manufacturing and analysis aircraft integration and customer support. Proand marketing. Logistics management was done gram participants were free to pursue their own

in the support matrix. Excluding the design effort, career paths into and out of project management.

the immediate PM office was moderate in size for

the project scope.

c. Mr. Bruner indicated that be and each subor- 2. System Engineering Management.

dinate manager had direct input to the selection

(,f all directly reporting personnel. The PM had a. Key to accomplishing most program goals

significant personnel management power and was the first 6 months in which detail planning

could rapidly direct increases and decreases in and desiD, was done by a team of design and

manpower applied to functional efforts; the manufacturing engineers. This team created a conmatrix was there to respond to the immediate tract between designers and manufacturing on

needs of the project using an "equal hurt" features and technology to be used in the product.

philosophy. To ensure high-quality participants, This contract essentially was a functional

some sFrt-up manpower allecation efforts lagged. specification to guide and constrain . ... , ugn engineers. Using the production so,, e for

d. The total programmed funds were commit- deve!opment hardware enhances lcamninj; and

ted by top management ao the beginning and total lowers initial product cost, but do.,s require control of ihe funding was provided to the PM significant compromises in a volume driven

annually. The PM had flexibility to transfer facility.

funding between elements of the program as frequi.ed, providing he stayed within annual b. The PW4000 pushed the state-of-tce-art in

budget increments. lie czuld move, .fllort betw,'een several areas (e.g., compressor airfoil

years as long as total annual expenditures were ae-rodynamics). Most efforts involved backup

according lo plan. designs using more convention(fl iect,: -,logical approaches should difficulties be encountered.

e. Pratt and Whitney Commercial Engine Technical problem-solving was done by the PM

Business manages about 8-9 engine proje(¢ts at any in concert with his peer leaders from the applicable

tim,; thes, are mnnaage.d under Program Direc.- technology at(

tor,,. Thc 1i' '40'.0 is currently th( largest, buLt

ext&'ri.ive ioraniC cinin, is applied to other (- trrirt .he 1)W40CC. IPM had total responsibility

en, o': aind SUmT. developmentai pro , a,,' authtrlty for ,onfiguration control.

largue thrust lthdn. th, "V%!40001 en,,,,ine aip, ars d. The Ie: plan was developed by the I'M in

to I,' mi Ilic o•c'ptor ,t,,.. It 1,was noted that cooidination with Directors (peers) of various

,1ll ortoi'(ts w(rt' furided a'.crdihng to i'xpt' tvd engineering elements of Pratt and Whitney. The

nu.t&ds. t'.' tc,'d th. trrm 'sn - otth funding' to test program was directed by the I'W4000 pro-

,ivt:t.Ju ',l fIrn' n titf tcO I t-ques whit h rnca' i,0 Iteam, not an independent tester. 'Te FAA c.rtiro'-v'" lare ,inrnuil ,luil',t lowp', tor drop.s J he titi( atuori testing wa plarned and cunducted by

W40V was ,1Jre md uiided Iby the Utnited thft prrtit'I teram; the FAA monitot 'd tebt. (if

lc c..t,,lu, -" (.tu pt~cati.l Ul.I C.) itord Ofi [irec( dlit., tke po pJt. tteaii wroteand subntiittud tett

n,.'.mlh~ j e,..' Af .t'e aj,',j ()Vti d .,I I -, , .ain' ret-oits. lite I'M had aathority to shiedult.

l lI, , u tur'd,.,d O rd u ifirl ac'tu fl I.>y I 'ratt arid r,.,, heduh'.and , e qIim ,V testsat.S het felt riecesta-. y

W Iit;,, , to |ee t p (Jit' ct );oal',.

A2
RESULTS ACHIEVED aircraft installations. Manufacturing costs are still

"The Pl\.4000 has already been a major success for slightly higher than the goal termed a -stretch

Pratt and Whitney. Certification was completed goal." Improvement efforts are underway to meet

on time, June 1986, within budgei. Of the pro- or beat original goals. Sales of the PW4000 thru

gram performance goals. thrust and maintenance 1988 wvere in excess of $4B despite the primary

cost goals v.erc met; fuel cultsumption is not quite U.S. competition introduction of an enhancement

as dc;sired primarily due to competitive pressures of a current engine design 21 months ahead of

requiring further improvements. Post certification P&W. It appears that P&W's strategic forecast

improvements have been identified and are be- correctly targeted the timing of the market need

ing inzrporated. The competition still lags in all and necessary features for success.

A 3
APPENDIX B

HEWLETT PACKARD CASE

PROJECTS: New Product and New Product-line Development and Capital Systems Implementation

COMPANY: Hewlett Packard Microwave and Communications Group (MCG), Santa Rosa, Calif.

Hewlett Packard Computer Business Organization (CBO), Cupertino, Calif.

DATES OF VISIT/INTERVIEWS: 21-22 March 89

PERSONS INTERVIEWED:

Mr. Joe Gattuso, Defense/Aerospace Programs Manager, Hewlett Packard MCG

Mr. Douglas Scribner, Group Manufacturing Manager, Hewlett Packard MCG

Mr. Don Wolf, Quality/Customer Support Manager, Hewlett Packard Signal Analysis Division,

MCG

Mr. George Bodway, Director of Product Development, Hewlett Packard CBC

Mr. Carl Snyder, Director of Program Management, Hewlett Packard CBO

Mr. Dean Morton, Chief Operating Officer, Hewlett Packard CBO

Mr. Bob Walker. Office of the Chief of Financial Management, Hewlett Packard CBO

DESCRIPTION OF SYSTEMS in circuit board size. The management of this

Three types of systems programs were reviewed facility project does not use the CBO phase review

at Hewlett Packard facilities: process.

1. Phase Review Process Systems. These are SCOPE OF PROJECTS

typically programs composed of hardware, soft- 1. The phase review process is intended for

ware, and/or customer-unique application programs/projects which span 6 months to 3 years

developments building on the computer system duration (all phases) and of any funding scope up

baselines in existence at HP Computer Business to the largest approaching $500M investment cost.

Organization. The phase review process, 2. The "Spectrum" program required 4.5 years

described herein, has been in place for about 3 from program approval to market ard several

yearý, and is intended for management of all hundred million dollars invested.

sy~terns programs at Hewlett Packard 'HP) CBO.

2. The HP "Spectrum" was a major program 3. The surface mount technology facility will

to dt-vlup the HP 3000-series computer hardware sparn 3 yedrs from approvai to full break-even

and software architecture baseline from which operation (the facility will bring in revenues at

most 11 computer systems have evolved during least equal to expenses by the third year), Several

the past 5 years. Spectrum did not use the cur- hundred million dollars are budgeted for

rent phase review management process. implementation.

3. T"e tiP MCG is implementing a surface ACQUISITION MANAGEMENT

mount te.hnology faciliiy. The new fadility will TECHNIQUES EMPLOYED

improve prototype turnaround capability, build Due ýo the diversity of the programs and manageproductior capacity, provide for ccntrolled ex- ment techniques employed for each, the followpansion capability, increas, autumation, control ing are organized by interview versu, a functional

growti, in incoming parts, arnd facilitate reduction presentation,

B-1
1. Interview with Mr. Scribner, MCG Manu- -- Rapid Design vs. Low Development

facturing Manager. Cost > > > Design for Manufacturability.

a. Subject: Business Planning at Hewlett He described the following contradiction and

Packard. The process highlights how HP operational paradigm for the 1990s:

establishes business plans which facilitate attain- -ILow Cost Production vs. Rapid Cusment of strategic objectives and enable effective tomer Solutions> >> Strategic Alliances.

new product/process management. f. During use of the above planning prob. The business planning process includes cess, Hewlett Packard's Microwave and Cor10 parts; it is prepared to cover a 5-year period munications Group proposed establishing a surand is updated annually- face mount technology facility. For this capital

-Statement of purpose project, a PM had been selected; he was a divi-

-Specific objectives to achieve during a sional VP, R&D laboratory manager, and is

5-year period expected to manage the facility into production.

-Description of customers and channels The PM is assured continued employment at HP

of distribution even if the project should fail. The project has

been chartered to break even within 3 years. It

-Description of competition is budgeted annually but stabilized by the strate-

-Description of necessa, y products and gic decision to invest over a 3-year period.

3ervices The PM must submit quarterly reviews to top

-Plan for development or purchase and management.

introduction of products and services 2. Interview with Mr. Wolf, MCG Quality and

-Financial analysis of costs and returns Customer Support Manager

-Potential problem areas a. Subject: Qualify Management at Hewlett

Packard. -- Recommendations Mr. Wolf has substantial experience with DOD

-First year tactical plan. quality requirements.

c. Business planning is a bottom-up pro- b. The most significant difference between

cest, responding to periodic top management DOD and HP in managing quality is that DOD

guidance. reviewed and approved annually by the focuses on paper systems to document quality

Chief Executive Officer (CEO). management process whereas HP focuses on

d. Mr. Scribner's philosophy is that the measurable results. He explained that the cost of

operational paradigm must change when you can quality documentation on DOD purchases of HP

see recurring, fundamental problems. He defined products adds about $1,000 to each end item purparadigm as: chased and has resulted in less actual quality than

-A set of rules (usually unwritten) the same items delivered to commercial customers. This is due to the fact that HP must -- The way you view your environment employ someone to create the paper; they employ

--How things "get done around here." their field service force to unpackage the end items

e. lie described the. paiadigatic responses and run them through tests on field support

ol the 198Cs to the natural contradictions in systems which are frequently not as accurate as

business: the in-line manufacturing process delivers.

c. lie acknowledged that DOD is apparently -1 ligh Quality vs. Low urnable to feed back specific field failure to HP in

Cost > > > Total Quality Control a timely manner to support fundamental correc-

-Responsive I)elivcry vs. Low Inven- tive actions. lie described quality feedback as an

try ), > > Just III ' rlie essential element of any viable quality ,ystem.

-- l nrovt ion vs. l~ar ,g (.rganiza. d. I tewlett Packard, orn the other hand, reacts

titrv, > > > Marijgcmcrit by Objectives qui. kly t. returns hfom thc field to subject failed

13 2
items to analysis: reasons for failure are then Second, the metric is rooted in history.

arrayed by type failure and cause and subjected Hewlett Packard has been tracking this metric for

to pareto prioritization to preclude recurrence. many years and has a data base from which to

This may require a change to HP's processes (40 make meaningful compaiisons, and the metric

percent of the time). a change to HP s purchase was developed by founder, Bill Hewlett. To their

specifications (30 percent of the time), com- credit, HP has resisted attempts to change this

munication with parts vendors for warranty cor- single most important measure of quality.

rection (20 percent of the time), or other actions. h. Hewlett Packard has a vendor

e. He explained that during the past 15 years, rating'evaluation system called TQRDC. The

defects of vendor supplied items have been driven elements of that system include evaluation and

down to 28 parts per million. Given that rate, HP rating of: technology, quality, responsiveness,

feels its approach to forming strategic alliances dependability, and cost, seemingly in that order.

with suppliers is correct and it need not imple- i. Mr. Wolf's final point was that technology

ment incoming screening procedures. Normal is changing so fast that a paper-based quality

assembly testing and fina! assembly testing is con- " system cannot define all important factors before sidered fully adequate. The purchasing system is there are fundamental changes that invalidate the

ver' decentralized and involves few "how to' procedures. There is no specific corporate require- system,

nient to compete purchases, nor is there any 3. Interview with Mr. Bodway, CB1 Director of

second gue.;sing of single source purchasing deci- Product Development.

sions. In fact, one of HP manufacturing's strategic a. Subject: Product Development Process for

visions is to procure commodities from "a HP Informnation Systems.

minimum number of long-term, world-class sup- The presentation and discussion describes

pliers" who would be "partners in success." Mr the standard "phase review process" composed of 'Wolf described a recently concluded alliance seven serial phases and the responsibilities between HP and an OEM manufacturer for a involved with new product development. The

component common to many of HP's products. typical project completes al! phases in from 6

He did not appear concerned about potential loss months to 3 years with an overall 70 percent

of leverage associated with committing to a single likelihood of successful completion.

suppl~er for a long period of time.

b. A new product is composed of computer

[IH feels that MIL-Q type requirements of hardware, basic operating .,ystems, and/or

DOD are wilitn to the lowest common operating system overlay software in combinadenominator of supplier quality and a funda.,,,n tions necessary to enhance existing product lines

tal change is necessary for DOI.) to see quality or create new ones, plus if applicable, customer

deliverit: on the order of HP's. sy,.tem solutions and interface to customer IS netg. It was observed at HI' that a good rule of works. Their PM is called System Manager

thumb for tracking and systematically improv- though this report will term this individual the

ing quality in their products was to trend end iterm I'M.

failures per $1000 of end item cost. In 1976 the The process has been in use since 1986 to

rat. was 10 percent/$1000 "that is: .1 end-item permit management of 20-30 new projects at any

failure per v eat per $1,000 of end-item value); by point in time; it i. composed of 7 phases (0-6) as

1980 the rate was 3 percent, $1,000 and it is now follow,:

.3 p.rcent,$l ,000 du(' to continued umphasis io

find and analyte lailurfe's and corre(t problems so -lejui',r'n!•. Plan. Identifies opporthe.y don t rec ur. I hey allow that this quality !unities, dt'iines life-(yce resource requirements

ietric. is, not perleI, but feel it has sonie strong and commits resources her next phase. L.inks proiitcrit-, [ii t, it is srinple and rel'vant '.( overall jec('t to bu ,it ss planning. About 50 percent of all

pr 'du t quldity. 'I lihte(orJR, they fue] irnprwoveryet I)t ,jects pro ceed to next phase

ori 1his tnitr,,u is 'asily understood aid will hav .. S l Ov l i•',c. ky. Selects the (orpetitive

a (lo ati -al crt bend. of i iprovi ril quality oi all al]ternative th-It satis!ies (orporath cxp'.lvced return.

frunlI,. rn,. ju',, s;eci ic area, ein,,, measured'. l,.tablishcs I uritction,il plalning atid onimits

15 3
resources for next phase. About 80 percent of all divisional GM reviews all reports to the phase

projects completing this phase are ultimately corn- review committee but does not "vote." Should the

pleted and marketed. project require more than the previously approved

-Specify/, Design. Confirms total project project funding, the Computer Business Executive

baseline (cost, chedule, performance and payoff) Council must decide (composition of the CBEC

and commits resources for all follow-on phases. is the COO and corporate executive vice

-- Develop/Test. Authorizes publication of presidents).

specifications of price, performance and availa- 5. Interview with Mr. Snyder, CBO Director of

bility and may authorize limited customet access. Program Management.

-User Test/Ramp Up. Authorizes unre- a. Subject: Strategic Direction of the New

stricted trade shipment to customers. Product (Phase Review) Development System.

The discussion included specific reference to the

-Entrancemn Support. Complete R&D major new product line, "Spectrum," in which the

enhancements and system management activities. HP 3000-series computer hardware and software

-Maturity. Implements discontinuance architecture was changed; the project required 4.5

plan (like transition plan) and removes from phase years, completion in 1985, and was conducted via

review process. a different process than described for current new

d. At each phase review, the phase review products.

committee decides if the project will proceed b. The "Spectrum" project was managed by

immediately (with or without conditions), will be a hand-picked, dedicated team of 200 experiencdelayed or cancelled. The committee is composed ed personnel organized under a system program

of the highest corporate functional managers: manager (SPM), as distinct from a system

marketing, R(&D, quahity, manufacturing, cus- manager, due to scope. The SPM and other senior

tomer support, and finance. The phase reviews participants had "assured round trips" back to

are often conducted with the Chief Operating previous positions should they have to "bail out"

Officer, Mr. Morton, in attendance. They are from "Spectrum." Spectrum was clearly a project

scheduled for exactly 30 minutes. They are not in which HP "bet the companv'." The SPM set the

design reviews or problem-solving sessions. The I chedule and controlled funding; he had direct

primary purpose is to discipline the product communications with the CEO and regularly used

development system to work on schedule, and to them to resolve issues among functional particiensure all issues are resolved before the review, pants. Schedule was the critical criteria of success;

There is no formal preparatory review with the funds were overrun somewhat and performance

committee; rather, the IM is expected to identify objectives adjusted as necessary to achieve oilall problems well before the ieview and resolve time market introduction.

them via direct action with the necessary func- tionl grups.c. Mr. Snyder indicated that the success of

tional groups. Spectrum laid in a stable baseline for the whole

c. The critical factor for successful projects is information system product line for about 1b

the business plan; if it is well thought-out and years; that is, another project of similar scope

integrated, the corporate system will successfully should not be needed for another approximately

execute accordingly. The PM conducts weekly 8 years.

reviews with all functional participants who are d. The SPM reported monthly to the COO

accuntablc to the corporation foi support. The and CEO to inform, explain arid, if needed, get

IM is an orchestrator, with no decision or direc- assistance. Financial management support wa,-

tive authority other than to coordinate all actions provided by the matrix.

and ensure fuli compliance with corporate systerns; h'I- als,' has no direct control of project e. For the projects managed under the phase

t rinding, review system, Mr. Snyder explained his office

decides which projects will proceed past Phase 2

I. htie typical 'M ik two levels below the and when. lie stated that thL intent is to choosv

,1,,,YgImI (livisli ial gini'r~ mo' .ilge ((GM.,. The the prtji,(t,, whi(i will offer maximum market

'3-4
penetration first; but nearly all projects, once ap- f. He further explained that the Computer

proved for Phase 4, will be completed. The pro- Business Executive Council was empowered to

Cess provides a set of "technology platforms" make strategic decisions, review selected

which can be selected from for earliest introduc- businesses and integrate planning across

tion of satisfactory capability; the result is that businesses.

very few projects require pushing the state-of- g. Mr. Walker described the process of

the-art. attributing financial data to projects as fairly

f. He explained that the piimarv problem for relaxed, giving the line managers flexibility to

industry is failure to complete a major develop- adjust funding to accomplish priority objectives.

ment; the HP systerri facilitates rapid, tailored

introduction of solutions for customer use. He

stated that a precept of HP'- system is to ensure RESULTS ACHIEVED

against "surprise." If anyone ies, or hides behind

legal interpretations, that person is fired. If sup- No specitic project was tracked at HP, either at

pliers fail to live up to agreements, they are the Microwave and Communications Group or

elimrnated from the industry, the Computer Business Organization; therefore,

achievement of specific cost, schedule or perfor6. Interview with Mr. Morton, C9O Chief mance goals was not assessed. It appeared that,

Operating Officer, and M'r. Wa!ker, CBO Office as a general observation, emphasis was on timely

of Chief of Financial Management. achievement of strategic goals. Major programs

f C oc jef : P(e.g., "Spectrum" and the surface mount

a. Subject: Strategic IPlannuing and Decisions. technology facility) were controlled at the PM

b. Mr. Morton described Hl' as being good evel with frequent PM to CEO-surrogate status

a! discminating corpcrate obe'ctives J o all per- updates. Success of these major programs was

sonnel know the priorities. He explained that he measured in terms of timeliness first. Technical

attended most phase reviews in order to keep performance was next in importance, the prodabreast of progress and to ensure the system was uct 'plant must bh fully sufficient when introworking. duced, but could, and would be improved ebusiness planning process through planned enhancements over its life cycle. c. He described the Invstienecot walnannvi-ngnrpredceund

as (me that builds consensus and ensures good Investmen cost was not over-controlled, funds

short-term performance without sacrificing long- were the tool to achieve strategic breakthroughs.

term R&D progrdms. The smaller, product enhancement and application projects were tightly administered by the

d. st le described the I'M as a facilitatur to the phase review process. In this latter process, PMs

standrd structure' and when he was unable to had little authority, acting as coordinators for norresolve all problem-, the group and sector mal operationai managers. Timing, performance

managers would step in to assist, and cost for these projects appeared to be

e. Mr. Morton mentioned that a divisional orchestrated through a committee management

realii,,nment had been acccrnplibhed in N,v'rnber process. I'roje_-.t achievement versus original pro

]968 to better fa ilitate integrated program plan- jedt baselines was riot assessed.

nin; and c:Xccution.

B-5
APPENOIX C

DOW CHEMICAL CASE

PROJECTS: Capital Plant and Equipment

COMPANY: Dow Chemical Company, Michigan Division

DATE OF VISIT/INTERVIEWS: 23 March 89

PERSONS INTERVIEWED:

Dr. Robert Pangborn, Laboratory CIrector

Mr. Frank Aerstin, Section Manager, Process Engineering

Mr. Larry Meir, Division Engineering

Mr. Norm Hozak, Division Engineering

Mr. Stan Nelson, Dow Purchasing

Mr. Mike Wood, Dow Purchasing

DESCRIPTION OF SYSTEMS: 2 Preliminary Engineering. At this stage

This case documents the Dow Chmical Corn- authorization1 is given to proceed from

pany, Michigan Division process for managing the appropriate level dependent on proimplementation of major capital/equipment jected cost. Program Manager is

systems. Four to five of these systems are in pro- assigned.* Long lead Items are placed on

tess at any point in time. Recent examples include order.

an aspirin production facility, a special purpose 3 Plan for Engineering. The operational replastics plant, etc. Such plants include a structure; quirements for equipment and buildings

a process-flow line composed of incoming are established.

materials storage, handling and processing; in- The steps above (which result in a detailed cost

process and final product storage; process estimate and business plan, as well as, engineermonitoring and control systems, safety and waste ing descriptions) are the responsibility of the Prodisposal systems, etc. cess Engineering Department. It is handed over

SCOPE OF PROJECTS to Division Engineering upon completion oi Phase

I Timeframe. Typically, 18 months from Board 3. The lead Process Engineer normally reverts to

of Director approval for detail engineering a consulting role with the lead Project Engineer tof Dietorapproval gh foardtal ctaking over. There is a formal review at the end

through operational start-up, of Phase 3; the Head of Process Engineering has

2. Funding. Investment funding of $2M 'o the authority to move the program into Phase 4.

$50OM; the typical new plant costs about $100M. The PM has the authority to bypass this review

if he feels it is essential to meet program

ACQUISITION MANAGEMENT objectives.

TECHNIQUES EMPLOYED

l. Program Management and Process Phase Effort

Engineering 4 Detail Engineering. Contract requirea. Dow manages all capital projects in ments are documented, sources ,,olicited

phase,., as follows: and evaluated.

Phase Effort 5 Construction. Contractor accomplishes

1 Scope. An outline proposal from any building and installs vendJor provided

element equipment.

(.-1
6 Prestart-up. Cleaning and testing of facil- program, total control of these funds goes to the

ity. This is a joint PM and gaining Plant program manager. He must obtain approval from

Manager run test with the PM retaining the Board of Directors prior to commitment if he

decision authority, expects to exceed his budget by over 10 percent.

Start-up. The facility is turned over to b. Dow Purchasing is normally its own

operations. prime systems integrator. Contract administration

b. The mortality rate of projects is nearly 50 is in the engineering division. They visit plants

percent before Phase 4. This cancellation does not and inspect processes. Program management

necessarily represent a bad program but may be employs detailed control using Pert and basic cost

in response to a change in the market or bus~ness accounting information, updated weekly. In conplan. Dow Purchasing (worldwilde) has approx- struction programs, one division utilizes MAC

imately $2B capital expenditure budget annually. computers with MAC Project II software. Several

of the local construction firms use the same in- c. The size of the typical program manage- formation data bases to track schedule. Tlhere is

ment core staff is 5-10 with the remaiinder matrix aormat d atten to t hedeled Ter

assipedas equied.Theentre pogrm saff a gr,.'at deal of attention paid to the detailed master assigned as required. The entire program staff plan; the PM reports monthly to upper managewith its matrix support is moved near the con- plnt (no rm l one leve la th e m) Pr gra

strctin steusall ina st o tailrs.Thi gies ment (normally one level above the PM). Program

struction site, usecally in a set of trailers. This gives managers and plant managers are generally five

the PM significant effective authority over all pro- levels below the Chief Executive Officer of Dow;

ject team members. intervening layers are (from the top) President,

d. Nearly all PMs come from manufactur- Dow, USA; VP Manufacturing; GM, Michigan

ing because the result will be a manufactu 'ing Division: and Major Manager, Product XYZ.

plant. They are experienced in manufacturing c The firm is using a financial management

operations. Characteristics looked for in a PM are: system which would probably pasF CSCS audit.

-Gcod leadership They look at it in detail as they manage their work

-Plant operation experience, but only report up aggregated data. They can,

Most PMs do two or less projects in a career. however, vainesrquedfocus on a particular cost or schedule

They are high-risk operations, that is they can terminate advancement but will not terminate 3. Purchasing Capital Fqutpment Items and

employment. Construction Services.

e. Previously, most Dow projects took 3 a. Dow has only a few major purchase items

yvars from scope to turnover, now the emphasis or commodities centrally purchased. Otherwise

is on a shorter start period. There is a move each operating location (e.g., Michigan Division)

toward concurrency and away from a strict se- controls its own purchases.

quence as described above. b. In purchasing, most of the professionals

f. Detailed financial control is maintained, are degreed engineers from the technical field supA detailed cost estimate is established at Phase ported. Emphasis is on the buyer's professional

three and lot ',ed in at Phase 4. It clearly identifies knowledge to understand acquired technology.

cost to the equipment level. c. Specifications are general in nature. Dow

g. Program managers have authority to pick expects 'he vendor to produce specific solutions

a supplier, with price not the only factor. foi operational requirements. A great deal of erm2. Detail Engineering Management. phasis is on technical evaluation. If the engineer and the project buyer disagree, the program mana. Volume of business has driven Dow to institutionalized "fast track (12-18 months cycle) ager is the tiebreaker.

programs where emphasis has been on budget and d. When making a source selection, cost is

timiing. There is recognition that cost and time are only one factor. It must be integrated with

related and the firm is emphasizing scheduile schedule and quality.

within budget limits. Time is a competitive ad- e. The company concentrates on maintainvantage. Once the Board of Directors funded a ing a stable vendor base, The basis for this base

C-2
is the experience of the professionals in the corn- possible in the process, giving the greatest flexpany. The company spends a good deal of time ibility in making engineering decisions.

on prequalification. RESULTS ACHIEVED

f. Dow uses competition when it is ap- No specific project was tracked at Dow Chemical;

propriate. There is no corporate goal or policy therefore, no specific cost/schedule/performance

mandating its use. Guidance is based on common goals were set. In general, schedules appeared to

sense. Supplier relationships are developed to be met as a first priority; performance objectives

emphasize schedule and put less emphasis on cost. were met though detailed requirements were

We were provided copies of their supplier evalua- traded-off with the exception of safety features

tion system which was quite similar in use in other which were never compromised; cost objectives,

cases. It is a supplier audit system which evaluates plus-or-minus the 10 percent management reserve

the supplier's processes. The goal is to screen out to the PM were met.

poor suppliers with the collateral benefit of reducing the supplier base. They have not used the Endnote

system as a weighted factor in making contract 1. Authorization - The company's Business

awards, but are considering this later. Management Team can authorize the scoping of

g. Procurement administrative lead time is a project. If it is more than $2M, it must be aprarely longer than a month. It can be done in 1-2 proved by the Board of Directors. This decision

days when necessary. Because most projects are is reviewed at the end of Phase 3 when the Board

on a fast track, with considerable concurrency, gives its final approval. Approved program fundthis dictates making purchase decisions as late as ing is allocated to the program manager.

C-3
APPENDIX D

GENERAL ELECTRIC AIRCRAFT ENGINE CASE

PROJECT NAME: "Factory of the Future"

COMPANY: General Electric Aircraft Engines (GEAE), Lynn, Mass.

DATE(s) OF VISIT/INTERVIEW(s): 14-15 Feb 89

PERSONS INTERVIEWED:

A non-attribution request was made by interviewees. Personnel were interviewed at several

management levels including general management, project management, and functional department

management.

DESCRIPTION OF SYSTEM days/year. Management personnel are production

planners, systems and maintenance engineers; The General Electric (GE) Aircraft Engine Group union personnel are of two skills-parts receiv-

"Factory of the Future" is a fully automated ing and shipping handler and automated factory

machining facility for processing rotating com- mechanics. There are no direct machine operators

ponents of high performance jet engines. It is one in the plant.

of several new manufacturing plants planned and

implemented from the mid-1970s to present to SCOPE OF PROJECT

modernize GE's worldwide competitiveness across 1. Timeframe. Conceived: 1982.

many commercial and military product lines. All Planned: 1983-1984.

such plant projects shared many of the same

guiding principles such as automation and team Implemented: 1985 ground

management. The factory system includes a breaking; 1986sinitia producmodern process area whicl, houses approximately tion startup

25 numericaiiy controlled (NC) machines for turn- Full Operation: 1987 24-hr.

ing, milling and drilling vendor-delivered raw operation; 1990 full capacity

materials. Numerically controlled machines are loading.

linked to a mainframe computer controller which 2. Funding. A $52 million internal venture

directs interaction of machines between process capitalization of which about $6 million is for the

runs with automated materials handling and other building and $46 million for the automated

support systems (e.g., incoming inventory staging machines and materials handling systems.

and deliver)' system, tools staging and delivery

system, and the system for finished product clean- ACQUISITION MANAGEMENT

ing and preparation for shipping). Production TECHNIQUES EMPLOYED

control and status is automatically provided to 1. Program/Project/Plant Management

the production control room. In operation, a part a. Matrix managed, aspects are as follows:

undergoing processing in the plant is never a. m PM a s as ta re a bo uto 60

touched by human hands from the time raw -The PM has a staff of about 60

materials are unpackaged until the finished part dedicated personnel, hired via the standard comis packaged for shipment. About 22 rotating parts pany personnel system for the implementation

for various jet engines are currently being pro- and production phases; about 120 additional peocessed i.n the plant with growth to about 3C parts ple were provided by functional directorates, as

during the next 2 years. The plant facility is run negotiated between the company and the union.

by 120 union personnel supported by abeut 60 -Staffing appears to be very stable over

management personnel, 24 hours/day, 362 the implementation and production phases to

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date. The PM has a strong position reference per- The second PM implemeited the plan

sonnel retention due largely to strength of per- and continued as the plant manafer for i year

sonalitv and knowledge of the personnel system, following initial production start-up.

-In production, the PM is not responsi- The current PM is principally responsible

ble for the business plun; that is the responsibility for production, but also is seeing to the evoluof the PMs of customer engine programs. tionary nature of application software develop-

-The plant PM is responsible for qual- ment and implementation, and initial processing

ity, cost and delivery of machined parts to the of the remaining ten parts planned for full capacity

plant responsible for the follow-on process. operation in 1-2 years.

-- The PM has no authority to operate 2. System Engineering Management.

outside of normal G.E. aircraft engine procedures; a. Specification of systems to be acquired

for example, purchasing exercised strict autonomy from vendors was done iteratively and

in source solicitation and selection procedures. cooperatively with system vendors. The requireb. Project was baselined via a plant ap- ment, solicited competitively, was a capabilities

propriation request (PAR), a projected business definition; vendor proposals established what

plan, resource allocation, schedule, and technical would be provided; these proposals were

description. The baseline PAR plan is developed negotiated to ensure full understanding and the

by operational management, approved by the capability to be provided. The GEAE did not inChief plementation Executive Officer, and presented to the ima- itiallv specify subsystem requirements but did

PAR must 

PM for execution. Changes to the spell out all critical interfaces to other systems, be approved by the Department Gen- including control system. Vendors were selected e1al Manager (Pos immediate superior unless based on their technical proposals; solicitations e ,iarifdrant Ld,,I, t, 'iudmetd iaheduie or ultimate were open, though, the design team did suggest

capability are to be made. The PAR is not a de- probable sources. A somewhat unique aspect of

tailed document but an objective-ut ientated one. vendor contracts was since there was significant

risk there wculd be problems integrating various

c. rogress, status reports were made systems which must operate automatically quarterly to the GEAE Vice President (two levels together, vendors were obligated to perform unabove PM). The reports were detailed and pro til all systems were operating successfully. Fixedvided for information. The GEA` has eliminated price contracting applied to most vendor efforts.

all VP positions at l.ynn, Mass.; thus division pi ctract ed to most veno efr

general managers directly report t- the GEAE VP. b. It was noted that, though GEAE uses

The Manufacturing "Factory of Department the Future" PM reports to the CAD,'CitM and has acquired a CADl tCANI co- General Manager. pany, it can not automatically transfer CAD documentation to the CAM system due to the

d. Plant organization in the production detailed and time-consuming process of review

phase iý based on managementrworker teams and approval of design results. Should this prorather than traditional line and staff elements. cess be improved, there appears to be substanOnly t•,,' worker skill categories exist-part tial p!omise of diretIV trarislating design criteria

handlers and machine maintainers. fhis permits into numerically controlled machine instructions.

great flexibility in employing teams in that they

are motivated to work cooperatively to optimize 3. Purchasing and Quality. (Stubparagraphs

productivity and quality, apply to all elements of GEAE, not just the sube. The PM selection criteria is different for ject plant.)

the PM designated to plan and gain corporate ap- a. It was observed by GEAE managers that

proval for the project from the PM charged with the attitude concerning ethics has evolvedc during

implementing the plan and running the plant. The the past few years to one of total compliance with

"Factory of the Future" has had three PMs. The the letter of government regulations and guidefirst managed concept development and planning lines. This strongly subordinates project perforthrough approval of the PAR by the CEO. mance, cost and schedule objectives to that of

D-2
compliance. This situation is driven by findings tor" for government orders but is in use for cornof unethical behavior in the 1984 timeframe and mercial orders.

the tremendous emphasis government agencies d. Numerically controlled machine selfhave made to define and enforce ethical practices checking accuracy, coupled with off-line but infor industry.. Therefore, for consistencv, DOD re- tegrated testing capability, all linked to the conquirements are implemented across the board, to trol system minimizes the need for off-line testing

include their application to commercial products to verify quality of machining. This capability can

and processes. be of use in two important ways: 1) Normal acb. The corporation uses MIL.Q quality re- curacy of the numerically controlled machines,

quirements on all aircraft engines, commercial and backed up by automatic calibration may permit

military. GEAE touts quality as the first element component specifications to be detailed knowing

in successful engine products due to implications the inherent NC accuracy/quality; 2) When qualof failure of aircraft safety and company reputa- ity reporting is required, the reports requirement

tion. A supplier quality rating system is in place can be adjusted to use computer output from NC

for a few component commodities; a classic qual- machines directly, versus using off-line tests and

ity control approach is employed involving the differently formatted reports.

following- 4. Production.

-- Audit of suppliers' QC system to en- The "Factory of the Future" has potential for

sure sufficiency significantly reducing WIP inventories due to

-On-site visits to ensure systems are be- predictability of process time. The JI'r and TQM

ing used according to plan. reality in the plant forms a cornerstone for ex-

-Performance is assessed based on the panding these capabilities out into the integrafoilowing: tion,'assembly plants.

--Delivered quality: reported quarterly; RESULTS ACHIEVED

value-40 percent; measured using an exception The "Factory of the Future" is clearly a technical,

reporting system cost and schedule success. However, due to

--Definition of the quality system and reduced orders for the principle parts to be

conformance; value-60 percent. processed in it, the plant has yet to achieve the

financial success upon which it was approved. The

c. The goal of the supplier qualification shortfall of business is being made up by pulling

system is to narrow their supplier base while en- processing of other production parts from older

couraging suppliers to become more self-sufficient plants. This requires more application software

and responsive to a greater line of component re- development and integration and should be

quirements. The system is riot used as a "bid fac- achieved in 1-2 years.

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APPENDIX E

TEKTRONIX CASE

PROJECT NAME: World Class Manufacturing Plants

COMPANY: Tektronix, Beaverton, Ore.

TriQuint, Beaverton, Ore.

DAlE of VISIT/INTERVIEWS: 30 March 89

PERSONS INTERVIEWED:

Mr John Ristow, Director, Corporate Quality Assurance

Mr. Soren Vestergaard, General Manager, Portable Test Instruments Division

Mr. Robert Due!tgeri, Marketing Manager, Portable Test Instruments Division

Mrs. Bonnie Sullivan, Director, Corporate Procurement

Mr. Don Tuc:ker, Manager, Operaticns Group, Federal Syst.ems Division

Mr. Neil Shiller. Army Account Manager

Mr. Richard Allen, Director, Quality and Reliability Assurance, TriQuint

Mr. Alan Patz, President, TriQuint and former Director, Finance and Operations, Tektronix

Technology Group

M.Ir. Richard Anderson, Financial Manager, Multi-Comp and former Financial Manager, Tektronix

Capital Projects

DESCRIPTION OF PROGRAM production. The building project involved a proSix capita! programs, planned and implemented duction area:

from the late-1970s to mid-1980s, were investi- -Isolated from vibrations of corridors and

gated. They were efforts by Tektronix to position elevators and with work areas isolated from each

itself as a world class manuficturer and supplier other (conceptually like a Beautyrest mattress)

of elettronic test and measurement equipment and -With overpressure atmosphere which, with

communications systems. Corporate strategy was to Iprov e',Ue ad thir arkt shre inthe a ir cleaning filters, provides atmosphere cleaner

to en,,ure and improve their market share in the than 10 parts (1 micron or larger) per cubic foot face of the mount ing Japanese in'vasion of world- (this is 1000 times cleaner than a hospital

wide market,, for electronic test and measurement opers1ting room)

equipment. Centerpiece of the strategy was a new

2400--cri.s por:able oscilloscofe product line. The -- With extremely tight temperature and

;•c.1' U~.Coe' required much higher performanc,, humidity control, compressed air and special proFmallkr and less powei-demanding components duction gases (including poisonous and explosive)

than pi-vious instiuments a!, well as improved distribution systems, and with five separate conavailability of tho,,',ands of vendor supplied com- taminated waste material dispesal systems.

;,onnert.. In addition, a purchasing program The plant ( urrently produces silicon bipolar ICs,

orig.iyally termed the "Supplier Reduct;on Pro- charge-c.:,-:ph,-d devic-cs and gallium arsenide

i,, ,m" wa., ivestigated; it was implemented o,,r (GaAs) ICk. 'ihe GaAs capability was a business

the period 19Y7-19e8, 1he 1to ur capital proiects spin-off i ! ,.; to TriQuint, a totally owned sub- we Ii! sidiary, to prcduce and market GaAs technology

Jlidilg?1X Y,9. 1,;t'.×tutcd (-ircuit MuMzu'ictu, - to Tektronix and other customers (including com-

'aif. A 185,000 sc,. it. prnduwtion facility petitors): it is the subject of a separate caselette

Vd S .JC6 fdilýtJy (i(; integrated .ir(uti (IC) below.

E-1
2. GaAs IC Plant. This plant occupies 35,000 3. Building 78 (automated warehouse). Cost:

sqc. ft.. of Building 59 (above) and is operated by $23M; Approved by BOD in 1977; completed in

TriQuint. The plant w.as planned and iniple- 1979.

mented as a part of Tektronix as part of a long- 4. CRT, Hybrid Circuit and CB Plants. Cost:

range design to ultimately spin it off. Tektronix $20-50M each; approved and implemented beforesaw ;ts needs would be far less than plant tween the late-1970s and mid-1980s.

capacuy. The plant produces GaAs ICs to customer order and a number of standard compo- 5. The Supplier Reduction Program reduced

nents for Tekti onix and other customers. At this manufacturing material suppliers from more than

time Tektronix represents 10 percent of TriQuint's 2,900 to approximately 200 in 1 Vi years. These

sales while direct sales to the government (mostly suppliers represent more than $380M annually in

research a I advanced developnient efforts) are Tektronix purchases.

about 20 purcent and sales to industry (including

primes on government contracts) are another 70 ACQUISITION MANAGEMENT

percent. the project involved designing, providing. i,,aiig and testing automated equip- Tektronix went through a major reorganization

ment tor IC production (e.g., ion implanting in the late 1970s from central control to decendevices; and a!! utilities (e.g., gases, air, waste, trali;,ed. It is compo,,d of three fairly autonomou,

etc., wh'i ,,,.id iuginent or adapt to the business groups (managed by vice presidents),

Building 59 facility. The GaAs is the most each with several product divisions and/or cormdemanding IC technology currently in production ponent manufacturing plants. These divisions and

in Building 59. plants are iranaged by general managers and are

3. BuIldihg 78, Automated Warehouse. Building profit-and-loss centers. Each of the above capital

78 was designed to be the central incoming parts P101t:LIS was .onceived during a period of central

rcceiving, storage and retrieval facility. The management and most were executed during

building wvas designed around an automated sys- decentralized operations. In all cases, Tektronix

teni for storing and retrieving parts and a high- was the integrating organization, hiring consultants and system/subsystem contractors as bay storage area for oversized items; this storage

area utilizes special 50 vertical foot fork-type lifts required.

(these lifts are manned). The objective of the facil- 1. Building 59 (IC facility).

itv was to integrate and reduce all parts inven- a. Program/Project Maiagemcnt (including

tories and to improve cycle-time in finding and functional management). The vce pesident for

moving needed parts to appropriate manuiactur- mnufacturing was initially the responsible senior

ing plants. manager for the project (later the project was

4. Cathode Ray Tube (CRT). Hybrid Circuit, reassigned to the VIP of Tektronix Technology

and Circuit Board (CB) Manufacturing Plunts. Group); the. former chose to assign a project coor-

"f.hese projects were referred to during interviews dinator (PC) to share the coordination function

about the above projects and were similar in with a PC assigned by the corporate )ire tor of

scope, timing, and overall corporate objective. Facilities. This VP retained all project decisionThey are included to rou;id out the application making authority. The project team consisted of

of project management approaches used in several industrial engineers who, among other

lektronix. duties, managed various building and subsystems

SCOPE of PROJECTS contractual efferts, and who reported to the VIP

through chanrnls; representatives of four pre- 1. [uih',iy, 59 (IC fuilihy. C''st: .S53.4M Ap- existing semiconductor manufacturing facilities

pr•).',d by Boald of D1irctors (MO3D.! in 1979; re- (these were users) wlio reported through their

CjLii1Ced 21 mlonths !(. implement,. chorinels to the same VI'; and a ,:onsulting (-on-

"z'(.,u Pitwt (in Ihpihiy 59.). Cost: $1.7M; tractor Procurement was, at the time, a central

Ap;.,roved by BOD h'brtov 1984; completed and corporate function. The project tearn was reor-

,,-- oil as ]' i~nt t, in Apil 198.5. ganized about 12 months into the 21 month imn-
pkI Ital'Jn I) du( L.I I )(I. ItU I 'oj l ed | I 1 i I1 I d J .',0O-M e' iv ociili)sii p's wh=ih d;-

UTl(ldI'way A't iliUt tihll Siric tim1 5'vfrad k.y p'ndeci upin th': facility i.,'_ri~ t rodtJ 01)

parti(.ipdnt, (including thle VI1 and engineering target avd have become the highly successIul,

were ( han),ed due partially to a sinificant main product line at Ti.ktrorix. Over-de,,ign of

Uriduth(IrI/eL( oUSt overrun coLilhtIfn. 'I .lie l•,il Building 59 ha-, facilitate'd te(hnological expani(-, P'C ttih( tiotil %Va t%,tisurni:d under thf: niw sion and wIll continue to do so for up to 2.0 mort.

Si re'.tt) (if [ manm t and OIperation', who rcported y.ais; any ,ignifi..an Iy l) . f, ac.iility Would be

o(, the: ne'w VP' if 1l'4 trmni- " tcchrlwy (Iiup. aprprma,.hing techndogical (s,,hl..c(,nce by the

he Ih C. (orI(u( te'd v,:el.y statu,, rvview,, with early 1990s. It appears that if overruns had been

all teali MnMIrS eX'etxt the V.' who) ýa brietfed reported in a timetly manner to the 1301), thuy

.W. ILe( V',Si y minght have been alppruv.i wlthout f.-cd to i'lilit c

1). 71-' h li mi (11' RJ'I s Ispi, 'Pi Z{',It' t tih ' -t, sible. In any as ' l k.tronix has, niit

Lr,' ,,, iic•.ltal r.qtui v'if:nt-, fli tht f.cility vrid ilII lf: lrn'rflted sev,:r .pi oc'duir s w hi, h w ould prc-

.oIaris t,.• u, r gi,,,p repesenttive.', cuc to thI ar' TIu)e iossible recurrenc.t, rathr they cond tlitV,'ll'; Ii. [t'efL Ji 'it o li he csidtnt I li lirui tii rtly UtN III)JIU t 1i'd ,;ti'. 10Ii• to i~ iii.t,

IL(ildil y (.)rcyiill",' .I'lhf tec i nology wuulc l gel I(,t~ cirq, to g,',(O huu,,siIS,, lir tdi-c.

o1 aicJ tiii ie',,, I( t,, ' . n '. v'• i., l, ited Irulil 2. h G O As la IIIty In IBuildlng 59

ilt k ttie' 1(1 ,I Cw ! y 11,1v I ,ito I allct ltL'd tol U L' )., PJ? ox ramliit Ci. I M i ci otiliviltl. i h pro- -

tCdi li- t W'r', Jijtfiful, l i(i th.tlieiri :, duc to (if jil Wa. aplproved to, t: ie lt.erriilly iqiipletnivitcd

,.i m1 i' ri . ,:; ,I I', kI tIre. ,iii'.,In for cai i 1" I he tlivic %plUl fll ad a sela'ite f'uh inl ll% e titerlpti/t

r,-.,ut w w.i thc vr':l . lt:1"illy w.a built to the, i ,vjt foulowinlg t li, j iltIT mfl iml, 'lhv ll'li1l )i 'ectOl (if

trlii g'illt ;01c el|' t',' t-)lhf of , (k0 /\11 If K ). liLLec us F:ina iit and Ulieratimii, ltekti orix Teohiirl•t igy

dI , i~ i t , 1'1i', l . J l 1 , 1 . jl i~ lll l W .I ., ",( , lilt' O w ni,, i C ,l' lU l ), %w ,l jp p m in tc d ( ,['n ri v i l M a n j g t-r ( C j'M ) oill_

i(,'i1,4, iiiipl~l V:.iiiii I, h, I.hl 11,,. ,,Ii i I ,(1Jwrl IM% ty'IlC Pro )l(.tiv 'r1 'w I~u'.in('s and had full !,utitor

tiiitligff''. ,ne. o, trui. tiulir, l nUalteriil, cMeMh, it>y to collirl it t1 I tilme A;,triv'd If .91 , Ilus 10

' /., ,i'er p pl ,l, iritv.,il f i t ta inlfts -1% ' lv 1)~( fit r ,ei rve w ithout i re oirting bac I, m to( r-

"r~ u' gis p~p'.) Lu il~t ts spetif i~a ii in'wer l)(radte headquarters; h' vw,, not rcquiei'd to r, li•t t

J'.t , I "i ' -.., irl strita i al I nclvir' in cLollrdillatin plrogite_,, toi the aboratorý VIl'. This GM a ipv';0. tl-'e: f,(, iliti • N ; s•,it user felit IfIt out of Iiiinted I lull thii . I'w j'.i Managt-, who, fiilli)w-

, until ti,,, lati.l c pletion, becme Vic' Iii4:.idLfnt If

(. iiiIi, it l4 V1(4Piid~i'!7 Ilf . fu1 ullntoii l V/,l. Marluf i uring in the new [musine"i, I riQ uint; thie

,, ir'ially (u 1itr,1li ed 11t coli, atv aio hl'ildlqu.tut l.s, (.,M heLt,.m IPre idein of "IrQ uint.

l, . ili,mvd tmt thiv miew l)irect l l ()I I iF iti , anl l; d . Rcui fs.". 'I [ rirv wvasc, tcinm iit'ted in

) Iilui',. ''!•,i thai t iit ,,iiilm v-,i• i tlt'i. ifit' uif igi]mal %ch 'dtile despite i delay ii 1101 ) ilppif val

origi'lIl 0) .Ilic;td jud,(,,'/,l S42M iii thiV Ul 4 1 lllt0h01. It (ilit i o 0rn jlmer(.tit tinlder *lplil w'd

lrc•t'( t withd III, Lu a1 Ilit(eilit ret 'rvt'1 aiicfitted uost and in lull coinpllanc with ttclinkal ret,, il,,' VI' cL,l[cratit Iriimai.ilii m irrc ai-.inl'nl did L.uir tunent-. IriQulnt Is now a ili)M/viy'ar husihuIt ti 1, 1.riir, iitmliiiilt if.I 0 urin Ifn tIlt i~r jI('i.t, lit!%%. 1!,s (,aA% tVchnol0ogy iP c1.ili rimicially I-old

~i, i uI t,.;eia did WM 1.4, uci riilr,11, finan i ti, t i uli lli.tby ,t la,1giy,1 an1d % 1% 0I: Oif the (litigal

ri. !iil.egiriiit, ,,•scive td a( tual texpiwridituft-,I i:.,- CIlllMIfcii . provided to 'I~ e prOganilll,.

t - .u Jt li~il~t t.• i, li, H i,1ItS ft'StI vV, t lil l ll'l!

!,fr tO Iru,, .''et vvii ir,,. ht i' ii-ikulistig 2t.ullding 78 Autoitnated W archlouwe

,,i, 't l 't I, tr ii 11x ( ,iuitimltis tO I leave! rc 1iru 1 N, P11"i)X)ill/I 'i '? M'i•, 1XlVL'Pith . 'I lie Vitt'

fiti l,. l, hIl ir ii il); il-'lit 1I tie ii S.jFu IS1'i 1 V P d/l' d llfid I dtl 41, i'lt f pt l ,iiii ' I'll 0 th 6% iscl pi l 1lt ad Jim

I,,i'-' i',ut iiuuqiu,'.,i Il~iuiii stiirigy, it' t Oues i ji dui li/ tIi.s',,limnal l,1fijlct iildItIgeI . '110% I'M w.is 4,lit-

.i,i Iidi l[t il,ili Illy prfilvrl , Ln I( aitict l lit 1 r.it'ly t(I tIn ,IuV.' leL 'vl ,tIii ix ,ta lf a 'i.d (Otulliit

uiite~hy (If .is'.yti ii 1 y'ia l f. 1.1 1(iiiert ' 11.1u t Ii /Cd I/ t )?f tile 111 1"d t Mt .%I

d P,I'till ,/, is,- l , Wd t10I1't I• o t I) iicleltd ,M A ridi i' hi ic, i tIht tl Il (( ' t' in: ti in Ii~t n.tIrt o ,d 

kiiiI.,'111d t,) 111 %v , ( i~l. i Cit ), i t~,lll I ('i t to ilu iliplul . ftill 1,i~u .Jii J i~ll h -,mu L es.s ol ll}f:..l1, Pjq- ht t ill t:!•

i,•rt ',,, , i.• , - 10 I,' I .cu., u,i iI,)( iltihally AUtluit thcinigs

L-3
-Ii rir,,; a prt .-,,,ioral PM 3. Purchasing and Quality. In April 1987,

I )etihid huine..... and dal te1 hr, i",1,- Tektronix chartered a project manager, responFingn rl,;ir to' BC)!) approval, inmluding sol kiting sibit to DirUe1to of Corporate Procurement, to

and ,uati~iain, bhik, tofr all buildng and sub- rtducC the number of suppliers of manufacturing

t,,,',,ctL i , radtts on 1id.1 a ras0i .-l ba•siJ. Tl hi, re.- material, from the estimated number of 1,500 to

o.ired bild.in ng firm. ti\t'd pricle,, with continbcenciv 350 bv October 1988. Objectives were to reduce

\ a tie, l thould [biddcrs -n ri.oLIn tr bad wUat hcr purchasing overhead and improve delivered qualunexlAJ'(t(d ,,oii (onditiin,. sottware intertacing itv of component items and materials. Later, this

probl'ems, t.)- The pro je(t tean, the n analyzed project was renamed the Preferred Supplier Proptifential (osts., ,stablished a best estimate with gram lISP). It wvas planned following examples

im,,. ct ckntinr,,,r i.-, and ,btaied ,pprova! for tht. tot Xerox and Ge:;eral Electric w'ho provided some

e'st esti n te pIlus A 10 pecen-ct re'Serve. early guidan-e. The goal (350 suppliers) was

approved bv the Executive Vice Pre!id-nt for "-The-rtuirement was no}t chaig,4ed ilr- Operations. The concept evolved from their

iv," itmplcn lorn. Inc.ca,,t'd requiremeit.nt'- were Mantfactu ring Excellence Program (,EP), an

iil~h-t-lvle.f, tfllow-on" blc_ k upgrades ' adapted form tot Total Quality Management. The

7c hir/uuw Rciujt:'iwi, Aliurwigcotu. M1ElP consisted (it four integrated programs:

1 Ihtw te''t vas, lranned ftol eVoutionar' immpie- -JIT: just-in-time

tivre t, t;,,nr . I f i .- l ', 'lin t e fttf rt w a mtplc M r Iien tect

It. fA( ilie futur upg.r,ides, (e.g.. initia; ground -TQC: totl quality commitment

l 1,1t,, MIu wasJ, bIeyond thc minimumi nccdcd to, - MRP: manufacturing resourco

take.i. i•nmta);c o low c.t,st, it d]one all at onc._e; planning

1t V-1., U:,'d LIter during an upgrade). Ihis ap- -- P1: people involvement. jo,,,i. ]: per mnittted lo•w cost ex,,pans.,ion once such

1114'. h C,,1] ,tI,. ap wipd lnionut ci.•np cuatihn a. The PSP foresaw a need to continue us- di idc:td t, •d provf , Wta ing somne suppliers who may never become "preinitiil wiipleitntmafion. ferred' but support mature product lines. These

l. ieu project was iornpleted on have been termed "strategic suppliers" and are exfir, .imhin I tct'r. cnt oft authorized $23NM cost pected to be phased Out.

.;id a ,al'.ed''v. ttal,, required petrformance. This,, tdt e hsdot i, ifit .11iI v V i t ' lmu v privih'i-e, moure (,apa( ict than b. The project was managed as follows:

1 t-will'. Ie'rwiti"- d(1r1(. 1 later d]ii,-, s n, to - A Procurement Council (Counci!),

illh"iu i I I with ',ehC Led ven.dors dtelivering headed by the Director of corporate procurement.

di.m I, 1 1 m ', u.1ii; di.vi sioni . This wa.., in Each division has its own procurement function;

pmr , dit- it, decer f ,ial •I.a i i 0 t rii rporate fin,,- corrorate pro( urement is now a staff agency. The

, 'I. 1t4 ti ,ii,. ha,, ,ito .l tii use the extra c iapc, ity Counc-il established criteria and approved plans

ti, s"11 i a Ial ulity h too tside f i r1s. It for the project to ensure fairness and consistency.

,(4 .ihoi•t u montrls to complete training of Thc Cuancil also selected members of:

t "ic 1w1). 1,i' 'usin', persomnel to use the auto- -- The Management Review Team

niaett'd i.qjailjfy bqdiary incentives wvere used to NMR-I ), including cross-functional managers who

ii fute"-arehoLu,.ers -it _ to asuLIM( more (con1- were pcers of the PIM. The NIRT provided interh ,e,i.' t s i, Ltriiftttr use. divisional and staff coordination and selected

()Ill .I plants (t. I.,, hybrid circuit and C13 members of:

iirj,,, ta( tlim Jji %,' it r -U((t- .jwil ,,nrd cl mployed dit- --The Supplier Reduction Team:,

fer•mi• pojp •.t rcr.ig,'m renf tei.'hrtices at , (R-I, one per comniudlity of material, totaling

dti-( et,,m ,i ttfop oijior~ite ofti vrs responsible 18 SRIs. Each SIi wastcidircd I-,", aFplicable pro- 'it f. pirsihc'nts). (.)mm' plant was impleincrnted curument commlodity managers from corporate.

u.i m,;,, a ,i',mt il, ,rj'. t rira'agi'r wli ,I was ýiven Membership included engineers and other user

a ~i li,, hv t I , ar , 1rv ,In 'n 'a i t'- "r *': ,: :i,,c vi,'i 1" i1o: ta. 1 ijitlestted iianufactuinii'ctl'd f ill,,I i iin,,ihrilti],n. ing divi.,ion. These divisional meirmber,. were

L-4
responsible to communicate progress and tindings gated and fed back to procurement via the above

to their div'ision.. Now that the project is in the closed loop process. It was found that conversion

sustaining mode. SRTs are employed to develop to JIT has ,upported corporate test philosophy

corporate contracts where appropriate, periodi- since any lot problems are likely to be noted early

(aliv reviw ',upplier pertormancc (e.g.. delivery and little inventory will be on hand or incorstatistics e, rportormance exception reports) and porated into final products.

adjut any commodity supplier decisions, as e. In addition to periodically polling divisions

needed. These teams are now called 'stakeholder for supplier data, Tektronix periodically polls supteams, pliers to assess their opinion of Tektronix as a

c. The project is elfectively constrained by customer. Questionnaires and follow-up meetings

government requirements to maintain a minimum attempt to identify highlights and shortcomings

percentage (it small, disadvantaged, and minor- in an" Tektronix division procurement practices

itv owned busine',ses. To date this has not been or policies.

too limiting due to the tact that few such firms f. Results. By October 1988 the number of

.upply h)igh-technology manufacturing corn- preferred suppliers had been reduced to 207 (i.e..

ponents: rather, they typically provide local value suppliers to be used in new product development);

added services which at: c-utticient to (over during the project a total of 2,898 suppliers were

government requirements when applied across the noted to have been in use (almost twice the

business, original estimate). These 207 suppliers provide

d. Tektronix employs, a ' c_1osed loop correc- component material in 276 component technoltive ac.t:on process" whereby c.orporate contract ogles and covering an estimated 100,000 part

suppli-r problems are solicited periodically, or on- numbers (number not available during the inter-

.v('nt a~i5. to corporate procurement. (Problems view). Tektronix also utilized another 200O

with divisien-unique suppliers are bandied at the strategic" suppliers to support existing product

division level. These are analyzed by stakeholder requirements. Tektronix has an objective of one

teams with feedback provided to suppliers in supplier only for most parts. Often several other

qilartvrlv or annual meetings. These meetings suppliers are noted as capable of meeting needs

typically consider in-process price adjustments in a crisis, but no spec:al effort is underway to

based on market trends; Tektronix does not wvait keep multiple suppliers available. Tektronix acuntil the end ot contract pertormance periods to tively encourages suppliers to consider long-term

adjust prices. Typically, no incoming inspection strategic alliances in cooperative development of

te,t- arme done at Tektronix. In the past such tests new products; an example mentioned was an

"w,,,er( done: over time the need has declined due alliance with Motorola where both companies anto practice of developing.; strong partnerships with nounced that a Tektronix computer work station

the best suppliers. Rather, testing done at board would be the first user of a new Motorola

and assembly levels during manufacture at microprocessor. Tektronix also solicits for

Tektronix tinds any tailures which are then aggre- strategic alliance partners in Japan.

E-5
APPENDIX F

PACIFIC BELL CASE

PROJECT NAME: Advanced Digital Netw\ork (ADN,

COMPANY: Pacilic Bell, San Ranorn, Calif.

DATE OF INTERViEW5: 17 Mar 89

PERSONS INTERVIEWED:

M",rs. judy Bradtord Director, Digital Product Introduction. Product Management

Mr. Lawrence Kunke. Director. Human Resource Management; former Director, Marketing and New

IProduct Developrment

DESCRIPTION OF SYSTEM 2. Funding. Since November 198b, Pacific Bell

Pacific Bell - Advanced Digital Network (ADN) has invested S2.5M for planning, design, developa1 digital line servic tfor subscribers which pro- ment. testing and analysis, prior to approval for

vides full duplex point-to-point or multipoint ser- implementation; significantly greater funding was

'ice with customer-selectable data rates of 1.2, approved for system-wide implementation (actual

2.4, 4.8, 9.6, 1Y.2, 32, 38.4 and 64 Kbps. The amount is not releasable according to Pacific Bell

--,-c prov- - c- i.,crc nnccti;"".. lo other net- sources).

Work services such as public packet switching,

Pacific Bell's local area network and others.

Unique features of ADN are customer network ACQUISITION MANAGEMENT

control and diagnostic capabilities, speed selec- TECHNIQUES EMPLOYED

tivity, and network reconfigurability. The system

is composed of equipment and software added to Pacific Bell was created out of the Bell System

existing Pacific Bell digital transmission network divestiture in 1984. Prior to that time, it had no

.entral office plants to provide the host capability; in-house acquisition system or activity except their

subscribers order service from Pacific Bell and role to implement Bell system enhancements conacquire terminal data sets from independent ceived and managed at corporate level. Therefore,

vendors. Pacific Bell was described as a start-up company

SCOPE OF PROJECT with a S9B revenue stream when created in 1984.

It took several years to formalize an acquisition

1. Timeframe. -Conceived by Bell Labs prior process within Pacific Bell; it also took several

to Bell System divestiture in years for new product development to become a

1984 priority business at Pacific Bell. These factors may

-Concept development by have been principal contributors to the decision

Bellcore, 1984-85 in 1986 to redirect and restart the development

mdevelopment by of ADN. Though schedule was determined the

-Systemfirst pririty in achievir.g project success accord- Pacific Bell, start May 1983 fispiotyna

ing to the PNI, lack of top-level management link-

-Project redirected, November ing strategic objectives to project goals delayed

1986 the process of trading-off system technical require-

-System deployment February ments for cost advantages that customers

i989; -.. ently orders are be- ultimately demandcd. The following discussion

ing taken and service initiated focuses on the systems development process in

for customers. Pacifh Bell as observed through the ADN case.

F-1
I. P frogram Proju.t Management cMomncltltie.. At this time the PNI is assigned: PIs

a. :Nlatr;•,\i'od. The designatkJ P.\ ~ a,, were normallyv hfu r levels heneath the vice

1,ocviJed a dedicated team .t five Iii nctinavpres,ldentlal level. Begirning with ADN, P acific

managers who report directly, and are total!%! Bell began appointing Ps for priority systems

responiible to the I'."l to c.ordinate their tune- trom di.,tr t manager diirvctor' ranks (o, ne level

tional tasks througfi their departments, organic higher,

functional directorates. One ot these subordinate' -[)X.,,z2 Test anil T• ls tvnd Dcclop -

managers chaired an interdepartmental project rnuct A,;a&ui Iesign con.ist. of detailed project

team of 13 peron', The I 'Mas directly respon- planning to include business planning, specitica1"b'e to th, ! orporate Market Planning Board tion and standirds development, establishment

IMPBi consisting of corporate o ifcers. The I'M, of veido, ,.our c.kS .d development of .upport

t aired ,1 distrit.t direttorate manager-lev.l Steer- systemn,. Development test- are done in-house and

ing. Commttee composed of peers. There are arrangements made tor selected customer,, to parapproxi natelv 150 such P[Ms in new product Or ticipate in operational te,,ting. Permission to concapitaIl deve'm•MCnt at IPa(ific: Bell: new product du(t customer teq.ts rnufit be obtained from the

developrnent is organized under the Vice Preusi- Caliltorna lPublic Uiities Commission. Followdent ot Marketing. There are appro\imately 60 ing conclusion of operational tests, the business

active new product development projects under- case is ,ubmitted to the MIPB for approval to

way,' at this time. At peak ac.tivity periods, about imliemcnt and to aliocate necessary resources. A

300 people were working ADN in dedicated or tariff is prepared for filing upon NIPB approval.

time-s.,hared tasks. Mrs. Bradford described her The AI)N proceeded through this design, test and

authority a-, informal; most project personnel development phase twice (only one tariff was

worked lor Other peer or senior management. so filed): however, the first tirne was followed bv an

she telt that open and frequent communications aborted attempt to implement via project team

with those peers and senior managers was the onh\' 'hand-off" to the matrix for implementation. As

pra(tical way to sustain eftective and integrated a result che project was restarted in 1986 from the

involvement of all participants. The six-person design stage. The first developmental effort was

protect team organized itself to establish sets of attempted too quickly resulting in the PNls deciprimary functional interfaces with the followving sion to conduct an intensive customer survey to

matrixed tunctons: find out what digital transmission services the

- jrkcti.nu -,NOt. .,k Lnvnrinr" market really ;'anted, and at what price. The

v-tr,il rt-,-• result was a significant modification to the

specification. Mrs. Bradford described this as the --- V~na r - fr. :,,n S':"-,r'n, salvation of the project which up to that point

-k Lea ,wl;ir Kit; n,,' -)p( r,, ,Iwn, focused more on technology than customer need.

- , ,-S'r,it.,<,,i 1dnnir,,: -- Following approval (or full-scale im-

-I;,:al --. xtvlnjf Aliair, plernentation, the process involves deployment

-;,, ,,-.- ii,,.iry planning and technical implementation to prepare

communications backbone and control facilities

b. The new produit development process is for the new public offering. At this time, the tariff

a-- th~lo-,, is filed. Once the network is prepared and tariff

.h,,a PrJ)cssmx aud FeasIbiht; A ualtsis approved, customer orders can be solicited and

by i ,,tandin.. ,.,tudy team. Thi, team ,ulls through salislied. The ADN completod this phase and

All sugges.tt'd idtas- for thok' appearing most prom- would be finished but the PM insists she be

s,,ini,,, teasible, and c.onsistent with corporation allowed to carry the project for several additional

strategvy. For selected ideas,, an approximately weeks to manage issues that may arise as customer

30-page mini-bus1iness p lan is prepared for service is cut over and field service fully institu- sirubi,,.ai,,n to the MI' which selec.ts the best, tionalites he provisioning and activation process.

plioritizes aminong them, allo(ate",s necew.sary As of late March 1989, 120 customer orders are

devel,-opment funds and direct,, .hat development in and 25 operational. Another unique aspect of

F:-2
this, phac i: the I'M s decision to prepare an audit success. She had 5 days ot PIM training during

a-ind ev.luation of the process as experienced by development oi AI)N. none before. She did feel

A.\N inadequatel.y prepared to understand the finan-

-Once the project is completed it is cial aspects ot project management and felt

t;;r.M 0'V-r to th,' life-cycle managenment and somewhat compromised due to lack of budget

product portlWIio tulilhnment process as a standard nianageuient authkrity onhl, $11 of the total

,~vii.,. ott.ring. It [. interesting to• note there is allocated for implementation was tinder her conn1o tormal vice-preidential level decision required trol. The biggest drawback in finances was difto activate the new service. Effectively, it is a P>M ficulty in tracking funding resources within the

deciý,ion made in coordination with operational matrix to whom most funds were released. Matrix

managemnicrt. The ADN required 27 months of functional managers had a tendency to unilateri'~n..i ,.,' marianageent to _on plete development allyv decide how," and when to commnit or expend in,!d implmentatio once redirected in 1vlp. pro.ect tLIunds. The P'M had a 10 percent reserve in the implementation phase: it that buffer were

k.. -rT,p management tie., President and Ex- exceeded, a revised business case wvoul have been

c ,itiv. e \'P, are not in vohvd with n,,,%, product su1britted to the NMl'B tor- project go no-go decidcvelop:_nt busi ness cUXcept to approve major sion This was not an i,,sue with AT)N which C nim1lplenm ntation budgets A[)N was approved by pleted success1Iullv within budget. ti~h P'residen~t

d Tc ]'PNI noted tie development process

wa pernhaps unneccsarily long for Al)N due to

tK heC'el-to-toe na' Itre ot process, guidelines and 2. Purchasing could]v be. iil[.pro\ved by tailoring and parallel acv iti, t a. The ADN acquired the basic design techie.i T ' rfil I tr1 i11 l ULsIU!_ suUik. ._ during tht-t designr. e. The reporting re.quiremens for ADN were and test phase- The design source was and is a

cuarterly presentat on- '15 minutes,) to the small business. However, Pacific Bell has acquired Marketing Planning Board. She felt that was in- ownership ,of the techiiology.

adtequate to sustain interest by the functional

matrix in order to continue on schedule. There- b. Due to regulation of the public contore, ,he urilaterallv decided to provide monthly munications business, Pacific Bell is precluded

from manufacturing or marketing any customer satu, rep rts to the planning group and to tunc- tional(istrct managers upon whom she depended premises equipment bvyond an interface point

tot ,-,er-onnel res',ources and funds status. (e.g.. a line jack). This poses several technical and

pro( Lirement issues, rhe ADN project's ultimate

The I'," tMIeels that AI)N .,as quiLte -uc- business success is tied to the capacity and well-

((-,-It uL:t.tilld have been much more so if it being ot vendors who offer the cutstomer premises

V.-a,, (0(:(,' ved as an Cvolutionary projEto coim- adapters which control data line access at terminal

pose-,d ot several phased Implementat ions. The locations. Mrs. Bradford indicated that Pacific

dravba,.k is that there may have been substan- Bell is trying to encourage other vendors to license

fll,, u0i-ie.cl 1..,s .utlo'ot, foi AI)N if it was the technoiogy so access to the necessary hardno t ae, 'as signiticant'' uinder, those tWvaie for system proliferation is not limited. She

i ro. t; m-tn ,.'., said it is difficult for a company as large as Pacific

g. \ir lHra.itur d dos,( ribcd her qualification, Bell to appreciate the severe limitations of small

)r p l)r,,m n, nager a, sign:if: ant milti- companies once a large-scale product line goes

W',icti(t '... e, c' drie.n(e. durii ig hr• 22-year career into Iull-sale production and deployment. The

%%:,h t t,,.' le,.fphone ci.,mraanv. She developtd in- Al\)N is now limited in the sales effort due to lack

sight into many as.ct-, ot the company. She has of vendor participation marketing customer

no busins,, de,.gree or engineering hao kground adapters. During the development phase, frequent

She telt this did not inordinately hamper her, visits of Pacific Bell engineers and managers to

et-'-isJ- ,e t.el, people management and com- the vendor facility often overwhelmed its capacity

ru-ni'. ,l, ws skills arc in' st (onclusive to pioje( t to host visit-, and continue development work.

F-3
RESULTS ACHIEVED regulatory agencies (FCC, California Public Ser

The Advanced Digital Network is one of the first vice Commission, and the Department of Justice)

ig nicant flew products to ,,uccessfully transition results in a confusing and uncooperative environto market at P-witic Bell. Success sCems to have ment for new products. The ADN complet-d on

beer attributable to a deLermined professional time and under budget for the final development

ore projv(t It.an, moresu than the management and impleici.ation phases. It is selling well and

procf,.s. The dual oversight of the Market Plan- promises to be a major contributor to Pacific Bell's

ori,, Board within Pacific Belli and various profits in the future.

F-4
APPENDIX G

BECTON DICKINSON CASE

PROJECT NAME: FACStar

COMPANY: Becton Dickinson hInmurocytometry Syserms "13DIS)

Division, San Jose, Calif.

DATE OF VISIT/.INTERVIEWS: March 16, 1989

PERSONS INTERVIEWED:

Division President

Director, Product Development Programs

Engineering Project Manager: former FACStar PMVice President, Product Development and Technology Management

Purchasing Manager

DESCRIPTION OF SYSTEMS ment in April 19: livision president

Becton Dickinson lmmunocytometry Systems staked the future o 3mpany on it The

(BDIS, designs, develops, manufactures and FACStar is the rebii o, vailable laboratory

markets high technology cell analysis systems. FACS technology into a marketable system for

The BDIS is the market leader in the United States clinical research use. To be marketable it had to

and worldwide for this type of system, with 55 be easy to use and affordaL le; neither feature appercent of sales outside ot the United States. plied to earlier FACS systems. And, it had to be

Fluorescence-Activated Cell Sorters (FACS) are available for an April 1985 industry show for

automated systems identifying blood and tissue biologists and first customer unit shipped in

cells in a flow, stream, separating them, and col- September 1985, 18 months later. The SI0M comlecting them from samples for further analysis and pany bet more than $1M in research and developculturing. The systems were invented in the earl. ment (R&D) on FACStar. Following FACStar,

1970s and w,,ere primarily for laboratory use. Dur- BDIS developed FACScan and FACStar-plus (an

ing the 1980's, BDIS was organized to bring the enhanced laboratory, high-end vers;on of

technology to the clinical market with a rede- FACStar' over a 3-year period. The decision to

signed, lower cost, user-friendly FACS-type devel -p FACStar was not supported by detailed

system. The BDIS has also developed and cost- benefit analysis at the time; rather, the presimarketed the FACScan, a cell analyzer, and other dent explained he felt strongly that the clinical

advan-ed cell processing systems. Most of these market was ripe if Becton Dickinson could prosystems are integrated and are composed ot an vide an affordable and user-friendly aid to clincal

instrument, a commercial computer controller, diagnosticians.

applications software, and a variety of reagents

which are chemical compounds used in process- ACQUISITION MANAGEMENT

ing samples Primary applications for the systems TECHNIQUES EMPLOYED

are patient monitoring and diagnosis and treat- 1. Program/Project Management. (Subsequent

ment of cancer, immune system disordmT, to introduction of FACStar, FACScan and

rheumatoid arthritis and multiple sclerosis, et(. FACStar-plus, BDIS began to formalize the new

product development process. This was thought

SCOPE OF PROJECTS necessary due to company growth and the need

The FACStar concept was approved for develop- to manage more developmental projects in

G-1
parailel. The new, process, is sUrTnnarized at the funding expenditures were tracked closely due to

attat hmnd t the requirement to provide quarterly status to

a. Matrix Managernert. The IA\CStar wa,, limited Partners (source of capital improvement

dCVelope! by a pro ject team ot tour ke\' middIe hinds arrangtd by ON t t',.int corporation). Subsemiianagement persn-. (,1 lead engineer, a marketing quent to completion of the approved main prollanald,-i ,d idnti,it ttl iiq: il anager and a inan - jet's that required detailed financial accounting cia [u,-ine.s ianageri. thc lead engineer per- to the partners, 'he system of detailed financial

tor!mtd the rt,iditjonal I'M aiti v'itit., in an Lu hoC tracking by project has been discontinued: it is

manner al!nd t,1rildlll led th,- te., hnial ,lemeni, being reconsidered for the future as the new prodal-,o del icated to thc prol,. t tur its duration. uct development system is implernented

b. The FACStarwas described as a 'skunk v. The president explained that in his com-

%,. I,,, proj- t(or thet design phoac in 1%vh 1h par- pttitive mnarket he feels that on-time completion

it i 11 )11 i. till at t lio ) t % v to doI w ) that I, is noreinmportant th.an developnient cost, since

net --sarv to mlke' it work; perto,-nance trad'- e.arl entry into the mark.et will rnore than make

ot!,t ,.%erc ,nc,,'tra,,cd to meeT the design-to-u nit - up extra R&i) costs. This attitude is well underpri e og)iecand tv sc h,0L I el cd ot o'eCrru n- wer.,- stood by all personnel Interviewed. It was felt that

,1ll00,e'J thoMugh not eno(. uiragted. Tile protect ha. 30-40 per(ent overru!i in developmrcrt cost would

total suppoii o! the picrident, who regulairly ex- result in a 4 percent decrease in life-tycle profits

hrtt'd tile comparnv to fully 'uipp'ort thc * )r'ct con)nared to a 50 percent developmental schedule

cven it it !inpipcted oth ,e'r ongoing eorts. The in)- stretch-out which wouid result in 30-40 percent

portan(c ot }ACStar wa& not lost on any reduction in. life-cycle payoff. Despite the

emplo~v.s. The presidt'rit explained that hie placed philosophy o! pushing schedu.le accomplishment

"rla\imtiiil trUIst in his, people and could do that first, it was clear that resource constraints at the

.:, to thek ,re he ,,eU in ",h k division level force management to intentionally

mnanagers Ir exchange for the total trust at- prioritize some projects at the expense of others.

rnosphere he demanded theie be no "surprises.' It seems that such decisions are fully announced,

The Director o(f Prodtuct l)evelopmnent Programs with likely impact, to the company, so particidv-;cribed the president's management style as pants of lower priority prolects do not get disvisionary" he used consensus to establish organiza- illusioned.

!ion ,oninuitnlenl pr;or io, approving the program i. The Vice President for Product Developfor development (which he ( onhirmed by saving ment and Technology Management explained the

that hi,, top-inana-;emvnt personnel expected him V"P role as providing resources to• projects, not

to be able to express c!early the merits of any' deci- managing new projects. The result i3 that V\Ps are

.,ion he c',.inunmcatedi. ,nvolved with strategy formulation to select the

c. Coordinition was accomnplished via week- most promising projects for full stippcrt; they do

ly project team meetings when status and action not review projects for content or status once

plans were reviewed and problems solved, launched (approved for development). He went

Qt, arterl., the president reviewed the project wvith on to explain that following project approval, prootk di,'i iI naI l iiarigenieIIt. T Ctu potI ate I lead- gram managemnent shift, to "change control and

qcuarters was not iormnall' involvx:d but was ad- problem-solving" done best by the PM. T-he apvised of statti, by tb,' president as hc felt pointed PM is his own boss unless he seeks help.

appropriate.

d. Th., prottct budget ,ias allocatctd to par- 2. Requirements and Technical Management.

ticipating department chiefs (typically V1' level), a. Lvolutionary product line development is

tht pn,.-jecCt letader reujtiested commitment of funds, the prelerred method at BDIS over total new

as required. I he Vies used broad discretion rnov- systems. When new systems are needed, the diviing available funds around to ensure their func- sion uses the research department to provide

tion-, were tully supportive of the project. For "technology platforms" to prove-out new techFA(-Star and other early development programs, nology; this minimizes technical risk.

G-2
1'. unimited design spc..lt:a,1io0 ac uIsed; cm- This SPC is beginning to squeeze major problems

pha-.i, i:, o, tunctional oper.itiorai spei,:ificatins out ,I tile BDIS vendor purchasing system.

, :xI dct'•icd planr, in, by all an.t a repreen- 4 Manufacturing and Field Service. These functatives ot projcct tearils. tions were not directly investigated, but it was

3 Purchasing and Vendor Ouality. noted that FA('Star was not well prepared foi

a. 111V purchasing maage: d.c,' ribv'td the 11'aiuitanature or field support when introduced.

kil Ient stage ot 13)IS relatiGL ip t. vvn&i.s as It was explained that neither the FACStar project

"kco;-tr-.ctu~a!," ieaning 13I)IS sends -11ý't .:e,:.:,s foi team. nor anyone in the company had much

Quotes, to prequial tied mupter>:. , and manufacturing or field support know-how due to QolowIing evaluation (ontracts -A. 1-2 ya the very small product line in place prior to requirements. He wanlu to kee'n at tosr 1, ,..il., FACStar. These deficiencies appear to be drivers

O,,, (t ,. 10,r Uah com odi t reqiPirk'd bl:, t,.,d., tor the new tormal product development system.

to h•.e mnlv one so rce on lir& at a ;::,c t,: "n" RESULTS ACHIEVED

spe.it ic part. He distingulihes this contract tl' The FACStar completed development and was inappi oa,_h Iron purely ol-en b 0dit,, ard does nt troduced on schedule; performance trades were

WCee t,)I."S cvert!ng to ,_assi(.al and trans1ior. ln-crl made to meet the desired unit price bogie; arid

trnptlitive bid,: it wouild be too expensive trirm development costs were the buffer variable to enan overhcad standpoint, as well as unnecessary sure other criteria were met. As of 1984, the cornor act ompl'lishmen (it orbt i ve - Ni~s vltiriatC p,ny 1B1)IS) was in trouble with a very narrow

goal i, to have a mninimumn nurnber (it niulti-item product line and flat sales. Several years of

u salitv suppliers with long-tern, ,a-tner.,hip research in the FACS-type systems resulted in adarra ngements. vanced technology with a small market in medical

b. The BDIS buys piece parts, kits parts research. The FACStar did directly result in turnac( ording to assembly anid eitki contracts out ing the company around, which grew over 10

assembly ettorts or pertorms assembly organical- times (X10) in sales over a 5-year period from its

]y, depending on the item. All testing is done in- introduction. The project has been a commercial

ternaliv. not mally as pzrt ot the product integra- success . is own r.ght (average sales of about

tion process. Purchasing also acqaires computers 100 units'year compared to 15-25 units/year of

which arC used as svstem controllers from DEC the earlier type FACS systems). It has a good

and ll P depending on customer applications. For margin and the reagents it uses have a significant

the S12,M v 1989 estimated sales;' business, pur- margin, so it has had multiplied profit effects.

chasing expends about 528M1 annually at present Also, the following two major new projects,

rate. FACScan and FACStar-plus, were major successes. These successes have resulted in sufficient c The purchasing manager described the growth so management decided to formalize the

tracking svstei implemented to attribute delivery' g of projects program management. Th'o.ough

performance and quality performance to vendor system

- most aspects of the "new" system have been used

The system has beein during recent years, and the system has evolved,

ic t oiilv ab~ut 0month',, to date, but is already it appears it may take time for project personnel

used in vendor source selection to ensure low bid- to adjust to the more formalized process. As enders. who have not performed well, do not get visioned, it does not appear that senior functional

more business. Purchasing provides feedback to management (the VPs) will second-guess their

vendors and trend charts show dr, natic improve- designated participants on project teams once they

m,_ntt, over 1-2 month periods once these vendors participate in project go-ahead decision-making.

realized they w,,ere being tracked. This feedback

has revealed instances where BDIS procedures NEW BDIS PRODUCT

contributed to schedule and performance prob- DEVELOPMENT SYSTEM

lei n' that were then corrected in-house. In-house The BDIS organization and staffing have grown

requisition handling, order processing and rejected to manage the now highly-successful business.

materials processing are also regularly tracked. Organizational features are:

G-3
1. The division now has four vice presidents ni inibu-iness plan is presented to the Operating

(CtUtonwer Service. Research, Product Develop- Committee for resource commitmcnt and

niunt and Ie. hnology Management, and Opera- prioritization. The objective for the mini-business

tiOns) plus directors for Finance and Administra- plan is that it be done quickly and without great

tlion. L,.edi.a! and Regulatory Matters, Human detail; "..if the 'quick and dirty' look-, attractive,

I<Rou ur( y Marketing and Sales, arid Busines,-, detail (on cost targets, etc.) will be worth pursuI tvclopment,. ing during the Development Phase.' Once the

Slrr lu( t dtv'elo, pment eungineers, are pro- operating co nm ittee decides (compo,iitio, is the

gram manager,. This is due to the co,,ipanly l- president, vice presidents directors and other

phlo',ophVy ot technical market leadership. The direct reports) the program manager is appointed.

hardware systenm P"Ms report through a director He. she has total program authority to implement

it n e w.,. p r cj , t. i th e ..i , e p r esi dle n t, th e n c.e to de ,_'ludp m e n t a n d p ilo t m a n u fa ctu re .w ith o u t o p e rthe prs-,ident: sottl, ive PN%1 report directly to th( ating comrmittee approvals unless the bu',siness

i L, pres.ident; the Di, rector o( Produdt )e,'clop- plan schedule or pcrformance is likely to be

rniut [Progrjm,- reports ,uparately and directly to breached.

t !,(" Vi preide(nt; her responsibilities are resource bh. Developnment. Ihe concept is devloped

ilanniny:. priority setting, contlih t resolution and via the process oA creating a program speciticaO,'cr,,i i ipn!ernentation strategi(e. Alo. she per- tion, initial design and breadboardirig, constructirn', d J.ctk' as programn manager on several tion arnd testing of several prototypes ind refine-

" j; iijrt 5 ;': thes.e proj(ect,, are driven by tight ment of [:rutot vpes. The product development

So lkJuls'. ,puecifi ation defines as many externally

-]e engineering i eplained "Nt that committee measurable performance parameters as

mnanagyivent. implemented as the company pro- possible -those that are of key importance to the

g•,sc -, could, but should nuct be allowed to, c t. uI lul Lest hi e but not t '

de.rade the de.isiveness of past new product deci- engineering details of how that performance will

sons. The BIN31S approa(h involves assigning one be achieved." This specification, which appears

top manager to run the New Product Committee to be an enhanced business plan, de, ribes interand ePsure top management control, face requirements among functional disciplines inhe to!lowing are e'xtract,, from thc B1IAS draft, V()olved, plus a detailed schedule.

l'rogram Management (if Product Development c. Manufacturing. Pilot systems art' built by

IrufieS,. 1OP q5152.0': a joint team from development and manufactur1 T he ne-w proiess is d'cumnnted in an SOP ing organizations followed by product release

o "bout 50 once the product team agrees the product is ready

,If ,,iout ., pars for production; this is done in a Iiiial design

2 -1 li purposc i,, threetold review. Manufacturing engineers complete Irana . Io aLccelerate introduction of new pro- sition to full production; field service teamrs

diults, to the marketplace...." develop procedures to provide support and a

training and education group prrpar.s to provide b. '. .to 'c'rsure' their (ne'w produc~ts') prm- continuing education.

prr operation and ability to be produced....

4. Program Manager Authority, Pesponsibili Ilo provide guidelines for management (f tý arid Accountability: The programn manager is,

ntiw produ(t development, from Concept and I a

e hiIi.t ai t hrough Dnt i red from the product development otganiza turin' ) p it u,;u a 'i] ,t yres as the product authiori(y followinj program approval by the Operating Commit3. The process is conducted in three phases: te:. He/she authorizes the product spe(.iication,

a Concept and Feasibility. A product or is the business manager and generally responsible

te(hnology ide, is proposed by the champion to for overal! management and support of the

the New Product Committee. With minimum in- process. He/she is asiisted by the Director of

vestment, risks znd benefits are assessed and a Product Development Prograrms who operates as

G-4
an a1ltur tu,, tt vnS r`. 111] II •,L , f"L- i i'rt1 'rflt ,r ar e to, the program r hnay.cr, but h w:vc authc)riIuhly ( tv lei',Jk' d by thl" pIII' I))(.;'( I Iu'll 11,1 i if 111.1 k I y il their lunc t itinal oTmrniition to A tltIn bup-

"IIh%%. hiniI.IIU)IIdl Pit•(,j I Iv.111 l•.d i1i( i1'.1,IS ,11. I' (I 1(,r the pro IbfItIlIvt }e'(t .

de~~Iatv oet iiiI~~-( I~.d~dthy ir tuunt
APPENDIX H

MOBILE SUBSCRIBER EQUIPMENT CASE

!'ROJI.CT NAML: N1,,1iukL SuH,,•rI r yStt, m NSL'

CCOMIPANN : I 1!i, A,Vi (.t,:ti rtni, ,,t ill.ctI roi(, (omrn.and and (AT Gover nment Systems Division

I1 lS()NS INI LlRVIIVI4I) AND I)AFIS:

1. A\r ,t'v I',. ,midtt t . t. t nitrlit r.-, interview,,vd. lan. 18. 1080:

i .\l AIi,, .i )eit.tI Pr'ic t Nlan. gcr

, I ''1iWI l (, :l 1 1,ii . I' 11 ,, IltePt n (ontri ( ting O f I'Lcer

I 1I1 W( \,!e P\',l} Nlaiuiwir lrldL tion

N ,' I ,vt I It I I,.,. II (.IIt c I Ir ,;:. N11 \ n, l.-L),'r wt nt n )ivj'-.Ijon

,l ),1 VI , I. IIt kl'It )rlUV N ,Itc 1,inar, Sy,+,sttrns and Lngineering

Ni, ( 1,, I ,Iloi, x , (lhvit 1 r,,it.,mi,,-rit • 1 ecihn; l N lunagcnicnt l)ivision

'I i C, II ,.,i )',vI ti it (1t1 ,,lit' ft(. eset.,.t. tilvt.s inte.viewed, 1':0 . 16, 1989:

Nit \III, ( ,)l, m ll .N 11'l I'M1() ofi-sitir ret. ,.,sental tivet

M AI \ i , 1i A Hl i1. %SI1. I'k ) (q ,o t-I rej.))[,untativo.

,M \AI I ml ti e f '.ht.ilt, to ,itt l)(.,\•S rLprc: ni'tatwves

M, 1 u t , 1 1nI1ht,:r. 1• (.11. I)uiIctu Itt r IA Luired S VystrT)S

,\1f A I I I II.it ,l I . G I ,' II.I)iltt u h~ o ,L )lof wr,it ifIT.,,

N~i ( lill \iI'uur1 ,W11',111.r01 (,I' (,L',st ,\(Mtlu ting,

N1. I, I V',,II )t 1 11,r1. C " 1 lrlnginr(, ing Nliaa.,,er

I )I,( III'0I ION 01 SYY'II [NI or (LAC) and national communications

I I I( , "'I l i sii, % l , l lt 5,ir y , I lt ( ,rl n t S s yt' , .it m , .

, ). .t , .1 , r liltth' lit id h ti,, hllh. ii. And SCOPE OF PIROJECT

v'ti tld tI,ilti i Itt Ihe U;.S. A lllry 1,id1 ,10L', Sul. "'ht , SV1 I, aSE a turnkey sy.t. rn for Army tactical

VI, I I''111 ,l I.t ,y,,ttIn 'lividh s tIt.l radio c rIrnu rrLu ications. Once tully .t VeId, it will be

W1h ,i't ic, wilc h4hTr j ,.ih i ,uid .in si hilLt survict the tirsi tine in the history of the Army that all

it, -i0 1 1' 1 At imy (,Ii ,+ ,'ind ,(li,ir,itr t'i:ti(,il it, units, i(tive and reserve, will have fully

,t II' .L i,,1,1 to iiil til:;n r pl;','rri'ot interopetlitr , ., encry'l~ l t.dl, Ji-m-re,-i.tant, mobile

IN It f (i);l , n'Il1 ith.litly tIu It , ut ' oi f i 'ti netwtotrk ti.tic il (..(it rt unic,-tions e'quipment, The M SE is

l,.i .l, IM . 11i'd t I . V1 :.dt I vr st', liger -lr-ltwei leing6 ,ictpitr::d via the v(ompoted rnon-developIII ,,dtit' i, I t'lN tl il't tlivily. 1I lit, SE, i i aut',- kl tmlental ,I quisition of all signal battalion m ission

11111, ally I ,,itli,,llul ..y',,h-Ii aind, a,. such, i, cquijlrnT:nt (a1re-,1 (overage and system control),

-i. 1lth 1 I h i1 . .I 11 it itl( iV( t11 .s thllt.eienl 11ti,(1 "It plus subscriler (uer) a( (.",s and terminal ena lquip-

.itII( Itilt tl , , i:t 1ti:t!, Illt. skills ,t tllm ilt' ,,',- Ititt'tt (C.I;., tclct. t'honc, facsim ile and m obile radlioIt lit, it 1lpl.,tr, I lit NII. )r 'jll( (t'" UIt, .nJd rleihtone) ltr five U.S. Army corps, each with

, .I, .itittlliltlh' tf. tft'% i, Lt i (t rrlr•rln rtl ,itlth fiive divisions, plus separate brigades and support

tt W ll,'j ,t1ti1', Ili :411 1)i't] id h i be dt'lh1yt'e l units. '[het, tL ,,il ,ystcm is to be ficlded to all Army

w ill IIi tl l 1, 1,', rti kh"Li',isit ,Ll. . AkIt- , it tu iti, (a, jve and rese'rve) by, 1993, 8 years from

i~ltiti t h. I' 11ttltl,,i itel ilit" L lit'It . ill,.v- tliht avw.rd of thet production contract. The NISE

Il-I
acqusisioi .n(ludes acquisition, integration, train- Also, the DEP designation would provide the PM

ing, tieldin. , ncnd support of the communicationb, with required manning and support and freedom

shelte: pri.'w. mover, electrical power and ancil- from counterpreduct;ve regulations, policy, direc-

,ary equiprnent necessary for total system opera- tives, etc. The GTE Government Systems Divition and supcert. The equipment requirement sion built a new plant at Taunton, Mass.,

include,: dedicated to the assembling, integrating and

-- 270-f L..s node center switches testing MSE shelterized equipment; it is in full

-50-plu, large extension switches operation. The MSE subsystems are assembled,

-- 1300- 1

;lus small extension switches tested and delivered to the Army at field locations

--28CO-plus line of sight radios in "division slice" increments of about 80 shelters;

-580-plus radio access units no full system testing (i.e., division complement)

-- 40-pli- yvstem control centers was (one prior to foliow-on test and evaluation

-9800--'0-1, mobile radio-telephones (FOTE) at Fort Hood, Texas (the IOC unit).

-323C'2-plus telephones

-- 6300-pl :-, facsimiles ACQUISITION MANAGEMENT

-0500-1,!_. tIlMMWV trucks (more than 10 TECHNIQUES EMPLOYED

percent ot the total Army f) ,t of HMMWV% Attachment I outlines the most significant

-- 3500-pl, power generators. elements of the unique MSE acquisition strategy.

The FF." pi Aduction contract, with all options Attachment 2 provides the unique elements of the

which must be exercised to achieve the above solicitation for production and support offers.

deployment, has a baseline price of 54.3B and will 1. Program'Project Management.

be etfective for 7 years (including a last year to a. The Army and GTE program offices are

provide for additional quantities should the force organized similarly, that is, as a matrix where the

structure change). A time and materials contract organic program offies are small and the bulk

exists for follow-on replenishment spares, contrac- of assigned personnel are matrixed from other

tor maintenance support, contractor training, functional directorates or external organizations.

installation kits, and technical assistance for up The head of the project at GTE is a division vice

to 22 years (15 years following last production president, four levels removed from the corporate

deliveries). An FF1' time and materia!s contract chairman; the Army PM is four levels removed

exists for post-deployment software support for from the SECDEF. Following production contri, ct

the life of the system ý15 years following last pro- award, the Army managument structure changed

duction delivery). All three contracts were com- to the PEO approach as implemernted by the

peted, evaluated and priced together. Army. Before the change, the PM reported to

In 1982, Mr. James Ambrose, the U.S. Army Ac- Commander, CECOM, then to Commander

quisition Executive (AAE) and Under Secretary AMC, then to the Secretary of the Army. Followof the Army (USA) directed that CECOM acquire ing the change, the PM repoited to the PELO.

MSE as a tota! package using commercial prac- Communications Systems, then to the Under

tices and to acquire an available off-the-shelf Secretary of the Army, then to the Secretary of

system versus development of a full-MIL system. the Army. One of the key strengths of the

The CECOM solicited industiv in 1984 and ob- management effort was the independent assesstained two proposals: evaluation was completed ment of the program, conducted fom the time

in 1985 and production contract awarded in of the production award through 1987, by retired

IQFY86. The Army submitted the MSE project L.TG Robert Berquist, for the AMC Commander.

to the Congress as one of the Defense Enterprise This ongoing assesment, with quarterly updates

Program's (DEP) in 1987 lAW Title 10 US Code to the four star level, highlighted critical problems,

Sections 2436 and 2437. rhe DEP designation car- posed solutions and helped keep the project on

ried with it the milestoning mechanism to ensure track.

program funding would be as planned if cost, b. No MSI. M52, or M53ASARC/DSARC.

schedule and performance requirements were met. An ASARC was held in 1979 which approved

H-2
entry int); FSf!I). Following program redirection, designation was subsequent to the MSE producMSI and MS3 were documented as a result of tion award and !•;-st 2 ye'.-:, of performance. Fund-

.A.er4..lary of the Army decisions made during dCLi- ing has been ,table subce F'Y87, due to tht unision briefs; MS2 is not applicable to NDI projects. que nature of the scope of the program and the

"The. type clas,,ification action (finding of suitabili- production contract provisions for stable funding

ty for Service use) wa-, made as part of the evalua, and timely option awards. Relevant aspects of

lit n,,source selecti.n, early funding for production are:

c. Waivers to acquisition policy and regula- 1) The Congress cut the required FY85 fundtions. Mr. Ambrose signed a letter to the PM ing by 50 percent and threatened to do the same

waiving all but sttutory FAR provisions. The for 6Y86. Strong top-level Army support via conwadivw to, FAR and other pohicy provisions desired gressional testimony kept the FY86 program fully

wIre: I unde-d.

1 To eliminate progrss payments 2) The Congress required they be provided

tend o.er the details of the bpeciflic equipment to be Included 7-ye1r, of new owbliationns in the program, the assoUiated testing results of that equipment, and the ptoposed funding 3) To obtain a warranty' of design and &bhedulc prior to the obligation of any produc- rpe.rf, mnan v tire flio :ding.

4) '1 ) allov, fo~r e.,omonnic pri(eadjustments 3) Key elements of the MSE acquisition

5) " provide ,pecial econrini( acquisition oratv'y which appeared to support full funding

pr-visin whic h rtequired the contractor to spend with the Congress were:

at loast a specified percentage of the contract price -Recognition that MSE must be fully

iII the Uitd ,. deployed before Army units could fully inter6) To( aJhow the 9ove'rnm'ntl, t breakout operate and before they c,)uld Integrate the

%cle,.tcd spar, patts if in the government's beslt benefits of many foilow-on user command and

interest control systerm,-

7) A (urrency fluctuation protection -The production contract provided for

Iu)I'I'ision automatic termination should year 2-7 options not

b) Ii allow asseibly and a.c.eptanice testing be exercised within 90 days of funds availability

,If full Lonfix)tirations at field swaglng/deliver y to the !'CO

sites. -Funding by contract year must cover 100

No, subselquejnt D)A, AM(- or CLCOM documnen- percent of previously negotiated quantities.

Lition wa,. ,enerated to establish which polk y or 4) (.ongreIsional negotiations were critical

re).ulitio•,s were to be waived. The I'M hi",, due to the lack of schedule flexibility iii !singleestabli,hed, however, that the intent of all such year appropriations to otherwise plan for efficient

,lit y/rtegs is required of MSI: and MSE must pr-duetion runs and the lack of schedule slack in

com1pleh, tele requirements even though bomne the follow-on test and evaluation (FOTE) program

occur later in the project than may be typical in upon which obligation of FY88-and-beyond funds

blandard a(quisition strategies, were tied. Due to the relatively small funding in

d. I )espite I WI' designation, the :PM asserted the first year (IY85), a waiver to FAR was aptht no, slec•.ia authot ity has been granted to him. proved allowing the contractor to proceed even

I iv is. still involved with justifying matrix person- though second-year funding had not yet been pro- niel retention, travel funding, et(., and the v hied. Ihis becond-year funding was essential to

de'cision-makiny, authority for cost, scchedule and create the minimum bet of equipment and softperf,,rmnaii(,' trades, is at Secretary of the Army ware and support needed to xorduct FOTE In

level. T he I'M's, %1t, remains top cnsurt delivery of FY88. Mr. Ambrose concisely summed up the

a fully acceptable syt,:'., onII schedule and within situation in justifying the waiver to the full fundbudgVet. With 1es i•.t to funding, the DE[' program Ing policy to the ASD(C) as follows:

11-3
"This is an exceptional case.. .because the as usual mode." His comment punctuated the

program only makes sense if we and the d.rection to CECOM to ensure the program got

Congress agree to buy the whole program. all the personnel it required and quickly. The

! think we should recognize, therefore that CECOM was at the time beginning to evolve a

we shouldn't get caught up in rules and pro- "core/matrix" staffing plan which reduced the PM1

cedures that are designed for completely dif- core to about 27 personnel and CECOM funcferent acquisition methods." tional directorateb were to provide other matrix

5) In 1987, the Congress put a cap of $4.3B personnel, as negotiated between the PM and the

on the total MSE production program and effec- functional Directors in CECOM. This was about

tively fully funded the program through 1990 con- a year before the Army PEO concept was

tingent on continued proper execution. implemented.

e. The Army PM's relationship with the 2. System Engineering Management

Prime Contractor's PM (GTE, Taunton, Mass.) a. Priorities for the MSE acquisition were

is considered cooperative and frequently informal. satisfactory performance at absolutely least cost

This is due to the absence of many of the CDRL and absolutely on time. The system engineering

requirements for status reports normally asso- effort was to define and integrate the operational

ciated with Army procurements. The contract requirement and the supporting "ilities." Clear

formalized only two management tracking re- direction was made at the top (AAE) that the

quirements: system would be acquired off the shelf with no

-- Semiannuil cost expenditure reports development. Major "user" and "developer"

cooperation was mandated to get the "nice to

-Agendas and minutes of formal program haves" out of the minimum requirement and to

reviews (quarterly). ensure against requirements creep. Such direction

The Army PM describes the relationship as one and thorough execution protected the fixed-price

in which his staff assists the contractor to an- bottom line; in addition, all ECPs/VECPs, in

ticipate problems and to propose appropriate order to be considered, must be implementable

actions to preclude or minimize the impact of such within the original contract price. There were

problems. He indicated that the strategy was quite substantial modifications required to the

effective and, in fact, has been essential in keep- demonstration system to become the negotiated

ing the project within the milestone constraints MSE system; these included integration of

of his DEP contract with the Congress. demonstration software into the baseline;

f. The GTE conducts i,:erdivisional coor- repackaging components into smaller, lighter

dination meetings weekly; the Army on-site vehicles; and modifications to the radio frequency

representatives attend; this is one of two infor- bands required. Many unique acquisition strategy

nial status oversight means for the Army PM. The elements resulted in difficult negotiations with the

other is Army PMO direct access to the GTE functional experts in the special interest agencies

management data base system. In addition, there of the government (e.g., OTEA, NSA, and U.S.

are monthly status reviews between the Army PM Army Signal Center); virtually all of these had

and GTE's MSE Division VP. Quarterly, GTE to be resolved at the Major General level even

submits and briefs a project status laydown to the after the rather clear direction of the U.S. Army.

PM thence to the Program Executive Officer and b. The MSE project involves no GFE; All

Army Under Secretary. There has been concern equipment and data required to support the MSE

by GTE that the government is micromanaging configurations are the prime contractor's responthe project but the current (Feb 89) atmosphere sibility to acquire and deliver (e.g , HMMWV,

is good. power units, air conditioners, shelters).

g. The AMC commander observed in c. No military specifications were used in the

December 1986 (1 year after initial contract RFP; the system requirement is defined in the MSE

award) "MSti has always been touted as a pro- Operational Capabilities Document, an eight-page

gram that was riot !o be conducted in the business narrative of mandatory capabilities and desired

f1-4
(not essential) capabilities which defined the training and a field training exercise to prepare

technical and interface requirements for the corn- the gaining units for follow-on testing.

peted solicitation and against which the proposals 4) Follow-on test and evaluation(FOTE);

were evaluated subjectively. Evaluators compared system reviews and sample data collections. The

ottered systems against minimum operational re- FOTE was directed by OTEA and involved a full

quiremenws, highly desirable features, and "nice division field training exercise using a complete

to haves," then established any modifications division set of MSE. Only Army soldiers

W'hich might be requireJ to the off-the-shelf employed, operated and maintained (unit level)

svsterns oIffered. The McE production contract the system. Corps level testing features were

fully satisfies all five minimum required opera- simulated by loading the division system with extional capabilities, all mandatory enhancements ternal traffic requirements

in the forrm of priced technical options, and 55 e. The goal of the test program was to reduce

of o9 desired features. The selected offeror's prod- formal testing time without losing comprehensive

uct specifications are now part of the production data required for a valid assessment of the

contract; some of these are military specifications. system's operational effectiveness. A major inA P31 program is ervisioned to selectively add novation used to plan and execute the test profeatures once the basic system is fully deployed, gram was the establishment of dedicated "MSE

d. Systems testing was done substan,,ally dif- Test Platoon" composed of 32 senior NCOs and

feient from normal Army procedure due to the 3 officers. This platoon gathered lessons learned

NDI nature of the project. There was considerable from the French and British experience in testing

_oncern about the test program in that the RITA and Ptarmigan (similar systems to MSE);

required system was never tested as a full corps they were also responsible for monitoring preproor division system prior to FOTE. The risk was duction item testing at GTE and the subcontracthat the system, as modified for the Army, would tors; monitoring the 33 OTEA test items (issues)

not satisfy operational requirements and too much during source selection/evaluation and planning

equipment would have been produced by the time FOTE.

a full operational test was possible to correct any f. Two major complications for the testing

deficiencies. Integration and testing was similar

in approach to a commercial MIS system, which were:

is not usually totally integrated and tested prior -'There was no standard Army corps

to delivery to the customer location. The MSE test communications system of similar capability

program was described as "continuous evalu- against which MSE could be comparatively

ation" and was composed of four phases: evaluated

1 I Prior to production award--consisted -The MSE was the first of a set of Army

ot offerors submitting test plans and procedures; "Thctlcal Command and Control Systems so there

operational demonstrations of each proposed was no capability to operationally test the insystem in Europe in the field; and evaluation by teroperability with those systems.

the Evaluation Board augmented by OTEA, g. Configuration management has been of

Signal Cen- critical importance due to the presence of four

ter and Army Communications Command technical baselines from soon after contract

personnel, award. There was a requirement baseline in the

2) During production lead time- solicitation; a demonstrated baseline; a contract

consisted of initial production tests at each sub- baseline; and a modified demonstrated baseline,

contractor and prime contractor location wit- all of which had to be driven toward one baseline

nessed by the government; as equipment and sub- as specific definition was developed after award.

systems were built-up and integrated, contractor !t was noted that, in 1986, GTE decided to imreliability tests and government product assui'ance plement several ECPs "at risk" pending governtests. ment approval. This potential problem was cor3i Initial acceptance and fielding- rected during 1987 and appears to remain under

consisted of destination final acceptance tests; unit control.

H-5
3. Logistics scope and some will be handled through future

a. The maintenance concept calls for military enhancements; e.g., the P31 process.

maintenance at the operator/organizational and d. Logistics implementation required a Herforward direct support (divisional) levels and con- culean effort by government and contractor pertractor support at the theater (in-country and sonnel. This was due to the significant departure

depot levels. Following last production deliveries, of MSE from the traditional logistics approach

about 1993, GTE will be responsible for 15 years wherein LSAR is provided and the development

to provide the GS/depot support. process can be employed to provide time to

1) The GTE provides depot level mainte- develop logistics at a more leisurely pace. The

nance and spares for the operational life of MSE. need to totally revamp the personnel skills,

The program negotiated firm fixed prices for the recruitment and training for the tactical Signal

entire 22-year projected life of the system. Corps was a principle complicating factor.

However, some of the FF prices reflect a large 4. Procurement

margin for contingency (e.g., items potentially a. The source selection process shaped the

going out of production). The PCO and GTE plan MSE system (e.g., equipment configurations,

to renegotiate some of the out-year prices to testing, acceptance, support and training) in ways

reduce uncertainty by reflecting one price for beyond the traditional purpose for evaluations;

items still in production and another should they as a result, the PM had to have considerable inbe out of production. This latter effort is com- fluence in the evaluation board proceedings. For

plicated by the lack of audited cost data as a result the prime contract, simultaneous negotiations,

of the method of source selection used (see Pro- with demonstrations, permitted d:rect government

curement section below), involvement with each offeror to ensure each pro2) Many MSE components arc standard vided a "best operational system" to be priced.

military items of supply which will derive sup- The procurement plan established that only total

port through standard Army channels. The systems which had been designed, developed and

divergence of support channels and sustaining tested could be offered (and principle components

engineering/production for the standard items had to have completed development; special

versus the MSE peculiar items may be a problem modifications were permitted). It went on to rearea as time goes on. quire a subjective evaluation of offered systems

b. The contract does not provide much of the that satisfy the operational baseline but might

CDRL data normally required; rather, data in have different characteristics, to determine which

contractor format or in contractor data bases is offered the "best value" to the government. It was

made available to government logistics managers. possible that no system would provide all required

This requires a more flexible attitude by the and all desired features. Virtually everything was

government team than normal, much more in- open to negotiation including all terms and condepth knowledge of requirements and the MSE ditions. This led to the evaluation board assumsystem, and considerable travel. ing additional effort, in that it created detailed unique model contracts for each offeror before re- c. The principle issues coming out of FOTE questing best and final offers; this required the

are logistics. Specifically, new equipment train- evaluation board to understand each syste of-e 

ing was found to be insufficient; the biggest issues fered to an uncommon degree.

in training were focused at the first- and secondline leadership !evels and network control. A sec- 1) There was significant opportunity for

ond training related issue was the trade-off be- technical leveling due to the negotiation method

tween use of off-the-shelf applications software used; however, that did not appear to be a signifiwhich was not particularly user-friendiy and the cant problem due to the control and coordination

need for greater sustainment training for network exercised by the PCO.

controllers. Increased on-board spares and user 2) The PCO required cost and pricing

aids also appeared necessary. Many of these issues data to be submitted with the initial proposals;

are being corrected within the existing contract however, they were later determined unnecessary.

H-6
Thus cost and pricing data were not updated for b. The GTE has limited financial reporting

best and final otters. This is unique for such a large requirements under the MSE contract. They do

contracted effort and has caused some problems comply with CAS, but it wasn't clear if that was

in evaluating ECPs/VECPs, due to lack of visibili- a corporate requirement or due to the desire to

ty into GTE's cost structure. The impact, to date, be able to qualify easily for future government

has been that the source selection process was business. Also they felt it was important to have

about 3-6 months shorter than it would have been consistent cost accounting throughout the

otherwise. Of erors' budgetary cost estimates were corporation.

used to perform a preliminary evaluation, a "commercial practice" approved by the Army General 6. Production Management

Counsel. The final evaluation was based on each The production management effort appears

offeror's best and final firm fixed price offer; as similar to other government programs. However,

well it was decided that no audit of price proposals the subcontracted effort is high (65-70 percent)

was to be accomplished, and may provide some unique lessons for other

b. The GTE has a separate directorate to such cases. The in-house production effort is

manage subcontracts (there are 29 major subcon- predominantly that of assembly and test of comtracts plus many vendor components in the MSE ponents through the integration and preaccepcontract). The GTE uses a mini-project team to tance testing of 17 different type shelter configuramanage each subcontractor; a separate directorate tions making up the signal corps assets (to

administered contracts. A just in time (lIT) ap- distinguish from the user terminals which are

proach to subcontractor and vendor deliveries is integrated into existing user vehicles following

in place for some components and is expanding. delivery). The GTE designed, approved and built

It is GTE policy to maximize competition where a dedicated production facility in Taunton, Mass.,

it can exist but reserve critical components to be to uptimize the program. The facility produces

made in-house; a second source is retained where four shelters per day, one division's worth (80)

practical to maintain competitive pressure. Buys per month. A production team is assigned to inare split annually and GTE will pay a higher price tegrate and test all of a subset of the 17 different

to keep the second source "warm." shelters. This approach results in a hig! degree

c. The MSE program may be the largest ever of worker accountability and ownershi- which

bought primarily from foreign sources; it involved is not customary with production line techniques.

a "shoot-off" between the United Kingdom and The GTE would not have invested in the new

France and, due to the outcome, there was direct facility had not the Army provided top-level

pressure at the head-of-state level to influence the assurance that the full production quantity would

outcome after the selection had been made. As be bought. The plant will be paid for before the

a result of agreements outside the scope of the 7-year production program ends.

MSE program, the evaluation board results and 7. Quality Program. The GTE works to MIL-Q

the Army selection were supported by the quality standards with DCAS monitoring despite

Administration. no existing formally required MIL-Q program.

5. Financial Planning and Execution This appears to have been decided by GTE

because of the strength of the system in ensuring a. The system enjoyed the highest of budget all tasks are done properly and documented.

pricrity in the Army which has permitted a However, shelters leaving the Taunton plant do

rational execution plan to be developed and im- nothve sh fina tae rathe t ar

plemnte. thre s cntined I upprt romthe not have DD250 final acceptance; rather they are plemented. If there is continued support from the checked by DCAS and so documented, sent to

Congress through sustained funding, the program the field delivery site whea e they are assembled

should be successful. The contracts are structured to the vehicles and ancillary equipment and sent

to discourage reduced funding/stretchout as costs through final test and acceptance.

would increase significantly and system utility

would be jeopardized should full fielding not take RESULTS ACHIEVED

place on a firm schedule. To date, the project execution remains within DEP

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milestone constraints, fully funded, and has suc- duction system to qualify for the competition.

cessfully completed fielding and follow-on test and 3. No competitive reprocurement data to be

evaludtion (FOTE) by the 1st Cavalry Division

at Ft. Hood, Texas. The FY85 basic contract and

options for years FY86-88 have been awarded ore 4. No proprietary data to be purchased.

schedule. This is even more significant in view of 5. Contractor to perform life-cycle depot and

the reduction in real procurement funding for the in-theater special repair maintenance.

Army during the past 3 years and the ramp-up 6. No built-in-test requirement.

of MISE program funding required over the same 7. No

period. Savings to the Doa are estimated as: opti requirement.

-5500%1 RDTE, due to NDI basic system 8. No government maintenance equipment or

-S1.5B RDTE, plus PA due to acquisition ap- test software requirement. proach and scope of competed effort p S8a 3toan scpeof com tsdued t up-f*9. Commercial manuals are acceptable for

-c8mp total life-cycle costs, due to up-front operator and organizational level maintenance.

competition for life-cvcle support (Now military format manuals.)

-5000-7000 military personnel, due to simplic- 10. Contractor to provide post deployment softity of ,miployment, operation and maintenance. ware support for life of system.

Opc:ý,,Iuial benefits anticipated as deployment 11. No frequency spectrum limitations. (Criticontinues are summed up by the evaluation cal modification to of-the-shelf equipment

French Signal Otficers made of the RITA system accomplished.) (heart of the MSE system( and which is fully dhepltoyedf 

deployed by 

the 

the FryenhArm): Communications fu 12. No low-level nuclear detonation protection French Army: ' Communications reu ed

were no longer a limiting factor for the combat required.

arms." The Commander of U.S. Army 13. Foreign shelters, vehicles, and power units

TROSCOM summed up the impact of the sched- allowed. [GTE bid the full use of standard U.S

ule objectives of %ISE on the acquisition process Army shelters, vehicles, and power units.]

to make it succeed: *14. No interface requirements (NATO,

"Given the short time, there was no way TRI-TAC, existing Army systems). (These are to

business as usual would get the job done." be provided via priced options beyond the interfaces provided with the GTE/RITA system as

The MSE Acquisition Strategy Elements demonstrated.)

The following were outlined by the CECOM 15. No parts control program.

Commander in October 1983, following Mr.

Ambrohes direction that the system would be 16. Mixed contractor'government configuration

acquired without development, using off-the-shelf control based on impact to maintenance signifiequipment and software, and as a total turnkey cant spare parts.

system. ".. indicates those elements which were 17. No TEMPEST requirements.

later changed. The change process was a steady' 18. No producibility engineering analysis proanalysi, and negotiational effort by all elements

of any large acquisition team. The U.S. Army's

interest and involvement were instrumental in 19. No change to contractor software language

limiting substantial change to the initial NDI or documentation required.

strategy. 20. No formal safety program required; though

*1. No restriction to manufacture outside the some safety analysis was.

United States. (This was changed via requirement 21. The C-130 transportability not required.

to negotiate a minimum percent of contract funds [G'I L system provides for C-130 transportability. I

to be spent in the United States.) 22. No independent government testing prior to

2. Industry was required to demonstrate a pro- production.

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23. No validation verification of security and maintainer training during the lifetime of the

penetrability of software. system.

24. Contractor to provide initial training of 5. Description of means to accomplish fielding,

operators and organizational maintenance new equipment training to active and reserve perpersonnel. sonnel and in the Army schools.

The MSE Production Solicitation Features 6. Description of joint Army;,GTE configuration

The following unique features are key to executing management approach to support logistics

the acquisition strategy negotiated within the U.S. requirements.

Army. The offeror was to provide: .. Post-deployment software support for the

1. Description of test plans and criteria for sy-,tvm lifetime.

government acceptance of systems, equipment, 9. Strategy to ensure that more than 50 percent

and spare parts. of the total contract cost was spent in the United

2. Description of method of providing States.

maintenance and supply support at all echelons 9. Mandatory priced options for the following

above unit level, performance features not necessarily available in

3. Description of means of assuring availabil- the as-is equipment demonstrated: interfaces to

ity of spare parts "of satisfactory quality and at satellite, digital systems, TRI-TAC system (system

a reasonable cost" during the 15 years following for above Corps level communications), net radio

the last production delivery. and commercial or national communications

systems.

4. Description of method for providing opeiator

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