Solving the DoD's "hot capacity" problem
Decoupling development and manufacturing will lead to core competencies, and more efficiencies
Our defense industrial base has a problem with hot capacity—the capability to rapidly produce needed military equipment, such as weapons systems or vehicles, in response to fluctuating demands or urgent requirements. Conceptually, the Department of Defense (DoD) transitioning to “dual-use” products is supposed to resolve the problems as commercial markets would provide demand for products while there is no conflict. However, it is unclear how critical products such as ammunition, fighter aircraft, missiles, etc. can have dual-use applications. The best way to resolve this capacity problem is to decouple research, development, testing, and evaluation (RDT&E) and production. RDT&E often involves inefficient trial-and-error processes, making optimization difficult. However, the production process can, and should be, optimized separately to enhance efficiency and responsiveness to demand fluctuations.
Generally large defense programs are structured as "cost-plus," where the government reimburses contractors for expenses and pays a negotiated fee to provide profits. Approximately 43% of the five Aerospace Defense Primes’ revenues are generated through cost-plus contracts. The incentives for financial discipline are limited, as longer contracts lead to higher costs and profitability, one of the reasons why it is not uncommon to see such cost-plus programs going over budget. Despite inefficiencies, the cost-plus approach remains prevalent due to the challenge of incentivizing significant investment in RDT&E for products with only one buyer, fluctuating demands, and changing needs. Cost-plus contracts also offer a key advantage - the government owns the IP it funds. That ownership offers a path to address the problem of hot capacity and escalating costs of new weapons systems.
The decoupling of development and production, exemplified by the US Army's approach with the joint light tactical vehicle (JLTV) program, offers a promising model.
Once a product has been developed, the DoD should open production contracts for bidding by sharing IP acquired through cost-plus. Production contracts should adopt a firm, fixed-price structure, with long-term demand divided into smaller lots, and awarded to multiple bidders. This strategy creates a market for products even if the DoD is the sole buyer. The decoupling of development and production, exemplified by the US Army's approach with the joint light tactical vehicle (JLTV) program, offers a promising model. Army bought technical data packages for JLTV from OshKosh (the original JLVT developer) and informed the manufacturers of its intent to re-bid the follow-on production contract. In February 2023, Army selected AM General, among three others as the winner for the follow-on production contract. With this move, Army decoupled development and production. To effectively enable decoupling – all large development contracts should have a digital twin (a digital replica) of the product as one of the program deliverables.
Digital twins would allow the DoD to quickly share data with bidders, bidders could evaluate products, suggest changes to optimize production, and DoD could quickly evaluate proposed changes. Such an approach will attract multiple manufacturers to bid for contracts, optimize production, and over time create a diverse and flexible manufacturing base.
Modern technology companies are constantly improving their products – offering new features and lowering costs. Tesla is an example of how a modern technology company operates in a mature industry. Tesla manufactures a Model 3 in 40 steps in approximately 90 minutes. Legacy American car manufacturers need approximately 18 to 25 hours to manufacture a vehicle. One of the keys to Tesla’s superior performance is the co-location of its engineering and manufacturing departments – if a part needs to be redesigned to allow for faster manufacturing, Tesla will redesign the part. In stark contrast to general aerospace manufacturing operations where strict requirements do not allow for quick engineering changes, resulting in a system that can only deliver efficiencies through better organization of workflows. The outcome can be seen in videos of aircraft manufacturing facilities – most of the production is done by hand, there is very little automation, and it is not uncommon to see line workers struggling to connect cables or to install a part. It is hard to believe that manufacturing efficiencies could not be gained by reengineering aircraft parts and introducing new materials/manufacturing technology.
Digital twins should deliver additional production synergies through parts sharing. Common parts could be reused across platforms – speeding up design and manufacturing. Increased efficiency in the end means more hot capacity because we can do more with less.
Large systems only change when pressured, for many large weapons programs the DoD awards only one contract, which limits the pressure to deliver large efficiency improvements. Decoupling of production should seed the development of defense contract manufacturers--companies whose core competency is efficient manufacturing. Those companies design their manufacturing systems for efficiency and flexibility. Having flexible manufacturing processes tied to digital twins allows for quick retooling to manufacture different products, indirectly solving the DoD's hot capacity problem.
Contract manufacturing has proven successful heavily regulated pharmaceutical industry and others, there is no reason why the model should not be replicated within the defense industry.