Literature Review on Cost Reduction in Us Naval Shipbuilding
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Abstract
The cost of U.S. Navy ships has risen faster than inflation indexes in recent decades. These toll increases are like to those for other weapon systems and are driven in part by increasing complication of ships. To reduce costs, the Navy may wish to consider stable or modular designs, slower increases in complexity, or mission-focused ships, or fifty-fifty to change how it purchases ships (eastward.g., brand multiyear buys). Some manufacturing investments for greater efficiency in product can assist reduce costs as well.
Over the past 4 decades, the toll of U.S. Navy ships has grown faster than the rate of inflation. This real growth in costs means that ships are condign more expensive and outstripping the Navy's ability to pay for them. Given current budget constraints, the Navy is unlikely to encounter an increase in its shipbuilding upkeep. Therefore, unless the Navy can reduce the growth of costs for its ships, the size of its fleet volition probably shrink.
To better sympathise the sources of this toll escalation and its implications, the Office of the Principal of Naval Operations asked the RAND Corporation to explore several questions. These questions included how ship-cost growth compares with that for other goods and services, what are the sources of ship-price escalation, what shipbuilders say about price escalation, and how shipbuilding costs might be cut.
How Does Growth in Ship Costs Compare with That for Other Appurtenances and Services?
Annual cost escalation rates for amphibious ships, surface combatants, attack submarines, and nuclear aircraft carriers have ranged from seven to 11 per centum in contempo decades. This increase has been considerably to a higher place general inflation indexes, which accept been between four and 5 percentage per twelvemonth since 1965. As a result, real annual rates of growth in costs by types of ships the RAND researchers examined accept ranged from just under 3 to merely over 6 percentage.
Although outstripping rates of toll growth for many nonmilitary goods and services, ship-price escalation rates have not exceeded those for other weapon systems. In contempo decades, the annual toll escalation rate for U.S. fighter aircraft was about ten percentage. Historical analyses of British Navy weapon systems show cost escalation rates comparable to those the U.S. Navy has experienced in recent years.
What Are the Sources of Send-Cost Escalation?
The researchers examined ii primary sources of ship-cost escalation: those that are economy-driven, or outside the control of the authorities and including elements such as wages and the price of material and equipment, and those that are customer-driven, including elements the regime wants on ships and the regulations it imposes for shipbuilding and acquisition. Each of these accounted for about one-half the sources of send-cost escalation.
Economic system-driven toll increases are divided roughly between (1) labor and (2) equipment and material. While some economy-driven costs, such as those for employee wellness insurance, have increased faster than mutual inflation indexes, the researchers found that, overall, these costs have risen at a rate roughly comparable to inflation.
Customer-driven price increases are primarily a outcome of (one) characteristic complexity of the vessels built and (2) other standards and features desired past the government. Feature complexity is a measure out of how changes to basic ship features (e.g., deportation, coiffure size, number of systems) brand them more difficult to increment. The researchers found that increases in light ship weight (LSW) and power density (i.east., the ratio of power generation capacity to LSW) correlated virtually strongly with send costs. Changes in these variables by themselves probable do not lead to increased send costs. Instead, they indicate other changes that do tend to increase costs. Power density, for example, is related to the number of mission systems on a send. Overall, the Navy's desire for larger and more than-complex ships has been a significant crusade of ship-cost escalation. Other standards and features, such as desired improvements in survivability, habitability, working weather condition both onboard and in constructing ships, and environmental regulations surrounding the construction and operation of ships, accept besides contributed to transport costs. Procurement rates contributed a smaller portion to overall price escalation. Figure i illustrates the contributions of different factors to the nine.2 annual rate of toll growth seen in constructing guided missile destroyers between 1961 and 2002.
Figure one. Contributions of Different Factors to Shipbuilding Cost Escalation for Surface Combatants: DDG-2 (Fiscal Year 1961) and DDG-51 (Fiscal Twelvemonth 2002)
What Do Shipbuilders Say Virtually Price Escalation?
In addition to quantifying sources of toll escalation, the researchers asked shipbuilders for their views on why such escalation occurs. The most common explanation shipbuilders offered related to an unstable business base and decreasing production rates. For many shipyards, the government is the chief, if non merely, customer. Fluctuating ship orders, with initially forecast orders typically exceeding what is ultimately purchased, discourage shipyards from making investments that could ultimately reduce the cost of ships. An unstable business base of operations also causes fluctuations in the need for skilled labor that are expensive and difficult to manage and prevents contractors from leveraging through long-term contracts purchases from subcontracting suppliers. Decreasing production rates tend to increment overhead rates and make the shipbuilders and their suppliers produce at lower efficiency.
What Can Be Done to Reduce Ship Costs?
To counter increasing costs, the Navy tin can target some of the primary factors related to cost escalation, such equally those related to capability and complication of the vessels. Where the Navy has produced a form with a relatively stable design, the toll changes within that form have stayed in line with inflation. Another approach would be to reconsider the mission of transport classes. Rather than building large, multi-mission ships, the Navy could build smaller, mission-focused ships, thereby constraining requirements growth and reducing the cost of any single hull. A third approach would be to separate the mission and weapon systems from the ship, similar to the modular arroyo currently beingness pursued with the Coastal Gainsay Ship.
At that place are as well some areas in which shipbuilders might exist able to reduce costs. Some investment initiatives, such as those for lean manufacturing, could improve efficiency. Unfortunately, traditional defense contracting approaches have non provided adequate incentives for shipyards to invest in such techniques. Some other potential area for reduction is indirect costs, which have grown faster than inflation, but such reductions would target only the labor portion of the escalation, which accounts for less than a quarter of overall escalation.
Withal other approaches would address programme management or acquisition strategy—that is, the fashion ships are purchased. The government could, for example, use longer-term contracts or multiyear buys to add some stability to production demand. The Navy could also reduce change orders.
Still other steps, such as rationalization of shipbuilding capacity or the involvement of foreign contest, could besides assist reduce shipbuilding costs, merely these are less politically palatable. Rationalization of shipbuilding chapters or concentration of manufacturing to realize greater efficiencies, for example, could lead to some shipyard closures.
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