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Activity based costing efforts: related to advances in total ownership cost management for aircraft carriers - Navy Acquisition

Program Manager, Nov-Dec, 2002 by Stephen J. Moretto

This article condenses and updates "Advances in Aircraft Carrier Life Cycle Cost Analysis for Acquisition and Ownership Decision Making," by Stephen J. Moretto and Irvin M. Chewning, published in the May 2000 American Society of Naval Engineers Journal.

The U.S. Navy recently conducted an Analysis of Alternatives (AOA) to set the stage for determining the characteristics and acquisition strategy for its next generation aircraft carrier. The platform design selected is expected to be in service throughout the 21st century The issue of affordability is paramount as aging systems become more expensive to operate and maintain.

Meaningful Information for Cost-Conscious Decision Making.

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This article focuses on the need for the program management office and its supporting cost analysis staff to understand the Total Ownership Cost (TOC) of the existing and proposed future aircraft carriers and to then translate this data into meaningful information for cost-conscious decision making. The challenge is to relate the cost in terms the key decision makers and the engineering team can use to satisfy their respective roles. Thus, it is necessary to translate the results of the given ship design alternative TOC into the paradigms of the respective stakeholders:

* Fleet User (operators of aircraft carriers)

* Ship Designers (translators of the fleet operator requirements)

* Program Sponsors (providers of the funding resources)

* Program Management Office, Shipbuilder and Supporting Industry (executors of the acquisition and construction of the ship)

* Navy and OSD decision makers (overseers of program execution).

This article also describes how the aircraft carrier TOC breakdown structure was converted from traditional cost accounting format to a system or activity-based structure that supported the program manager's decisions through Milestone I. The structure has been used in the AOA as a tool to identify cost drivers in order to perform Cost As an Independent Variable (CAIV) analysis and develop its evolutionary approach to aircraft carrier design.

ESWBS--Central Backbone of the Cost Work Breakdown

The Navy's Expanded Ship Work Breakdown Structure (ESWBS) has emerged as the central backbone of the cost work breakdown for AOA work. The ESWBS structure is a natural choice as it is the framework within which the design and engineering community works. It provides the best framework from which to relate to program requirements, as it describes the ship-by-ship sub-system. The approach, for the first time, provides a breakdown of all life cycle cost elements by ESWBS. From this structure, it is possible to present costs in other formats for CAIV analysis, Cost Driver analysis, TOC management, design feature analysis, requirements analysis, and Office of the Secretary of Defense (OSD) Cost Analysis Improvement Group (CAIG) Milestone Reviews.

Inadequacy of Cost Accounting Format

Historically the life cycle cost of weapon systems has been presented

in a standard cost accounting format to satisfy program milestone requirements. Essentially the format was one-dimensional and provided cost data in a summary fashion with little insight into variables that drive cost, especially at the ship sub-system or design feature level. Additionally, OSD requires that programs must establish TOC reduction goals, associated metrics, and processes to evaluate progress toward cost reductions. In order to do this, the program must determine what cost reductions are achievable and how they should be allocated. The problem is that this cannot be achieved using off the shelf accounting system data.

Due to decreasing budgets within the Department of Defense, new reporting requirements have been put in place to increase program focus on cost reduction. Programs must develop TOC estimates for their systems and submit a TOC management plan.

In constant fiscal 2000 dollars, the TOC of a Nimitz Class carrier is estimated to be approximately $28 billion. Figure 1 on p. 37 shows the hierarchical breakdown of the TOC by major cost elements. The breakout shows manpower, procurement, and maintenance costs. Further breakdown of these elements shows traditional cost accounting formats and gives engineers little information to make design and programmatic decisions.

Developing a TOC Baseline

In order to understand the life cycle cost and the impact of design on affordability, a baseline TOC for the Nimitz class needed to be developed. The first step was to develop a TOC baseline that both the aircraft carrier program office engineers and upper management could use in making cost-based decisions. The initial problem to be overcome was that the Navy's database did not completely capture the data and did not present the data in a ship system format. Therefore, it was of limited use by those who were designing, managing, and overseeing the program.

To overcome this problem, a government-only team was formed to evaluate and compile databases into a total ownership cost estimate. The team determined that the ESWBS structure offered the greatest promise for a meaningful total TOC structure. After re-engineering the TOC structure for utility in the design, engineering, and decision-making process, the team recognized that it would need industry involvement in order to reach lower levels of detail it desired. Also, industry involvement was necessary to achieve buy-in, and institutionalize the TOC process within the aircraft carrier community Therefore, a Navy/Industry Integrated Product Team (Figure 2) was formed and produced a baseline far surpassing the detail and content of those previously developed.

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Activity based costing efforts: related to advances in total ownership cost management for aircraft carriers - Navy Acquisition

Program Manager, Nov-Dec, 2002 by Stephen J. Moretto

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