The Lion in Winter: Government, Industry, and US Naval Shipbuilding Challenges

DID reader Lee Wahler points us to Secretary of the Navy Donald Winter’s recent address to the annual meeting of the Navy League [PDF format], which focused on the problem of naval shipbuilding costs. DID has covered this issue before, but Winters’ speech went beyond that in some interesting ways.

Some key excerpts from the speech follow – and the opening sets the tone:

“After three months in the job as Secretary, I have some observations regarding the relationship between the Navy and industry that I would like to focus on over the next few minutes. There are some positive conclusions – but, at the same time, there are warning signs that the relationship between the Department of the Navy and industry, a relationship that won hot and cold wars, is beginning to fray under the tensions of the fiscal and security environments of today and tomorrow.”

I thought this next bit was his most compelling statement…

U.S. Secretary of the Navy Donald Winter:

“We are also looking to industry to make necessary adjustments in their operations to reflect changes in the long-term needs of the Navy. A responsive defense industry infrastructure is necessary if we are to continue the partnership that is vital to our national security.

The conditions that determine our shipbuilding program have changed. But the industrial infrastructure that supports shipbuilding is just beginning to face up to that reality.

The nexus between technology and resources is the driving factor behind the dramatic changes in our plans for new ships. The forces at work have, over time, brought the Department of the Navy to a challenging financial position. We are being pulled in two opposite directions.

On the one hand, the Navy exerts constant pressure on itself and on industry to increase the capabilities of our platforms through the application of advanced technology. This costs money. At the same time, the Navy is under pressure to control costs. The greater the capabilities, generally, the higher the costs – which means that the Navy can afford to buy fewer platforms. But that too drives up the cost per ship. Both factors – greater capability and lower numbers of ships – are pushing the cost of shipbuilding to prohibitive levels.

Given that the ships we buy today are much more capable than those that were purchased in the past, we need not go back to the Cold War fleet. But where we are today is also unacceptable…”

In other words, the Defense Industry Cost/ Death Spiral is at work in the Navy as well. DD (X)/ DDG-1000 Zumwalt Class destroyers that will eat large portions of the US shipbuilding budget for many years to come, in order to produce a grand total of 2-8 ships, are a symptom of the dynamic Winters describes. But not the only one.

Rather than challenge this dynamic, however, he later goes on to note:

“In the past, the Navy has had shipbuilding production plans that included 34 Spruance class destroyers, 30 Aegis Cruisers, 62 Arleigh Burke class destroyers, and 54 Oliver Hazard Perry class frigates – very large production runs over relatively short periods of time. Needless to say, those production rates are just not feasible with ships like DD (X), CG (X), CVN21, and Virginia class submarines. We need a new shipbuilding model that can cost-effectively provide significant increases in capability at low rates of production.”

…and…

“We are at an inflection point in shipbuilding and in the defense industry writ large. It is, indeed, a critical time for our Nation, our Navy, and for our defense industry. We must be able to produce highly capable systems in relatively small numbers. We have all the right pieces, and we have completed the initial steps. We need to continue on a successful track.”

With respect, there’s a difference between “successful” and “unchallenged.” Whether success would continue in the face of a serious challenge, given the dynamics described, is the open question upon which the US Navy’s future hangs.

Changes on the Navy/Government Side

DID’s March 2005 article “Cost Overruns, Budget Uncertainties Hurting USN and Contractors” discussed some of the practices by the Navy and even more so the US Congress that were contributing to industry problems. Winters spent some time on these issues, noting that:

“Industry will have to evolve, but the Navy, for its part, also needs to re-think its side of the shipbuilding equation.

First, Congress and the Navy need to stabilize funding so that industry can conduct effective long-term planning. We are off to a good start with the analysis that underpins the Navy’s 30-year shipbuilding plan to set the fleet at 313 ships. Now we need to work with Congress and our industry partners to execute that plan.

Second, the Navy needs to do a better job of stabilizing requirements. Scrubbing requirements at the beginning of a program is critical. But we also need to strictly control new requirements in existing programs.”

Both unstable funding and unstable requirements were cited in DID’s report as significant issues in the cost overruns and related issues that beset the LPD-17 San Antonio Class. Winters acknowledges this when he says:

“While the Navy has welcomed the addition of the Virginia class submarine and the LPD-17 amphibious ship to its inventory, pain and suffering have attended these births. We must do better. Especially when we consider the revolutionary platforms and weapons systems that are in the offing.”

Oddly, the connection between these two phenomena is never drawn.

Having said all that, a shipyard whose capabilities and execution simply weren’t up to the requirements was also part of the San Antonio Class’ problems – in part as a second-order consequence of unstable funding and requirements, but not wholly so. Which brings us to…

Ongoing Industry Issues

“We are also looking to industry to make necessary adjustments in their operations to reflect changes in the long-term needs of the Navy. A responsive defense industry infrastructure is necessary if we are to continue the partnership that is vital to our national security.”

To say the least, industry was not spared criticism in Winters’ speech. Why, and what seems to be lacking?

“Aside from the divergence in time horizons between the Navy and industry, there is another area that seems to divide us as well. I just do not see the sense of urgency in industry reflective of the fact that we are a nation at war. The behavior of industry reflects, by and large, the general attitude of the public, where people have resumed a routine of normalcy in their lives in the wake of 9/11.

The images of that fateful day – with planes crashing into the World Trade Center and people jumping to their deaths to escape the flames – are becoming a less-pressing memory. But we are at war, and our terrorist enemies have not given up.

Given those conditions, an attitude of “business as usual” is not consistent with the needs of the nation. By contrast, during World War II, there was a remarkable sense of solidarity, a feeling that the whole country was in this together. Consider the astounding feat accomplished by industry during World War II, when it produced over 2,000 Liberty ships between ’41 and ’45 – and another 2,000 Victory ships on top of those.

Industrialists such as Henry J. Kaiser, who had never before built ships, were eager to use mass-production methods in shipyards, and they stepped forward to meet the challenge. And they became national heroes for their leadership. It was the partnership between industry and the military that won that war – and both partners took enormous pride in their achievement.

Today, however, there is a difference between the atmosphere one often finds in corporate America and the atmosphere one finds in the military…”

Winters had previously noted that:

“A steady course has been set, but there are storm clouds on the horizon and we need to alter course to stay clear. We need to arrive at better alignment between Navy and industry. This judgment is based on long experience from an industry point of view, and on recent observations from within the Department.

From where I sit today, I notice an emerging difference in perspective. In industry, the focus is on financial performance – and in particular, the near-term: quarterly earnings and monthly financial targets.

Business executives are forced by a number of factors to focus, almost exclusively, on short-term considerations. The power of the stock market to threaten business viability, the impact of missed earnings on Wall Street, and recent legislation such as Sarbanes-Oxley – all serve to focus business leaders on their fiduciary responsibilities and incline them towards a near-term perspective. In addition, the way compensation packages are typically structured often creates incentives to adopt a short-term mindset. Thus, “making the numbers” is a constant, inescapable imperative for many of you here today. But an almost exclusive focus on the short-term may lead to an inadequate consideration of long-term, strategic issues that, although discounted today, are vital to a firm’s long-term health and the health of the US Navy.

Delivering quality products in a timely manner, investing in processes and technology, and making capital plant improvements all impact the quarterly bottom line – but they are also elements of a long-term strategy that will position corporations for financial success in the years to come. I am not suggesting that business leaders should abandon their fiduciary responsibilities, but there must be a balance between short-term financial goals and long-term considerations.”

Specifically:

“Industry also needs to shoulder some of the burden as well. First, it needs to implement rigorous process improvements such as Lean Six Sigma. Second, it needs to invest in capital improvements that support low rates of production of high capability systems. And third, industry needs to evolve its workforce to fit the new model.

I submit that industry will have to make some tough workforce decisions. It is a question of shaping the workforce to match the long-term needs of the Nation. This will require management of the demographics of the workforce, and changes in the composition of skill sets within the industry.

Yes, we will work with industry to preserve critical capability for the long-term so that when we need it in the future, it will be available to meet our needs. But we, as a Navy and a Nation, cannot maintain a workforce that is configured for a world that no longer exists.

To re-calibrate the workforce, various solutions must be pursued, to include knowledge transfer, skills retention, and re-training. It is a problem that needs to be recognized and addressed in an aggressive manner.”

This tack was also interesting:

“Competition is ordinarily pursued by cutting costs at the margin – all very good, but not adequate. While beneficial, competition to save a few percent on a product does not generate the capability, quality, or savings we desire.

What is really needed is a competition of ideas. When great minds focus on meeting requirements differently, truly innovative ideas can emerge.

The Navy’s new Littoral Combat Ship is a good example of a ship that appears to be winning the competition of ideas. It is a capable, low-cost ship – with missions that include Mine Countermeasures, Anti-Submarine Warfare, and Surface Warfare. It is fast, flexible, and agile, and it meets our emerging green and brown water requirements today. And with modularity and Open Architecture, LCS can be rapidly adapted to meet the requirements of the future.”

SecNav Winter’s full speech can be found here, in PDF format.

Tim Colton, who maintains a fine set of databases covering US ship-building, adds acerbically:

“He was right to say that the Congress and the Navy need to “stabilize funding” and he was right to say that the Navy needs to “do a better job of stabilizing requirements”. He was also right to tell the shipyards that they need to do three things: “implement rigorous process improvements”, “invest in capital improvements” and “evolve its workforce”, as long as “evolve the workforce” can be construed as including “hire some competent managers”. Now let’s see some follow-through.”

Ow. He adds:

“By the way, Mr. Secretary, your history’s a bit shaky. We didn’t build 2,000 Liberty ships and 2,000 Victory ships in WWII: we built 2,718 Liberty ships, 550 Victory ships, 533 T-2 tankers and 1,801 other oceangoing cargo ships.”

Perhaps, but Winter’s central point remains: partnership is possible, if it’s two-way. While SecNav Winter explicitly did not say this, one might add the lesson that up to a certain point, quantity has a quality all its own. Especially in a world characterized by the proliferation of threats in many different locations.