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More for Less: What Government and the Defense Industry Need to Do to Meet the Trump Administration's Aspirations

With the nomination of General James Mattis for Secretary of Defense, President-elect Trump has made clear his ambitious plans for the Department of Defense and, more broadly, for American national security. Whether Congress will allocate the funds needed to pay for his programs is an open question. But the results of the recent election are likely to be significant for the Pentagon and the defense industrial base. Indeed, President-elect Trump's campaigning suggests a defense buildup rivaled only by that of the Reagan Administration.

The Navy's force structure stands to be the most obvious beneficiary of the recent election. During the campaign, the newly elected president argued for a 350-ship navy, up from the 272 ships in the current fleet. This would bring the Navy to a size unseen in nearly 20 years. Although the exact types and mix of ships the new administration might want to promote are unclear, a number of key existing programs will almost certainly have to grow. To reach 350 ships, for example, the Navy will have to produce more Virginia-class submarines, something long called for by naval enthusiasts. Likewise, it will have to continue the Littoral Combat Ship and the follow-on frigate. It is quite possible that the Trump administration will move Ford-class aircraft carriers into greater production, too, perhaps increasing the carrier fleet to a dozen by the 2030s. And the President-elect has explicitly advocated modernizing a number of the Navy's Ticonderoga-class cruisers. To man all of these ships, the Navy will have to increase its end strength by tens of thousands.

The Navy buildup won't be cheap. Each Virginia-class submarine costs more than $2 billion, a Ford-class carrier costs in excess of $12 billion, and an LCS runs $500 million. Altogether, experts estimate the Navy's shipbuilding accounts must increase by about $15 billion each year over the first term of the Trump presidency, with another $60 billion added annually in the years beyond that, if the Navy is to reach 350 ships in the coming decades. Equally significant, the defense industrial base will have to expand. Recognizing this, Trump advisers have called for revitalizing shipyards to build new ships and to overhaul those whose maintenance the Navy has deferred due to budget cuts. President-elect Trump even hopes to reopen old shipyards and to develop a robust training infrastructure to supply skilled workers for them.

The Navy is not the only military service that stands to gain. The Air Force will get a big boost as well. During the campaign, President-elect Trump said he would like to see 1,200 readily available fighter aircraft in the Air Force, an increase of 100 from today’s number. As a result, orders for the F-35A will almost certainly increase. He has also promised more operations and maintenance money for the Air Force, whose training has been dampened in the recent years of budget austerity. Force structure will undoubtedly grow, too, by as much as 40,000 airmen, to service the new aircraft and to facilitate training. The Army, which is at a low ebb in personnel, and the Marine Corps will similarly expand. President-elect Trump has stated that he would like to increase the size of the active-component Army to 540,000, an increase of 60,000 from today, and add 12 battalions—about 10,000 people—to the Marine Corps. As a rule of thumb, adding 10,000 people to a military service costs about $1 billion annually, without factoring in the cost of equipment and training. So the planned growth in the land forces' end strength, by itself, will cost more than $10 billion a year.

Plans for this military buildup will run up against the mandatory spending caps that Congress enacted in 2011. Those caps have yoked an expansion of the defense budget to domestic spending increases. While no one in Washington has much love for the Budget Control Act, the law that put those caps in place, a lasting solution to the budget wars has proved elusive. But with Republicans in control of both houses of Congress and the presidency, there is some optimism that the yoke between national security and domestic priorities can be lifted. Still it will not happen without great effort, and success will require adroit political leadership.

If a continuation of the budget stand-off or other spending priorities laid out by the campaign imperils President-elect Trump's vision for the military, the new leadership at the Pentagon must realize that defense contractors alone cannot make up the difference. The defense industry has improved affordability for years, funding more research and development in pursuit of fewer programs, reducing their cost base by driving efficiencies in operations, and eliminating overhead. There is little room to squeeze additional savings from these processes.

There are some ways to close the gap between budget reality and the President-elect's plans. But pursuing them will require the government to buy differently, support defense contractors to push new technological horizons, and the public and private sectors to establish innovative partnerships. We see three areas of opportunity: 

  • Development of stable, long-term procurement requirements to enable experience-based savings
  • Deployment of digital technology by defense contractors to drive the next wave of affordability
  • Coordination across the entire defense supply chain to reduce costs

Development of Stable, Long-Term Procurement Requirements to Enable Experience-Based Savings

When production volumes increase, it is reasonable to expect unit costs to decline. This business principle is well known as the "experience effect": unit costs decline at a predictable rate as cumulative production grows. However, successfully achieving these cost reductions entails meeting an important condition. Namely, defense procurements must involve nearly identical—and hence, repeatable—units. This permits industry to learn and constantly improve, translating learning into lower costs and not into new design iterations.

Capturing the experience effect will be particularly important to realizing President-elect Trump's vision for defense. The implication for the federal government is that a defense buildup will necessitate a different management system for new acquisition programs, one that possesses four crucial features: 

  • It minimizes the number of changes made to the product and thus avoids corresponding resets on the experience curve.
  • It minimizes the number of changes made to the production system that are not part of continuous improvement efforts.
  • For any essential change, it has a business case that incorporates the loss of experience and the cost of an experience curve reset—a cost that is as real as the nonrecurring engineering costs.
  • It ensures that planners consider production system investments and design-for-manufacturability changes equally and in parallel with performance enhancements.

Deployment of Digital Technology by Prime Contractors to Drive the Next Wave of Affordability

Defense contractors have effectively squeezed blood from a stone in driving affordability to date. Achieving an even higher level of affordability will require adoption of new technologies that support new methods of production. Digital technologies provide the best opportunity for such improvements. Wearables, RFID, 3-D printing, laser scanning, augmented reality, automation, and other digital technologies have already shown promise in defense production applications. As yet, these technologies are just getting a foothold in the defense industry. But a step in the manufacturing process for constructing a radar installation or a fighter jet that currently takes hours might take only minutes with assembly work instructions tailored to the product and displayed immediately on a worker's digital tools.

The task for defense contractors is to take these nascent digital technologies and scale them to perform effectively in entire production processes, as well as across products, within their businesses, and across the whole product value chain beyond just production but also to new ways of operating and sustaining ships, vehicles, and aircraft. The challenge resides in rethinking old paradigms of design and production and in wedding technology and human talent to find new ways of working.

Defense contractors will have to re-imagine the possibilities inherent in the emerging technologies, organize to enable them, and create adaptive cultures to receive and work with them. It won't be simple or easy, but the effort will pay dividends. The cost-reduction and efficiency benefits can be revolutionary, as production steps that used to take hours will take only minutes in the future, and as new ways of working are revealed. 

Coordination Across the Entire Defense Supply Chain to Reduce Costs

The union of stable product requirements and new digital technologies can lead to further significant reductions in cost. Nevertheless, "engineering out" cost is easier said than done. For decades, each tier of the supply chain has become increasingly isolated from the adjacent ones, further separating the requirement from the design intended to meet that requirement. The challenge for prime contractors in the defense industry is to bridge the requirement/design divide. If they succeed in this task, defense contractors can pass along the savings to taxpayers.

But spanning the requirement/design divide requires both a structured process to identify where excess cost resides in designs and a partnership with lower-tier suppliers to effect the needed changes. The collaboration between primes and their suppliers has the potential to yield valuable cost-reducing updates to designs. Further primes and their contractors will have to work closely together to implement these new ideas. We call this structured approach Value Engineering, and it will be critical to the success of defense prime contractors in leading coordination with their supply chains and the government to lower production costs.

Regardless of how much spending is available in the end, any buildup in defense by the Trump administration will require the government, the defense industry, and the supply base to adopt new ways of working. Such innovative changes are the key to achieving affordable programs and realizing the defense program that President-elect Trump envisions. If it is successful, we anticipate the changes will transform the industry. 

About the Authors

Tom Peddicord is a partner and managing director in the Washington DC office of The Boston Consulting Group. You may contact him by e-mail at peddicord.thomas@bcg.com. Brad Carson is a senior advisor in BCG’s Washington DC office. You may contact him by e-mail at carson.brad@bcg.com. Greg Mallory is a senior partner and managing director in the firm’s Washington DC office and global leader of BCG's Aerospace & Defense sector. You may contact him by e-mail at mallory.greg@bcg.com.

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