Air university

The JPO preferred a price-based proposal strategy as opposed to a cost-based strategy. With single-year, cost-based contracts, there was no motivation for contractors to reduce costs--they would make less money. With a standard percentage fee, contractors would make less money if costs were reduced. On the other hand, the more sub-contractors charged, the more money prime contractors would make. With a multi-year, price-based strategy, contractors can give the government a price that is competitive. In order to attract customers in the commercial world, companies frequently plan an attractive, but relatively flat price curve that is not profitable until several hundreds or thousands of the products are sold. Companies do this knowing as they make changes to lower their costs in future years that they will be able to retain those gains. It is still a win-win for the government and the prime contractor. The Air Force and Navy customers get a product that they can take out of storage at 20 years, do a built-in-test (BIT), attach the tail kit to the dumb bomb, and expect it to work. If the BIT fails, they can send the tail kit back and have it repaired with no questions asked.

Mr. Little also encouraged his MD and MM IPTs to embrace priced-based acquisition. In the past, engineers designed the best product regardless of cost. They now had to learn to design affordability in at the outset to reduce cost and not reverse engineer the design to get cost out. The IPTs analyzed each JDAM component to find cost drivers. The contractors not only gave each supplier and their sub-supplier price targets with continual updates, but sub-suppliers were allowed to participate in performance specification development. The synergy of sub-suppliers analyzing each other’s part of the puzzle realized solutions that would not otherwise have been.

MM and MD both have affordability stories. Both companies’ IPT teams realized on several occasions that government furnished equipment (GFE) was significantly more expensive than commercially available products. In MM’s case, they found that the Navy’s standard metal fin tail kit was twice as expensive as a proposed injection molded fin tail kit. The Navy had bad experiences with similar parts using the same base material, but MM wanted to use a different lamination process. MM ended up overriding the Navy’s objection in order to lower costs.⁶³

For MD, Mr. Dillow flowed down the same JPO relief, like configuration control, given to MD and also made suppliers part of the IPTs. He set cost objectives on every supplier component and requested warranties. Where small companies could not offer warranties, MD took on the risk with the overall warranty given to the JPO. The EIPT which consisted of major supplier Vice-presidents and Boeing’s Mr. Dillow and Mr. Swain oversaw the efforts of the WIPTs and met monthly. The EIPT solved problems, made decisions, supported the WIPTs, and presented one voice.⁶⁵ To encourage complete and open communication between the WIPT members, non-disclosure agreements were signed between MD and its subcontractors and between each supplier. Mr. Dillow and MD led by example by showing MD’s financials and program management reserve. Mr. Dillow realized “that if suppliers weren’t successful in getting costs out, then we wouldn’t have a prayer.”⁶⁶ These kinds of actions built trust between MD and the suppliers and between the suppliers.

Suppliers provided 80 percent of MD’s JDAM design. The guidance and control unit (GCU) was the largest sub-system and accounted for 60 percent of Boeing’s cost. The GCU consisted of the Inertial Measurement Unit (IMU, made by Honeywell), the GPS receiver (made by Rockwell Collins, RC), and the mission computer (made by Loral who was bought out by LM later). RC had difficulties in keeping components off their GPS board and it kept their costs high. They attributed it to MD’s GPS antenna design. MD did not want to change the design in fear that it would result in other sub-systems’ poor performance. The epiphany for MD’s IPT occurred when RC asked to select a different commercial antenna, but paid for Honeywell’s and Loral’s requalification requirements.⁶⁷ RC ended up winning the Spirit of Excellence award for JDAM, the highest supplier award from MD.⁶⁸ MD inspired the rest of the supply chain by awarding a tiered system of gold, silver, and bronze preferred suppliers which enjoyed perks like multi-year and non-compete contracts.

Rolling Down-Select. The JDAM JPO gave MM and MD three report cards during the 18-month EMD-I selection period. The report cards were conducted during an open discussion forum. Color grades were awarded against each competitor’s plan so they could change course if needed. Previously, the government rarely gave competing contractors any information. The new EMD-I report cards directly contributed to the final decision to award EMD-II. The key aspects of this new cooperative “rolling down-select” saved the government money and prevented protests.⁶⁹ However, at any time, the JPO could excuse a contractor in a rolling down-select, but that would involve paying a “termination liability” fee. In this case, MM and MD competed to the end and MD won the rolling down-select in September 1995 with a final AUPP between $14,000 and $15,000, well under the original estimate of $68,000, the original target of $40,000, and the original bid of $28,000.⁷⁰ Although MD’s proposal was through production lot 11, the JPO awarded MD a firm fixed price contract for production lots 1 and 2; putting the initial risk on MD to succeed. The JPO also accepted MD’s Procurement Price Commitment Curve (PPCC) that took the contract out to production lot 5; less risky for, but very motivating to MD. MD was the first in the defense industry to use a PPCC concept.

The Boeing Company and JPO Continue the Saga

With a $14,000 AUPP, the government increased its purchase commitment to 87,000 tail kits for an estimated $1.2 billion in future contracts. Although the first contract was signed for production lots 1-5, it was based on a relatively flat PPCC curve out to production lot 11. Although no single action can be viewed as the reason for the JDAM EMD-I success, certainly much can be attributed to Mr. Little and Mr. Dillow. Their persistence in working in a consistent direction can account for much of the program’s success. Several JPO and MD PMs have followed between 1994 and 2008 to lead JDAM and have lessons to share.

Two years into the 40-month EMD-II contract and at the beginning of low-rate initial production, the Mk-84 (2000 pound general purpose bomb) JDAM friction brake did not keep the tail fins from moving on the F/A-18 inboard station during prolonged transonic flight. Boeing’s initial design calculations had the JDAM fins exposed to the transonic region for just a few minutes over its entire life. The JPO’s requirement for the JDAM was 50 hours of captive carry flight regardless of environment. Although MD designed a new robust tail pin fin that would work for five hours and not break for 50 hours in the transonic region during the entire life of the weapon, neither the JPO nor Boeing wanted to pay for the new robust tail pin fin.

After a year long stalemate and withholding MD’s 1998 award fee, Carl Avila (Boeing’s PM) and Oscar Soler (JPO’s PM) realized they needed to hammer out a compromise that was not necessarily supported by either’s management. The JPO wanted to meet its delivery schedule to the warfighter, avoid litigation since Boeing’s original Operational Requirements Document addressed low altitude transonic flight, and to preserve the competitively achieved PPCC. Boeing wanted the government to pay for and submit an Engineering Change Proposal and wanted the PPCC to be reset because the AUPP would raise about $700 per kit. Mr. Avila and Mr. Soler finally agreed that the JPO would recognize the increase in PPCC and that Boeing would do the EMD work at cost with no profit. Until the solution was incorporated into production lot 4 deliveries in 2001, the Navy accepted more BLU-109 and BLU-110 (1000 and 2000 pound penetrator bombs) JDAM kits instead of Mk-84 kits during production lots 1-3 to keep JPO deliveries on schedule. In return, Boeing offered to redesign the new robust tail pin fin at cost. Due to the progress made, Boeing received 100 percent of its 1999 award fee.⁷¹

At the same time, Operation Allied Force was looming over Yugoslavia in early 1999. The Joint Chiefs of Staff directed rapid acceleration of JDAM production. Luckily, JDAM had just moved from an old dispersed production facility in Saint Louis, Missouri, to a renovated automated production facility in Saint Charles, Missouri. Mr. Avila remembered that they tripled production in six weeks from 100 kits a month to 300 kits a month and that “it couldn’t be done without the continued supplier communication that began way back in EMD-I.”⁷² Even today, Boeing maintains a disciplined “battle rhythm” of quarterly visits, weekly video teleconferences, and daily teleconferences with their suppliers to establish trust, verify performance, and prepare and coach through changes. Between solving the friction brake solution gridlock and tripling JDAM production, Richard Walley, then the JPO Acting System Program Director for JDAM, felt that “Carl Avila and Oscar Soler did as much to save JDAM as Charlie Dillow and Terry Little did to set up the program.”⁷³

By 2000, Kim Michel and Mike Hatcher took over for Mr. Avila at Boeing and Mr. Soler at the JPO, respectively. They began their combined tenure with two important challenges. The first was the EMD sole-source contract to produce Mk-82 (500 pound general purpose bomb) JDAMs for integration onto the F/A-18, and the B-2. The second key concern was positioning for the production lots 6-11 contract.

Although Boeing already had experience integrating the Mk-84, Mk-83, BLU-109, and BLU-110 JDAMs on all U.S. combat aircraft and one international fighter, it was not ready to commit to a single outer mold line Mk-82 JDAM without testing it in several aerodynamic vibration environments. Air Combat Command was not sold on the 500 pound JDAM variant because they were already vested in the Small Diameter Bomb program.⁷⁴ General John Jumper, Air Force Chief of Staff, however, directed the Mk-82 JDAM development because he wanted the option of delivering 80 Mk-82 JDAMs (GBU-38s) from a single B-2. Northrop subcontracted Boeing to fit 80 GBU-38s into the B-2.⁷⁵ The JPO used an effective cost plus award/incentive fee in contracting the Mk-82 EMD program. The award fees were aligned with meeting cost and schedule aspects of the program while the incentive fees were based on those performance aspects related to the single outer mold line that Boeing was concerned about.

As Boeing was preparing their strategy to secure the contract for production lots 6-11, JDAM had already reached full-rate production in April 2001. Discussion began outside of Boeing and the JPO, namely at OSD, that Boeing’s JDAM PPCC was not competitively acquired for production lots 6-11. According to OSD, Boeing’s cost and pricing data were required since its FAR waivers and TINA exceptions expired with the 1994 Federal Acquisition Streamlining Act in 1998. The original JDAM EMD-I and first production lots 1-5 contracts were based on DAPP waivers to FARS and TINA exceptions. OSD argued that the production lots 6-11 contract should be cost based. OSD wanted the opportunity to look at Boeing’s financial books to make sure Boeing was not making an excessive profit. Ms. Michel, Boeing’s PM, recalled, “Without putting things in writing, I spoke with Mr. Hatcher and my boss, Mike Marks, spoke with Mr. Hatcher’s boss to let them know approximately what our margins were so they felt comfortable that they were not doing the Air Force a disservice by preserving the (price-based) contract structure.”⁷⁶ The JPO supported Boeing’s strategy and reminded OSD about the initial savings that was gained. “What eventually saved the PPCC deal for Boeing,” recalled Mr. Wally, former JPO JDAM Deputy PM, “Was when Darlene Druyun (Assistant Secretary of the Air Force for Acquisition and the Source Selection Officer for JDAM) said that she considered production lots 6-11 PPCC in the original awarding of the first production contract.”⁷⁷

Three months after the World Trade Center was attacked in 2001, air strikes over Afghanistan used about half of the 10,000 JDAM kits in inventory. By early 2002, the original Saint Charles production facility was operating 24 hours a day producing 1600 kits a month, the maximum the factory was designed to generate. To meet an expected 3,000 tail kits per month, a new assembly line would have to be built and suppliers prepared. A proposal to increase production was offered in October 2001 and the contract was signed in December 2001. Again, a logical debate on price ensued as OSD thought it should receive a larger price break with the increase in kits procured, but Boeing explained how it was taking a risk in meeting those high production numbers. With a new factory built and paid for by Boeing and the sub-contractors supported by the government, 2,000 kits a month were produced by September 2002 and 2,800 kits a month by August 2003.⁷⁸

In preparation for a new factory and higher production, Ms. Michel held 3P (production, preparation, and process) and AIW (accelerated improvement workshops) lean events with 30 people from her production team, suppliers, and the government. The JPO did their part and secured an approximate $10 million Manufacturing Technology Directive contract that eventually made way for a $130 million “not to exceed” Undefinitized Contract Authorization to facilitate increased production to meet the critical Operation Enduring Freedom (OEF) schedule. All the money went to the suppliers to help increase their production with almost $90 of the $130 million going to Honeywell alone to help them produce better IMUs and to do it faster.⁷⁹ As previously mentioned, Boeing invested their own money to build the new factory right next to the old factory, all with new lean material handling concepts.⁸⁰

New capability can be funded by having a new requirement imposed or it can be funded by re-investment. As OEF raged on and Operation Iraqi Freedom (OIF) loomed, war planners became concerned about GPS jamming and spoofing. Since DoD issued a Program Decision Memorandum requiring a GPS anti-jam (AJ) capability, the JPO wanted Boeing to work with the Harris Corporation and RC to develop a GPS AJ and selective availability anti-spoof module (SAASM) for JDAM. As a new product development requirement, Boeing agreed to a $34 million cost plus award fee contract in February 2003 and planned to have it delivered beginning in 2006 with production lot 9.⁸¹

The retention of contractor Class-II authority was and continues to be fundamental to Boeing for meeting their PPCC. It allows them to stay current with technologies and allows JDAM parts to avoid becoming obsolete. For instance, Boeing changed out JDAM’s advanced core processors five times since its inception. In order to strategically position for a production lot 12-17 contract, Boeing re-invested company profits (as opposed to independent research and develop money or new business funds) to develop a single-board, fully digital Integrated GPS Anti-jam System (IGAS) as a technical insertion. AJ/SAASM was an analog two-board module. Boeing had already replaced the RC 5-channel GPS card with a less expensive RC 12-channel GPS card. With their Configuration Control Board Class-II authority, they were able to easily change a part as long as the performance specification and the interface control document were met or not impacted. Realizing the future of AJ capability, the JPO funded a few million dollar software integration program that would eventually make AJ/SAASM obsolete. In the end, this was a win-win business case for the JPO and Boeing Company. While JDAM was reaching 36,000 tail kits a year during 2002 to 2005, Rick Heerdt, Boeing’s JDAM PM, complimented his JPO counterparst, “The Rutledge’s (Brian and Linda) had incredible integrity and real business acumen, he knew how to incentivize and understood the basic tenants of price-based acquisition.”⁸² Even though the JPO funded the AJ/SAASM quick fix to begin delivery in production lot 9, the JPO will still save money and get more capability out of production lots 12-17 by funding Boeing’s software development for the IGAS.

Carrots and Sticks for Price-based Acquisition

John Harnagel replaced Mr. Heerdt at Boeing in 2005 and worked with Linda Rutledge who replaced Brian Rutledge at the JPO. In June 2007, Kerry Bush became the current JDAM PM. He has been with the JDAM program for the last 15 of his 25 years at Boeing and has worked with all the JDAM icons including Terry Little, Charlie Dillow, and Linda and Brian Rutledge. Mr. Bush’s current JPO counterpart is Lieutenant Colonel (Lt Col) Susan Miller.

Although Mr. Harnagel took over a very strong and robust program with powerful and open relationships with the JPO customer and Boeing’s suppliers, he recalled that “it still was a daunting task to juggle AJ/SAASM integration into lots 9-11, to cut production in half after lot 9, and to keep the AUPP on the PPCC.”⁸³ Likewise, together over time, it was also a daunting accomplishment for Boeing’s Mr. Harnagel, Ms. Bond (acting JDAM PM between Mr. Harnagel and Mr. Bush), and Mr. Bush and the JPO’s Ms. Rutledge and Lt Col Miller to sign a $116 million U.S. government production firm-fixed price contract in January 2008. The contract was for more than 4,000 tail kits to be delivered in 2009 for production lot 12 with options for additional tail kits in production lots 13-17 for a potential $590 million program through 2015.⁸⁴

Boeing securing this contract was not a foregone conclusion. Mr. Harnagel commented that, “the JPO could not just approve another JDAM sole-source contract with Boeing without due diligence.”⁸⁵ Once again there was skepticism in the acquisition community outside the JPO that Boeing had made too much money on their price-based acquisition strategy over the last decade. Mr. Harnagel’s JPO counterpart, Ms. Rutledge, was required by FAR to put out a synopsis to invite companies to bid on the production lot 12-17 contract. Before the synopsis invite went out, Ms. Rutledge sent out a Market Research letter with a statement of objectives (SOO) and a system requirements document (SRD) in August 2006. What the outside community and the competitors were slow to realize was the amount of investment Boeing and the JPO put into JDAM--new factories, sub-supplier manufacturing technology assistance, SAASM/AJ and IGAS. MD gained a competitive advantage through years of technical insertions. Boeing’s competitors became less interested when they learned that the technical performance specifications tightened (JDAM was doing much better than the required 13 meter accuracy), that Boeing owned the JDAM technical drawings, and that the delivery schedule had to be maintained to keep a high OEF/OIF inventory. Ms. Rutledge convinced Ms. Payton at OSD to keep Boeing’s price based acquisition strategy because she “did not want to revert back to a cost based deal that would chase sub-suppliers away and ultimately increase the AUPP.”⁸⁶ To secure the future, Boeing took a risk and agreed to concessions like making Boeing qualify a second production source if it could not meet their PPCC. Other carrot and stick agreements have been in place since the production lot 1-5 contract and are depicted in Table 3.3. And as Spring 2008, just like in EMD-I, these opportunities and risks flowed down to the suppliers.

Carrots	Sticks
No Competition Guarantee	Full Cost/Pricing Data Required
Price Proposal Only	Contractor Qualifies 2nd Source
Contractor Configuration Control	JPO Configuration Control
No In-plant/In-process Oversight	JPO In-plant/In-process Oversight

To reach an agreement on the AUPP, Boeing management again opened their JDAM financial books to the JPO to dispel any other myths. That data revealed JDAM actually meant a financial loss in the early production lots and then made “fair” margins after that. In fact, Figure 3.4 depicts how JDAM’s performance improved significantly while the price remained within 15 percent of the original value in 1993 dollars. This remained true in spite of production peaking in 2003 and additional requirements requested by the JPO that resulted in AUPP increases for the new robust tail pin fin, AJ/SAASM, and container improvements. Then Mr. Bush had his team develop and offer “matrixed” pricing for up to 12,000 tail kits a year that simply lowered the price per kit if more kits were bought than planned in option years (accounting for inflation). He also promised to keep the prices the same for foreign military sales (FMS) which allowed the government to take advantage of FMS quantities on the “matrixed” pricing which was not done in the past.⁸⁸ This was a challenge because Mr. Bush had to sign up suppliers and prepare the workforce that yearly production lots were most likely going to decrease. Yet by communicating this reality early, Mr. Bush was able to get supplier buy-in so they could manage and manipulate their manufacturing lines to support potential commercial opportunities, just like Mr. Little envisioned staying the course.⁸⁹