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Top Pentagon official takes aim at F-35 cost, supply chain

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    Top Pentagon official takes aim at F-35 cost, supply chain
    By: Aaron Mehta, March 23, 2017 (Photo Credit: Lockheed Martin)
    WASHINGTON — The Pentagon’s director of defense pricing announced plans Wednesday for a major review of F-35 Joint Strike Fighter Program costs, with an emphasis on getting companies up and down the supply chain to find savings for the famously expensive jet.

    Shay Assad, who has led the industry-focused defense pricing office since 2011, used his speech at the McAleese and Associates annual conference to announce that he is working with Lt. Gen. Chris Bogdan, the F-35 program head, to develop a “deep dive” on the cost of the F-35 — not what the Pentagon is paying per plane but rather what it should be paying up and down the supply chain.

    “We know what we’re paying, but the real question is: What does it cost, and more importantly, what should it cost? That’s really where we want to go,” Assad said, adding that he wanted to look not just at prime contractor Lockheed Martin, but also the “20-25” subcontractors that make up the bulk of the supply chain.

    “I’m not questioning that we are making improvement. I’m just talking about where we need to go. I’m into the details of it. And so the fact of the matter is that there is a benefit to rate and there is a benefit to efficient and effective production. We’re looking for efficient and effective production” versus savings just from scale, Assad told reporters after his speech.

    [​IMG]

    Assad wants to see this review happen over the next year, saying it will probably be a “six month process that I’m talking about ... it will be in this next year. It definitely will be going on.” He added that while this may impact negotiations with Lockheed over the 11th lot of low-rate initial production jets, its true impact will be felt in the Lot 12 negotiations.

    Hand in hand with that deep dive are two other steps. The first is what Assad called the “de-layering” of the supply chain, looking at “what things should we be breaking up, what makes sense, both at the prime level and at the subcontractor level.” And the other is finding ways to incentivize companies to invest their own money on driving costs down for the fifth-generation fighter.

    “What we’re looking at is finding ways to get the companies to make meaningful investment in our programs,” he said, citing a figure that the defense industry has bought back $85 billion in shares over the last five years. “And it’s investment akin to what their brothers and sisters do in the commercial side of the street."

    On that point, Assad stressed that this wasn’t about getting profit margins down, saying that if a company can increase its profit while driving the cost of a part down, he would be more than satisfied.

    Speaking later in the day, Bogdan told reporters that Assad was one of his “speed-dial buddies” and expressed support for Assad’s goals.

    “The example that I would give you is: If Lockheed is buying material four layers down the supply chain, and the two or three guys between that supplier and Lockheed are very low value added in the production process — maybe they're just issuing a purchase offer — why in heaven's name would the government want to pay overhead and a fee for that? We wouldn't, and we're going to explore some of that,” Bogdan said. “And to do that you've got to engage the supply chain. You can't just engage up here, you've got to engage all the way down, and I think that's Mr. Assad's intent, and I applaud him for that.”

    [​IMG]

    Current cost reduction plan

    In the latest contract negotiation between the Pentagon and Lockheed, signed in February, the price per plane of an F-35A model was $94.6 million (a 7.3 percent reduction from the previous lot); an F-35B jump-jet model used by the U.S. Marine Corps was $122.8 million (a 6.7 percent reduction from the previous lot); and an F-35C carrier version was $121.8 million (a 7.9 percent reduction from the previous lot).

    On Tuesday, executives from Lockheed touted how they have driven costs down on the plane and said they are well on the way to reaching a target cost of $85 million per F-35A, with a path forward to getting that down to about $80 million. And the Lockheed team is quick to point to the Blueprint for Affordability initiative, toward which the company put small amounts of money to improve tooling and processes.

    A big part of that savings comes from quantity, of course, but Orlando Carvalho, executive vice president of the company's aeronautics division, said the company is aware that the Pentagon wants to see savings that are driven from changes, not just increased numbers.

    “If I drew the [cost] curve for you right now from where we started on the first plane to the airplanes we are now building, we’re already hitting that flatter part of the curve,” Carvalho said in an interview, “which is why the Blueprint [for Affordability] initiative is so important.”

    Jeff Babione, the head of Lockheed’s F-35 program, said the company and its partners were set to enter “phase 2” of the initiative, having driven the price per plane through Lot 11 down by “almost $2 million.” The second phase will involve an investment of about $170 million, Babione said.

    For their part, neither Assad nor Bogdan sounded very impressed by the initiative’s effectiveness so far. Assad called it “modestly effective,” saying in the future he was looking for a different model to bring cost down. Bogdan, meanwhile, said it was "just OK."

    Why make this move now? Assad said only that it was the “right” time to do so, but he may have offered a hint at the top of his speech, when he spent some time praising U.S. President Donald Trump for his negotiating acumen.

    Trump, of course, spent part of December terrifying Lockheed Martin over the costs of the F-35, actions, which eventually led to the launching of a study about replacing the F-35C carrier variant with new Boeing-made F/A-18 fighters.

    While Trump seems to have reversed his view on the joint strike fighter — he called it “fantastic” during a February address to Congress — it is not a stretch to think the presidential attention on getting the price down for the fighter could provide some top cover for Assad to get tough in negotiations with the world’s largest defense contractor.

    Assad also confirmed that he plans to stay in this role for the next four years.
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