1. SAVE Conference 06/14/2012 Page-1 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Federal Value Engineering Policy Update and Its Implications for DOD Jeffery T Hooghouse, AIA, DBIA, CVS ODASD, Systems Engineering Jay Mandelbaum Institute for Defense Analysis Government Value Management Conference June 14, 2012

2. SAVE Conference 06/14/2012 Page-2 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Outline DoD’s VE Savings and Cost Avoidance OMB A-131 Update DoD Instruction DoD Program Management Defense Contract Management Agency Conclusions

3. SAVE Conference 06/14/2012 Page-3 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. DoD VE SAVINGS and COST AVOIDANCE

4. SAVE Conference 06/14/2012 Page-4 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. DoD VE SAVINGS and COST AVOIDANCE

5. SAVE Conference 06/14/2012 Page-5 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. DoD VE SAVINGS and COST AVOIDANCE

6. SAVE Conference 06/14/2012 Page-6 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Enhanced Small Arms Protective Inserts (ESAPI) Plate Repair Achievement –All plates exhibiting external material defects (EMDs) were being replaced because some of concerns that the ballistic performance of the internal materials could be reduced –Through an examination of the protect soldier function, an inspection process was implemented and approved repair methods were developed o For severely damaged plates, the old spall cover is removed and recovered o For small cuts or holes, new material is welded on Cost avoidance: $324.5M over 3 years Other benefits –Re-spall and repair procedures allowed a majority of the plates to be recovered and returned to service rather than discarded

7. SAVE Conference 06/14/2012 Page-7 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. DDG 51 Procurement Achievement –As part of its function to procure ships, the Navy was faced with conflicting objectives o Maintaining viable competition with decreasing workload o Maintaining common terms and conditions across contracts o Reducing cost –VE was used to develop a contract negotiation approach to balance these objectives Cost savings: $298M over 2 years Other benefits –Sustains a viable industrial base allocating work to two shipbuilders

8. SAVE Conference 06/14/2012 Page-8 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. P-8 Poseidon Program Production Line Achievement –The Navy needed a replacement for its old fleet of P-3 land-based anti-submarine warfare aircraft – these airframes were suffering severe fatigue risks –By using the commercial Boeing 737 fuselage for the P-8 Poseidon (P-3 replacement) program, the Navy avoided building a separate production line o VE was used to examine the function of the fuselage, hold equipment, to help develop this option Cost avoidance: $1.8B over 6 years Other benefits –P-8 fielding will be accelerated, reducing the risks faced by P-3 pilots

9. SAVE Conference 06/14/2012 Page-9 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Miniature/MicroMiniature Module Test and Repair Achievement –Failed electronic modules were being sent to depot for test and repair o This generated a requirement to procure spare modules to replace the failed ones –A systematic method was developed to perform the repair and test functions at organizational and intermediate maintenance levels o The method was also more reliable in that no-fault-evident modules were no longer shipped to the depot Cost avoidance: $480M over 10 years Other benefits –Improved operational readiness because of quick turn-around testing and repair –Field units become more self-sustainable

10. SAVE Conference 06/14/2012 Page-10 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. DoD VE Awards Awards Program established in FY 1982 to recognize exemplary in-house and contractor VE achievements Each Service/Agency is eligible for one award in the categories of: Program/Project, Individual, Team, Organization, Contractor, and Special DoD VE MAG reviews and select award winners for USD (AT&L) approval Ceremony held annually at the Pentagon –FY 2011 awards to be presented June 27, 2012

11. SAVE Conference 06/14/2012 Page-11 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Outline DoD’s VE Savings and Cost Avoidance OMB A-131 Update DoD Instruction DoD Program Management Defense Contract Management Agency Conclusions

12. SAVE Conference 06/14/2012 Page-12 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Updating OMB A-131 is like …

13. SAVE Conference 06/14/2012 Page-13 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. OMB A-131 Update Published in Federal Register (1 of 3) Preamble –Changes made to update and reinforce policies associated with the use of this management tool –VE has been demonstrated to be an effective technique for cutting waste and inefficiency -- helping agencies to save billions of dollars in program and acquisition costs, improve performance, enhance quality, and foster the use of innovation –Revisions designed to ensure agencies have the capabilities and tools to consider and apply VE techniques, whenever appropriate

14. SAVE Conference 06/14/2012 Page-14 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. OMB A-131 Update Published in Federal Register (2 of 3) Requirements for all Federal agencies –Designate a senior management official (SMO) –Develop VE policies, procedures, and guidelines –Assign waiver authority to the SMO –Develop VE guidance, tools, and training –Budget for VE efforts –Maintain files on projects that meet agency criteria for requiring the use of VE techniques –Use VE clauses as set forth in FAR Parts 48 and 52 –Develop annual VE plans –Report annually

15. SAVE Conference 06/14/2012 Page-15 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. OMB A-131 Update Published in Federal Register (3 of 3) Performance based and service contracts highlighted –Senior management shall ensure that VE is used on all appropriate programs, including projects and acquisition programs that are supported by performance based and service contracts –Agency guidelines will include guidance and encouragement for the use of VE on all appropriate contracts, including contracts supporting major acquisitions as well as service and performance based contracts

16. SAVE Conference 06/14/2012 Page-16 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Outreach to Federal Agencies for OMB A-131 Veterans Affairs –Procurement –Construction –VA Academy Defense Acquisition University –Center Directors for program management; business, cost estimating, and financial; contracting; engineering and technology; and logistics and sustainment Federal Acquisition Institute –Program management FAB –Webcast NCMA World Congress

17. SAVE Conference 06/14/2012 Page-17 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. VE is not Engineering Also referred to as Value Management, Value Analysis, Value Planning and other related terms VE is mandatory across the Federal Government –Required by public law PL-111-350, Public Contracts, updated in 2011 –Implemented by OMB Circular No. A-131, Value Engineering FAR Parts 48 and 52 establish two VE approaches –Mandatory program –Incentive approach requires VE clause in supply or service contracts exceeding the simplified acquisition threshold This is an important message to many communities

18. SAVE Conference 06/14/2012 Page-18 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Outline DoD’s VE Savings and Cost Avoidance OMB A-131 Update DoD Instruction DoD Program Management Defense Contract Management Agency Conclusions

19. SAVE Conference 06/14/2012 Page-19 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. DoD Instruction 4245.nn Policy Components shall: –Implement a VE program to improve worth and reduce cost o Within government o With contractors –Incorporate VE within continuous process improvement training

20. SAVE Conference 06/14/2012 Page-20 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. DoD Instruction 4245.nn USD(AT&L) Responsibilities Establish policy for the DoD VE program and provide guidance on using VE to implement affordability, cost controls, and incentivizing productivity and innovation in accordance with better buying power Support the application of VE in finding ways to reduce non-productive processes and bureaucracy Review DoD Components’ annual VE results and management plans and continue the annual program recognizing exemplary VE accomplishments by DoD activities Assign an annual DoD VE goal applicable to all DoD Components and subordinate organizations Establish and maintain the VE Executive Steering Group (ESG), and the VE Management Advisory Group (MAG)

21. SAVE Conference 06/14/2012 Page-21 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. DoD Instruction 4245.nn Next Steps Waiting for final (third) coordination from General Counsel Security review Signature This process started in September MMXI

22. SAVE Conference 06/14/2012 Page-22 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Outline DoD’s VE Savings and Cost Avoidance OMB A-131 Update DoD Instruction DoD Program Management Defense Contract Management Agency Conclusions

23. SAVE Conference 06/14/2012 Page-23 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. DoD VE Management Advisory Group (MAG) VE Program Manager – Jeff Hooghouse –Oversight resides in the Office of the Under Secretary of Defense (Acquisition, Technology and Logistics) Systems Engineering VE MAG – Act as agent across services and agencies –Membership – one member per service/agency –Facilitate/Promote VE in services and agencies –Collect and report savings metrics –Select annual award winners and sponsor annual awards ceremony –Maintain VE program management plan

24. SAVE Conference 06/14/2012 Page-24 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. VE and Obtaining Greater Efficiency and Productivity in Defense Spending “The Department will obtain greater efficiency and productivity in its spending by continuing to pursue … initiatives like VE …” “VE complements other Department efforts to support Warfighters by providing them with the best possible systems through energy-efficient and effective solutions.” “… we can achieve an even higher level of performance by emphasizing greater application of both in-house VE and contractor-initiated VE change proposals.” “…identify a VE senior manager for expanding VE activities … and VE targets for FY12…” “I would like to track your targets on a quarterly basis.”

25. SAVE Conference 06/14/2012 Page-25 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. DoD VE Status Reporting Report on status of nine VE areas of responsibility per OMB Cir A-131 OSD maintains a database of plans and goals –Organizations report status quarterly to OSD –USD(AT&L) gets quarterly and annual reports OSD report annually to OMB its previous fiscal year VE metrics

26. SAVE Conference 06/14/2012 Page-26 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. VE Program Management Plan Foster the expanded utilization of value engineering throughout DOD to contribute to the Better Buying Power Initiatives by achieving greater affordability, increased efficiencies, and improved cost control by: –Creating a management framework for enabling compliance with Public Law 111-350 Section 1711 and its implementing instruction, Office of Management and Budget (OMB) Circular A-131 – Overcoming barriers that discourage the application of value engineering Activities organized around DODI 4245.nn responsibilities of the USD(AT&L)

27. SAVE Conference 06/14/2012 Page-27 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. VE and Continuous Process Improvement (CPI) VE works synergistically with all other CPI initiatives It makes any project better by utilizing a unique approach to problem solving that includes the analysis of the functions of an item or a process to determine best value VE systematically determines all of the necessary functions of the item or process, identifies those functions that cost more than they are worth, and brainstorms alternative ways to perform those functions for further evaluation This distinctive approach drives innovation because it encourages people to think about the situation in atypical ways Need to embed VE in all CPI processes

28. SAVE Conference 06/14/2012 Page-28 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Outline DoD’s VE Savings and Cost Avoidance OMB A-131 Update DoD Instruction DoD Program Management Defense Contract Management Agency Conclusions

29. SAVE Conference 06/14/2012 Page-29 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. New Defense Contract Management Agency (DCMA) Initiative (1 of 3) Objective –Facilitate the submission of VECPs in lieu of ECPs to create a win-win situation for the contractor and the government Background –DCMA typically evaluates some level 1 and most level 2 ECPs o Level 2 ECPs do not require government funding –Because of its presence in the field, DCMA is in a good position to evaluate ECP cost savings potential (which is not always included)

30. SAVE Conference 06/14/2012 Page-30 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. New Defense Contract Management Agency Initiative (2 of 3) Approach –When proposed ECPs meet the FAR requirements for a VECP, DCMA will recommend that the program office reject the ECP and have it submitted as a VECP –DCMA will also interface with the contracting officer to provide the basis for the VECP from a government field representative perspective –Exploring the possibility of combining single changes to a product that cut across multiple contracts

31. SAVE Conference 06/14/2012 Page-31 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. New Defense Contract Management Agency Initiative (3 of 3) Advantages for the government –Cost savings assured for 3 to 5 years –Some cost savings change proposals will no longer be rejected because of the government’s inability to fund the non recurring engineering Advantages for the contractor –Opportunity to share savings on change proposals that might not have been implemented –Risks associated with keeping its share of the savings avoided –Will be reimbursed for some non recurring engineering costs that would have been paid from contractor resources

32. SAVE Conference 06/14/2012 Page-32 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Outline DoD’s VE Savings and Cost Avoidance OMB A-131 Update DoD Instruction DoD Program Management Defense Contract Management Agency Conclusions

33. SAVE Conference 06/14/2012 Page-33 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Conclusions This is a good start Barriers include to further gains include –Lack of VE knowledge among DOD agencies and contractors –Lack of VE knowledge in the DOD contracting community –VE culture and attitudes in DOD program offices –Industry concerns about VECPs –Stove-piping of efficiency initiatives

34. SAVE Conference 06/14/2012 Page-34 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Value Engineering (VE) in the DoD: An Overview Nicholas Torelli Director, Mission Assurance Systems Engineering SAVE Conference June 2012

35. SAVE Conference 06/14/2012 Page-35 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. History of Value Engineering in the Department of Defense The Value Engineering (VE) concept is a by-product of the wartime need during WWII to address material shortages –Approaches were developed to explore alternative solutions that could deliver equivalent or better capability at lower total life-cycle cost. DoD established a formal VE Program in 1963. VE has proven to be a successful DoD cost reduction and product improvement tool for over 40 years.

36. SAVE Conference 06/14/2012 Page-36 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Value Engineering in the DoD Value Engineering - An organized effort directed at analyzing the functions of systems, equipment, facilities, services, and supplies for the purpose of achieving the essential functions at the lowest life-cycle cost consistent with required performance, reliability, quality, and safety. OMB Circular A-131 Application Areas:  Improve/streamline operations  Improve quality  Increase the use of environmentally-sound and energy-efficient practices and materials  Simplify logistics  Reduce maintenance  Increase availability  Improve durability  Design/Redesign to eliminate cost drivers VE Application at Enterprise-wide/Program Level Achieves Cost Savings during Acquisition/Operations/Sustainment

37. SAVE Conference 06/14/2012 Page-37 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Definition of DoD Value Engineering Terms Value – Ratio of function to cost, where: –function is a non-prescriptive representation of the intended purpose of a component in a given systems operational context –cost are assessed in a life-cycle context, which includes intrinsic and extrinsic development, acquisition, operations, training, support and disposal costs –Systems operational context addresses a community and continuum of use – develop, equip, train and employ Value Engineering is a formal analytical process that examines alternatives and attempts to maintain or improve function while minimizing cost, yielding greater value to the customer community Value Engineering Change Proposal (VECP) - A proposal submitted by a vendor to the customer that proposes changes in design, manufacture, service, maintenance or disposal that delivers increased value Value Engineering Proposal (VEP) - A customer generated analysis that directly proposes changes to a product or service to increase value

38. SAVE Conference 06/14/2012 Page-38 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Value Engineering Is Required by Law 41 USC 1711, Title 41, Subtitle I, Chapter 17 Public Contracts, Federal Procurement Policy, Agency Responsibilities and Procedures, Value Engineering Each executive agency shall establish and maintain cost-effective procedures and processes for analyzing the functions of a program, project, system, product, item of equipment, building, facility, service, or supply of the agency. The analysis shall be – (1) performed by qualified agency or contractor personnel; and (2) directed at improving performance, reliability, quality, safety, and life cycle costs. Law requires all Agencies to: –Establish and maintain a VE Program, supporting VEP and VECPs –Develop annual VE plans –Identify and report VE results

39. SAVE Conference 06/14/2012 Page-39 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. VE and Obtaining Greater Efficiency/Productivity in Defense Spending Increased usage of VE is a vehicle to enable greater success VE complements other Department efforts to support Warfighters Need greater application of both in-house VE and VECPs –VECPs need greater focus Expand VE activities and VE program targets –Identifies a VE senior manager for each organization Track progress toward these targets on a quarterly basis.

40. SAVE Conference 06/14/2012 Page-40 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. VE Supports DoD’s Better Buying Power Initiatives There is direct VE application to all five Efficiency Initiatives. Better Buying Power Efficiency InitiativePotential VE Contribution 1.Mandate affordability as a requirement Critically examine the value of every requirement and specifications derived from it by comparing cost 2.Drive Productivity growth through “will cost / should cost “management Improve what the product or service does in relation to the money spent on it as a systematic and creative approach for attaining ROI, VE 3.Eliminate redundancy within warfighter portfolios Aids in decisions through function analysis by achieving only the necessary functions at a minimum overall cost 4.Promote Real Competition: Remove obstacles to competition In re-procurement, Government can provide technical data describing required functions of sole source components, enabling multiple companies to bid 5.Incentivize Productivity and Innovation in Industry: Reward contractors for successful supply chain and indirect expense management VECPs provide businesses with an incentive to reduce DoD’s costs; contractor receives a share in the savings accrued if implemented.

41. SAVE Conference 06/14/2012 Page-41 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. DoD VE Savings and Cost Avoidance FY 11 Savings and Cost Avoidance $4.7B

42. SAVE Conference 06/14/2012 Page-42 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Systems Engineering: It’s Role for Program Success Innovation, Speed, and Agility http://www.acq.osd.mil/se

43. SAVE Conference 06/14/2012 Page-43 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. The Problem: The ESSM is an advanced radar-guided missile with a high explosive warhead used for surface- to-air anti-missile defense. A now-obsolete mechanical safe and arming fuze prevents an unintended missile launch and, once launched, arms the warhead when the proper stimuli are received. Suppliers for this obsolete component were limited and costs were high since highly skilled personnel were needed for the complex manufacturing process and a new fuze design was cost prohibitive. The Solution: The function of the fuze was analyzed by the contractor and compared with alternative electronic fuzes being manufactured on other programs. An existing fuze was identified from the sidewinder missile that could be adapted to the ESSM. A VECP was submitted to adapt the Sidewinder electronic fuze to the ESSM application. The Result: Up front investment to achieve life cycle savings: Development and implementation costs were $1,873,911; Payback met in 2 years Total recurring cost savings equaled $6,832,000, which, when spread over the 1,600 units, resulted in a net savings per unit of $4,270 Aligned incentives: Savings shared equally between the Navy and the contractor Evolved Sea Sparrow Missile (ESSM)

44. SAVE Conference 06/14/2012 Page-44 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. The Problem: Currently deployed Legacy Ship-based Air Search and Target Acquisition Radars Stand-alone / stovepipe development, maintenance, and support architectures Unique engineering, sparing, and training requirements Significant engineering redesign in order to address obsolescence issues and sustain readiness The Solution: Navy analysis identified an opportunity to create a Common Digital Sensor Architecture that could be retrofitted into multiple radars to: Eliminate required sensor unique reengineering efforts through planned modernization Eliminate redundant support infrastructure Stabilize funding requirements in out years Consolidate redundant contracts and engineering overhead costs The Result: Value-centric analysis identified opportunities for commonality across multiple systems; justified development and installation of common digital architecture Over 20 year lifespan, total estimated life-cycle cost avoidance of $950M Before After Common Digital Sensor Architecture

45. SAVE Conference 06/14/2012 Page-45 Distribution Statement A – Cleared for public release by OSR on 06/08/2012, SR Case # 12-S-2289 applies. Summary Value Engineering has been utilized successfully within the DoD for almost 50 years –$69B* direct savings and cost avoidance identified Successful VE programs require engineering staff to reexamine products in a larger systems context –To identify essential function independent of implementation and –To identify factors of cost in context of a holistic life-cycle * FY12 Constant Dollars