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Lockheed’s Joint Strike Fighter: Are you paying too much for your fighter jet?

High Price tag: The F-35 Joint Strike Fighter, unveiled at a ceremony in Washington, is part of the most expensive weapon program in history. Photo: APBy Dawn Swearingin, Rohan Verma, Jameson Neuhoff, Travis Wattles, Priyanka Jain and Wei Zheng

One of the few positive outcomes of the current financial crisis is the emergence of taxpayers as informed stakeholders in the activities of government. The U.S government, mindful of this development, is conceivably more cautious when allocating funds to its different departments. One exception is the Department of Defense, which has consistently seen on average a rise of 5 percent in its budget allocation throughout the last decade, whereas most other departments have faced major reductions.

This is partly understandable due to the geo-political scenarios in Iraq, Afghanistan and North Korea. As this is a matter of national security, it does provide a plausible explanation of why it has not attracted the wrath of taxpayers and media activists yet. But, have you ever wondered whether this increased allocation is justified on the basis of national security alone, or are there glaring inefficiencies in the Department of Defense that drive up project costs and timelines?

We went ahead and interviewed one of the Procurement and Contract Specialist for OEMs such as Lockheed Martin in order to investigate this further. He mentions that “there are many pros and cons to being contracted by Lockheed Martin. Being contracted by Lockheed Martin is essentially being contracted directly by the government.” While it does guarantee a long steady stream of demand for your products, it also exposes you to unreasonable DoD mandates concerning the project timelines, costs and getting selected to be on the ASL (Approved Supplier List).

Once the bid from the potential supplier is sent in, they have to wait for a decision from Lockheed Martin. The Request for Proposal bids are reviewed by Lockheed Martin to see which potential supplier is the best fit for the project. Lockheed then selects ten to fifteen different suppliers that can produce the product at the rate demanded. This list is then sent to the DoD for Approval. Once DoD approves the suppliers, then they become a part of ASL and Lockheed can only do business with those suppliers that are on the ASL. The pressure placed on the potential supplier is that by government regulations the lowest “applicable” bidder will be awarded the contract. Many potential contractors know though that the lower they can bid on a Request for Proposal, the more likely that it is that they will be awarded the contract. They also are aware from past experiences that when an awarding date is revised more than once, then prices have changed too much for them to complete the delivery of the product within their stated budget. When this timeline does pass, the bidding process will be started again from the beginning with the same ten to fifteen suppliers.

In a Bush Administration effort to cut costs and stimulate the economy through job creation, the DoD looked to Job Shops. OEMs such as Lockheed Martin were told by the DoD they needed to start using smaller suppliers known as “Job Shops.” The Government believed that the OEMs and Tier Suppliers were exploiting them; charging too much and taking too long to deliver, and thought using Job Shops would be an easy and effective way to accomplish both the goals.

The problem with sourcing from job shops is that they are 1) small 2) unsophisticated and 3) for the most part, inexperienced with working on platform contracts that can last over a decade. In an attempt to “win” a bid, many of these Job Shops had underbid their priceand underestimated the cost, time and effort it would take to deliver on such a huge project.

According to a tier supplier of Lockheed Martin, the JSF platform is so large that it is “taxing the suppliers.” Due to the expensive nature of the rare metals and other materials needed to build a fighter jet, the underbidding Job Shops ended up producing at a loss, some went insolvent. This impacted the Job Shops’ ability to deliver quality parts to the Tier Suppliers. The Tier Suppliers then end up rejecting non-quality parts, or not receiving them at all, and are left without many options as they are constrained by the ASL as to who is allowed per the DoD to pick up the slack. The Tier Suppliers are then unable to deliver to OEMs such as Lockheed Martin, who in turn is unable to deliver on-time to the DoD. This results in massive delays in time, and skyrocketing costs, and strained relationships. The Government/DoD has bankrolled this massive project, and then has nothing to show for it.

The Tier suppliers’ frustrations are understandable. For the JSF F-35, what was supposed to end three years ago is still an ongoing process, straining resources. Tier suppliers declare it is these huge platforms with impractical DoD mandates and resulting delays from the bottom up that put “so many cost and price pressures on suppliers.” This ripple effect spreads all the way up through the supply chain, negatively impacting the very things the Government sought to “fix”.

There is one solution that would save both Lockheed Martin and tax payers across the country money. These tier suppliers that Lockheed Martin uses should be vertically integrated. If the number of job shops are reduced and more of the technological development aspects are absorbed by the upper levels of the tier suppliers then the number of job shops are reduced and the remaining ones will be combined. These four or five main suppliers can more accurately estimate project costs, deliver more projects on time, and reduce the number of bids that need to be sent out by Lockheed Martin and its tier suppliers.

The vertical integration of these job shops and tier suppliers would also consolidate the number of bidders that Lockheed Martin has on their ASL. This reduced number could put more pressure on the DoD to do make two changes. One, they could consolidate the ASL lists that all major suppliers (Boeing, Airbus, Lockheed Martin, Northrop, Etc.) have so that redundancies on the ASL lists could be eliminated. This would create a supply chain that only has a few suppliers having a constant stream of demand from the large suppliers. Two, this reduced number of tier suppliers should work together with the large suppliers to put pressure on the government to eliminate unreasonable deadlines that are chosen by the government. If the OEMs/suppliers do gain some bargaining power, then the pressure of the overly strict deadlines set by the government can be reduced and projects can be completed correctly with the quality and quantity that is demanded.
The aforementioned solution would of course be a more efficient solution to the current problem plaguing the Aerospace Defense industry. But unlike in business, in politics the most efficient solution is not always a feasible solution if the leadership lacks the political will to bring about a required but a potentially controversial policy change. This solution if implemented might result in closure of few job shops and possible consolidation in the industry with bigger OEMs like Lockheed and tier suppliers acquiring small time suppliers and job shops. News of possible job loss situation in an already fragile economy is least of what the Obama administration would like to hear at this point in time with the Republicans breathing down his neck looking for any opportunity to lambast his Government.

So for the Government and DoD to tackle this problem, it has to be a delicate balancing act between what’s right and what is perceived to be right by the people. It will be interesting to see how this story unfolds in near future because clearly, in the current scenario the industry seems to be struggling with major time delays and high costs. It won’t be long before media attention is diverted towards this issue and they start raising the question: Are we paying too much for our Fighter Jet?

REFERENCES
1.http://www.lockheedmartin.com.N.p., n.d. Web. 12 Dec. 2010.
2.Personal Interview with Tier Supplier to Lockheed Martin.

This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.