Cost Reduction Plans in Estimating Total Production Costs

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Table of Contents

Introduction
Main body
Conclusion
Reference

Introduction

The article under analysis called Defense Acquisitions: Use of Cost Reduction Plans in Estimating F-22 Total Production Costs displays the F-22 Raptor Program on reducing the costs spent on aircraft manufacture. The author provides examples of involved initiatives on the part of the congressional estimation, Air Force projections, and those of the Office of the Secretary. All the sides of the debate reveal different budget figures planned to be introduced into the cost reduction plan. While negotiating the exact projections of the cost reduction rates, a variety of evaluation methods and influential factors have been introduced.

Main body

At the very beginning, Li (2000) mentions overall projections, as well as potential constraints, that the manufacturers might face while calculating the actual production costs. This is due to the critical situation in 1996 reflecting the significant cost increase influencing future projections. With this in mind, the Air Force’s further actions were directed at increasing the production costs by means of increasing the planned amounts.

In this respect, the cost reduction plan could be implemented to defer the cost growth, but not to cut the prices. Because only half of the planned reductions were implemented, it was difficult to define whether future projections are justified.

In addition, there are inconsistencies concerning the implemented objectives of the plan, and the external criteria influencing the planned accomplishment. In accordance with the report, the major focus of the cost reduction initiative relies on introducing advanced technologies, improved production techniques, and reconsidering acquisition standards to buy materials. At the same time, failure to consider the impact of cost reduction on the current price competitiveness could lead to unpredictable contingencies following by plan cancellation.

Potential problems that a plan can meet, as presented in the report, can be connected to the governmental costs predictions. As it has been mentioned earlier, the difference in methods used by the offices had a major influence on planning production costs. At this point, mixed assumptions occurred regarding the influence of breaks on production, production rates, and historical data used to plan the expenditures.

These differences made the Office of the Secretary provide evaluation higher than those provided by the Air Force. The main reason for the discrepancy lied in schedule considerations, cost estimation with regard to the production breaks, and reliance on the different technical characteristics to plan cost reduction. While comparing these preliminary estimations with congressional calculation, the difference in cost estimation amounted to 19 %, which was significant. In this respect, the calculations made by the Air Force were much more appropriate for the congressional costs since the difference is subtle. Judging from these considerations, the choice of an estimate should be associated with the cost limitations.

Conclusion

In conclusion, the article addresses the problem of estimating future cost reduction initiatives as represented by various bodies – the Air Force, the Office of the Secretary, and Congress. As it has been turned out, the highest predictions were provided by the Office of the Secretary which exceeds the predictions by Air Force and congressional calculations by 19 %. Therefore, the given report provides the relation between criteria for cost reduction plan and evaluation of existing cost limitations. All these frames are necessary to consider because they contribute to defining the real outcomes and making accurate conclusions. Much attention should be paid to production breaks, scheduling, and historical data.

Reference

Li, A. (2000). Defense Acquisitions: Use of Cost Reduction Plans in Estimating F-22 Total Production Costs: T-NSIAD-00-200. GAO Reports, 1-15.

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Cost Reduction Plans in Estimating Total Production Costs

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