In many industries, the effect of production rate on the successive unit cost of major weapon systems is well understood. High production rates allow greater use of facilities and greater specialization of labor where the increased volume of business reduces overhead rates. Taken together, these factors work to increase efficiency and lower unit production costs. All things being equal, the influence of production rate should be the same in the manufacture of defense systems as in the manufacture of automobiles or personal computers. But all things are not equal. Production runs in defense systems tend to be short-in the hundreds rather than thousands or millions. Changes in production rate and changes to the product being manufactured are frequent and often unplanned. Production cost is tied to a specific production rate as early as the conceptual phase of weapon system development. Major weapon systems consist of relatively long cycle and made-to-order items that often are produced and procured in single or multi-year programs. An example of long cycle, made-to-order production is military aircraft, of which production is planned over as much as a 10-year period. The aircraft are produced in lots, with each lot representing the number of units that are funded by one year's appropriations.
The aircraft industry differs from other manufacturing industries in the quantity of units manufactured and the frequency with which changes are made during the course of manufacturing operations. In mass production industries, methods and cost of production tend to remain fairly constant after production has been stabilized; in the aircraft industry, method improvements are being made constantly, and cost is a variable that depends on the number of airplanes being manufactured.
Few units of output, frequent design changes, governmental uncertainty due to funding cuts, and required production rate changes characterize the production of military aircraft. In general, we are dealing with a made-to-order production situation in which learning affects the production process.
This article attempts to demonstrate the interdependency between unit cost and production rate as it applies to defensebased aerospace/airframe manufacturers. In doing so, we must first discuss some ground rules.
1) Rate and production volume are an interdependent phenomenon that affect cost.
2) Based on economies of scale and economic order quantities, rate alone is inversely proportional to recurring and amortized non-recurring cost. If production rate (the independent variable) were to increase, the result would produce a decrease in unit cost (dependent variable).
3) Most economic theories are best related to commercial or consumer products in which volume is measured in the tens of thousands, production methodology is capital intensive, product attributes reflect standard designs and standard options, production cycle time is measured in hours or days, direct labor content is 5 percent of total product cost, and work in process inventory levels are 40-50 turns per year.
4) Traditional rate theory models are difficult to relate to defense material items because of:
* low production volume and rates;
* production methods that are labor intensive;
* direct labor content that is greater than 10 percent of total product cost;
* long lead times of 10-18 months;
* long production cycle time and high set-up costs;
* overproduction (inventory-to-net requirements);
* work-in-process inventory levels of one to two turns annually;
* make-to-order and custom options;
* many customer driven specifications; and
* product life cycle of 20-25 years.
5) Given the climate that exists in the development and manufacture of defense material (i.e., low production volumes, low production rates with frequent and unplanned rate variations due to changes in government funding appropriations, labor intensive fabrication and assembly techniques, and frequent changes perpetuating make-to-order manufacturing methodologies), any change in production rate from a stabilized production process will result in adverse unit cost variation. …