Acquisition Reform

Contractors Can Use Technologies and Management Techniques to Reduce Costs Gao ID: NSIAD-93-125 July 15, 1993

In the face of defense industry downsizing, the Pentagon is encouraging contractors to switch to modern manufacturing technologies and innovative management techniques. Such changes would benefit the government, which often ends up paying for all or much of contractors' work-in-progress costs--the inventory, labor, and overhead costs incurred during manufacturing. Although defense companies could potentially cut costs significantly by using these technologies and techniques, GAO concludes that competitive market forces may not be enough to motivate companies to significantly lower costs, which can lower profits in the near term. In addition, many defense companies receive government funding, which provides few incentives for aggressive cost cutting. Pentagon programs have played only a limited role so far in motivating companies to reduce costs. GAO believes that significant progress in this area depends on the Defense Department stimulating contractors' cost reductions through several policies and programs, not merely those that focus on manufacturing technologies.

GAO found that: (1) the defense companies that significantly reduced work-in-process costs have instituted innovative management techniques that shorten cycle time and make efficient use of inventories; (2) the companies surveyed have adopted new manufacturing technologies and management techniques to protect or increase their market share and improve their long-term financial health; (3) competitive market forces may not be sufficient to motivate defense companies to reduce their costs; (4) defense companies maintain a relatively small financial investment in federal projects than companies that have to obtain private financing; and (5) the Department of Defense (DOD) has established policies and incentive programs to motivate defense companies to achieve cost reductions.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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