performance implications of product life cycle extension: the case of the a-10 aircraft

JOuRNAL OF BuSINESS LOGISTICS, VOL. 29, NO. 2, 2008 189

PERFORMANCE IMPLICATIONS OF PRODUCT LIFE CYCLE EXTENSION: THE CASE OF THE A-10 AIRCRAFT

by

Shawn R. Jonesuniversity of Memphis

and

George A. ZsidisinBowling Green State university

The views expressed in this research represent the personal views of the authors and are not necessarily the views of the Department of Defense or of the Department of the Air Force.

INTRODUCTION

In the case of capital equipment, the initial acquisition cost is often a small percentage of the to-tal ownership cost faced by firms. Many manufacturing companies forecast that more than 50 percent of the total life cycle cost of a product occurs after it is operational (Jackson and Ostrom 1980). In the aviation industry, this percentage is closer to 70 percent (Galloway 1996). In addition to economic cost, capital equipment has unique considerations impacting the health of the owning organization such as production loss, maintenance costs, idle time of operators when the equipment is not in use, overhead costs, and disposal of the asset at the end of its useful life (Ellram 1993). In order to pro-duce an accurate forecast of life cycle costs, it is reasonable to state the product must have a designed service life identified. However, in a world filled with tight budget constraints, shrinking research and development dollars, and evolving technologies to better determine the service life remaining in products, businesses are faced with challenging decisions when a product reaches its originally de-signed life expectancy (Bruno 2005; Galloway 1996). Consequently, companies must make several important decisions. If the item continues to function and appears to require no additional investment beyond routine operations and maintenance inputs, why invest substantial capital in purchasing a replacement? Who outside of the owning organization should be involved with the decision to pro-long the life of the product? A thorough research of business and manufacturing literature does not produce an answer to these questions.

The purpose of this study is to examine the performance and cost effects associated with pro-longing the life of capital assets beyond the initial forecast. A secondary purpose is to propose supply

190 JONES & ZSIDISIN

chain practices that should be considered during the acquisition decision phase for successfully ex-tending the life of capital assets while minimizing cost increases. As very little published research ex-ists about the topic, this article is exploratory in nature. To further clarify the discussion and highlight the impacts of supply chain failures from lifecycle extension decisions, the United States Air Force’s A-10 Thunderbolt II aircraft is examined. The example evaluates data showing performance and cost impacts realized when capital asset lifecycles are extended without a supporting supply base. This case is of particular significance as an example of a nearly worst-case scenario. At the time when replacement was feasible, the equipment showed no significant signs of deterioration. However, as the fleet passed the original design life, structural failures, maintenance requirements, and spare part demands skyrocketed and the supply base was unprepared to support the increased workload.

This paper begins with a background of the research on capital assets and the A-10 aircraft, building on the theoretical framework of Transaction Cost Economics (TCE) as it pertains to capital equipment sustainment. Propositions relating the effects of service life extensions on performance and cost are then explained. The research method and measures used to examine the research proposi-tions are then discussed, followed by an analysis of the data. Managerial recommendations, grounded in TCE and business practice, are then presented, followed by overall conclusions of the study.

LITERATURE REVIEW

Background of the A-10 ThunderboltThe A-10 aircraft was first fielded in 1976 to provide close air support to Army ground opera-

tions. The A-10 had a designed service life of 6,000 flying hours based upon extensive research by the United States Air Force and the original manufacturer’s engineering and production staff (Russo, 1990). The A-10 Chief of Engineering explained that this service life was based upon such factors as historical data of aircraft flying similar flight profiles, engineering fatigue data from destructive analysis of early A-10 prototypes, and commercial wear standards for the wing, fuselage, and em-pennage structural components. A number of design characteristics make the A-10 uniquely suited to perform the close air support mission and there is not another aircraft currently in service within the USAF that could easily assume its mission (Logan 2000; Sweetman and Peacock 1992; United States Air Force 2005). As the A-10 approached 6,000 flying hours across the fleet in 1997, the Department of Defense (DoD) had to decide whether to continue flying the A-10 beyond its initial design life or acquire a replacement aircraft. In 1988, the USAF predicted costs of $8 to $30 million per unit, for a total cost of $2.5 billion, to replace the A-10 with aircraft capable of meeting the all-weather, high-threat environment in which it was predicted to operate in the 1990s (Report to the Chairman 1988). As is becoming typical of many military aircraft, the A-10 was designed to handle certain missions and provide specific capabilities over a projected useful lifespan, but military aircraft are increasingly exceeding the originally-predicted retirement dates. With shrinking military budgets, the premiere USAF fighter of the future (F-22) acquisitions reduced by 25% in 1997, and the F-35 Joint Strike Fighter encountering further schedule and funding delays, the USAF chose to keep the A-10 flying as the lower cost solution to providing close air support (Chandler 2005). However, this research will show that failing to ensure a robust supply base prior to extending the service life of the A-10 contrib-utes to a more costly solution over the extended life cycle than investing in a replacement aircraft.


A-10 Sourcing from a Transaction Cost Economics PerspectiveFrom a transaction cost economic perspective, we can better understand how various factors

can influence capital asset acquisition and management decisions. When analyzed through the frame-work of TCE, owning firms can evaluate two distinct processes in terms of their capital equipment. The initial acquisition and support for a piece of capital equipment is the first. The second is the long term support of the assets. Typically, the original manufacturer will be involved in the initial delivery and setup of the equipment, establishment of the initial spare parts supplies, and maintenance during the warranty period. The capital equipment owner will reach another decision point when the war-ranty and initial support contract with the manufacturer expires. Continued support of spare parts and maintenance may be available through the manufacturer, but this may not be the lowest cost option available or the best long term solution. Prior arguments and research in TCE has examined how as-set specificity and outcome uncertainty influence ownership and governance decisions (Coase 1937; Jones, Hesterly, and Borgatti 1997; Oxley 1997; Williamson 1979). Each of these is discussed with regard to the A-10 Thunderbolt II.

Asset SpecificityAsset specificity refers to the degree that investments made for a particular transaction have

greater value than if those investments were used for any other purpose (McGuinness 1994). Asset specificity can have a number of facets. First, physical asset specificity refers to the uniqueness of an item, generally ranging from complete customization of an item for a specific purpose to a general use item that could be applied in an endless variety of settings (Lonsdale 2001). The A-10 aircraft can be viewed as being a highly specific asset since it was built for a single customer that required exclusivicity, the U.S. Air Force, and for a single purpose, close air support of ground personnel. The extensive investments Fairchild Aircraft Corporation made into production would have been worth far less if the Air Force ended the relationship prior to delivery of A-10’s. As assets become more specific, there is greater dependence placed on other firms to provide the equipment. When asset specificity becomes very high, there are few other uses for the equipment. Under these circum-stances, prior research and theory development has advocated hierarchical control, often leading to a “make” decision (Lonsdale 2001; Williamson 1979). In terms of the support structure for the A-10, asset specificity is also prevalent. According to an A-10 Supply Chain Analyst interviewed as part of this study, approximately 60% of the nearly 10,000 items comprising an A-10 are unique to the aircraft. Most of the remaining parts are specific to the aircraft industry, such as titanium bolts.

A second facet to asset specificity is the human aspect (Lonsdale 2001). Specialized training is required to design, construct, use, and support capital equipment. The degree to which this training is specific to an asset or task measures the relative importance of human asset specificity to the relation-ship (McGuinness 1994). While there are unique aspects to the design and construction of the A-10 aircraft, the manufacturer could translate the training to other production projects. Similarly, while the Air Force made substantial investment into training pilots and maintainers for the A-10, these skills could be used on other aircraft. As a result, there is some degree of human asset specificity of both the initial acquisition and the support structure.

Outcome uncertaintyOutcome uncertainty concerns two facets of the transaction. The first, volume demand uncer-

tainty, reflects both the fluctuations of demand by the buyer and the confidence the supplier places


on that demand (Walker and Weber, 1984). For the A-10’s initial acquisition, there was little volume uncertainty since the government contract for the aircraft was fixed and the budget approved by Congress (Sweetman and Peacock 1992). However, the parts support for the aircraft experiences significant volume demand uncertainty for both the Air Force and the suppliers. As the A-10 Weapon System Supply Chain Manager (WSSCM), explained, “We see parts sitting on shelves for years with no demand and then go through periods of needing ten of those parts every month for a year. It’s extremely unpredictable.”

Technological uncertainty concerns the change in component specifications due to advances in technology or gaining greater knowledge about requirements or compatibility over time (Walker and Weber 1984). Capital equipment designed to operate for a lengthy period of time is susceptible to becoming technologically obsolete before its designed or functional lifespan expires (Langlois 2000). While the initial purchase of the A-10 had moderate risk due to advancements, the support structure transactions have extremely high risk. In discussion with the A-10 WSSCM, he explained, “our largest problems are with outdated parts. The aircraft was designed in the ‘60s and many of the parts aren’t economical to build any more. Until we get Air Force engineering approval to replace them with new technology, we’re forced to use the original parts, which often aren’t available.” With regard to the A-10 aircraft, it can be argued to have significant technological uncertainty, specifically with regard to technological advancements and cost to maintain the fleet. These variables, their defi-nitions, and applicability with the A-10 aircraft are summarized in Table 1.

As shown in Table 1, TCE provides mixed guidance whether to focus on hierarchical control or market transactions for acquiring and managing the A-10 aircraft. However, one additional facet that needs to be taken into consideration is the core competency of the USAF. The mission of the USAF is not in the manufacture of aircraft, but instead is “to deliver sovereign options for the defense of the United States of America and its global interests -- to fly and fight in Air, Space, and Cyberspace” (United States Air Force 2006). Therefore, the USAF needs to acquire critical, highly specific assets in low numbers with significant outcome uncertainty to support their mission, but do not have the capability of producing those aircraft. Further, interviews with a former A-10 System Program Office Director revealed that since the United States government does not completely integrate with firms, the method for initial acquisition and management is limited to the language of the contract. In some cases, such as the A-10 aircraft, the Air Force will limit the contract to delivery of aircraft and initial spare parts with no future warranty or support contracts in place. All maintenance of the aircraft was immediately assumed by the Air Force and separate contracts were developed to provide additional parts and equipment for the aircraft with hundreds of different suppliers.

In other cases, like the proposed structure for the Joint Strike Fighter (JSF) aircraft, the Air Force purchased aircraft, spare parts, and logistics support for the aircraft from the manufacturer. While Air Force maintainers will service the aircraft, all supply and technical support for the JSF will be provided directly from Lockheed-Martin Aeronautics (Fogarty 2006). The latter case approaches the vertical integration structure as closely as possible for the government. Nonetheless, government restrictions result in being heavily reliant on external organizations that may or may not have the same vision and mission of the USAF. This study will examine how this reliance, in part, coupled with budgetary pressures and long technological lead-times, can affect cost and asset performance.


TABLE 1

TCE VARIABLES AND THE A-10 AIRCRAFT

RESEARCH PROPOSITIONS

The prior section provided a background into the A-10 Thunderbolt and how the acquisition and management of capital assets can be viewed through the framework of TCE. In order to more closely examine the cost and performance effects associated with this decision, several propositions will be presented. These propositions include performance effects associated with downtime and total cost. While it should be no surprise that older, heavily used equipment will experience decreased perfor-mance and higher costs than earlier in their life cycles, the key to these propositions is the magnitude of the change experienced once the equipment exceeds its designed operational life.

Since the fall of the former Soviet Union, the militaries of Western nations are operating on reduced budgets. This impact has forced militaries to evaluate new methods to control costs both in 34

TABLE 1

TCE VARIABLES AND THE A-10 AIRCRAFT

Variable Definition A-10 Acquisition

Hie

rarch

ies

Ma

rkets

Support

Hie

rarch

ies

Ma

rkets

Asset

Specificity

Physical Investments made for

a particular

transaction have

greater value than if

those investments

were used for any

other purpose

(McGuinness 1994)

Unique asset, no

other customers

due to exclusivity

requirements

X 60% unique

assets, aircraft

industry specific

X

Human Degree to which

training is specific to

a transaction versus

transferable to other

transactions

(Lonsdale 2001)

Highly specific

skill sets; partly

due to secrecy

requirements

X Highly specific,

partially

transferable skill

sets

X

Uncertainty

Volume Fluctuations of

demand by the buyer

and the confidence

the supplier places on

the demand (Walker

and Weber 1984)

Very little X Diverse range of

requirements

X

Technology Change in component

specifications due to

advances in

technology (Walker

and Weber 1984)

Little risk during

production

X Increasing rate of

obsolescence

X


procurement of new weapons as well as in support, or cost of ownership, of existing systems. It is clear that decisions made during the design and initial acquisition phase have monumental impact on the cost of in-service support. One method of reducing support cost is to create designs with inte-gral support from the initiation of a weapons system concept and then carefully manage the support throughout the life cycle of the asset (Galloway 1996).

As Ellram (1993) identified, the life cycle cost for capital goods includes production, main-tenance, and downtime, among other factors. For the Air Force, Enke (1958) explains that typical corporate business models have analogous measures. Production for Air Force aircraft is measured in mission capable rates and flying hours produced within a given time period. Inputs include main-tenance equipment, maintenance personnel, and spare parts. The challenge is that while the cost of inventory inhibits sufficient stock to prevent downtime due to lack of parts, the highest priority parts can take days to arrive. This delay prohibits use of the aircraft until a spare part arrives or is removed from another aircraft.

The resulting “train wreck,” as it is classified by John Christensen, chief of the Industrial Capa-bilities Division of the Defense Logistics Agency (2005), is worsened by the increasing life cycle of aircraft combined with a simultaneous decreasing life cycle of the parts that are essential for flying these aircraft. For cases where the original part suppliers are no longer available, wait times in excess of 300 days are not uncommon while the cost of the part is normally 100 percent higher than the original equipment manufacturer (Chandler 2005).

Capital equipment’s performance is measured in terms of productivity, usage rates, cost of op-eration, and in-service rates (Ellram 1993). For the Air Force, mission capable rates provide a con-venient composite metric of identifying the general health of the fleet and performance measures by combining downtime waiting for parts or maintenance into a single metric (Rainey, McGonagle, Scott, and Waller 2001). In response to a query by the Subcommittee on Readiness of the Committee on Armed Services in the House of Representatives (2003), the GAO investigated the health of the military aircraft fleet by examining the ability of each weapon system to meet the mission capable rate goals and explaining shortfalls in attaining these goals. The investigators found the shortfalls are:

“caused by a complex combination of interrelated logistical and operational factors, with no dominating single problem. The complexity of aircraft design, the lack of availability and expe-rience of maintenance personnel, aircraft age and usage patterns, shortages of spare parts, depot maintenance systems and other operational factors, and perceived funding shortages were all identified as causes of difficulties in meeting the goals” (Report to the Chairman 2003, p. 16).

In terms of research objectives, the above situation can be summarized in the first proposition:

Proposition 1: Capital equipment characterized with a high degree of asset specificity will experience abruptly greater downtime beyond the initial design service life due to supply chain failures.

Proposition 1 evolves from viewing the unique characteristics of the A-10 aircraft from the per-spective of TCE. As an extremely specialized piece of equipment with a significant degree of asset specificity for both the USAF and the suppliers, the A-10 requires spare parts, expertise, and training


that is not transferable to other assets. Both parties are reluctant to invest additional time or money as the designed end of life nears, therefore creating a vacuum of parts and expertise.

In a 2003 Report to the Chairman of the Subcommittee on Readiness, Committee on Armed Services, House of Representatives, the General Accounting Office examined failure of military air-craft to meet performance metrics and focused on parts shortages and causes: “Air Force officials told us that aging aircraft, in particular, may experience parts shortages and delays in repairs because original manufacturers may no longer make required parts. To obtain a new part, officials must wait for it to be manufactured. However, this may not be a high priority for the commercial supplier be-cause of the relatively low profit potential” (p. 20–21). Further discussion explains the problem with OEM proprietary rights and subsequent manufacturers requiring a first article test for quality, which often takes longer than a year. Additionally, when rumors of aircraft retirement reach the supply base, inventories are quickly depleted and very few suppliers are willing to invest in tooling for a one-time purchase. Lastly, Department of Defense purchasing regulations often force extremely small buy lots of only a few parts that cause the per-item cost to skyrocket (Report to the Chairman 2003). The A-10 WSSCM further explained contract solicitations for A-10 parts are increasingly receiving no bids in the marketplace, even when the contracts offer bonuses of “premium pay” for completion. He attrib-uted this phenomenon to the desire of suppliers to focus on long-term success rather than investing a great deal of time and equipment into a short-term contract for parts on an aircraft with an uncertain future. This situation leads to the next proposition:

Proposition 2: Capital equipment characterized by high outcome uncertainty of spare part demand patterns beyond the initial design service life experiences a significant increase in total cost.

Viewing the A-10 through the perspective of TCE’s outcome uncertainty variable, there is not only an unknown demand for spare parts from the USAF to the suppliers, there is also unknown support availability from the suppliers to the USAF. This volatile situation creates a great deal of outcome uncertainty for both parties and will lead to the buying firm expending significantly greater resources to attain the same level of support as was provided during the expected service life of the equipment.

RESEARCH METHODOLOGY

The purpose of this study is to investigate the performance and cost effects associated with prolonging the use of capital assets beyond their initial designed life. The information presented is intended to provide data analysis and interpretation of one example and promote future investigation of managing highly specific capital assets and support. The A-10 aircraft was selected as the product for this study primarily due to one of the researcher’s familiarity with the aircraft and the unique insight this case can reveal about prolonging the A-10’s retirement. The astronomical cost of aircraft replacement coupled with the lower cost per flying hour in the USAF made service life extension of the A-10 a seemingly simple choice in 1988. However, the series of events and unforeseen require-ments experienced by the aircraft in the past 15 years quickly eroded any cost benefit, as will be shown later in this study.

196 JOuRNAL OF BuSINESS LOGISTICS, VOL. 29, NO. 2, 2008

The unit of analysis for this study is performance of the A-10 according to historical data as tracked in USAF metrics. A number of USAF-specific performance measures are explained in Table 2 as defined in the Metrics Handbook for Maintenance Leaders (Rainey, McGonagle, Scott, and Waller 2001).

TABLE 2

USAF METRICS, DEFINITIONS, AND CALCULATIONS (RAINEY ET AL. 2001)

The research approach of this theory building study follows a qualitative-quantitative case study design (Eisenhardt and Graebner 2007; Ellram 1996; Yin 2003). This use of different research meth-ods within the same study, or triangulation, can overcome bias normally associated with single meth-odologies in field research (Hussey and Hussey 1997). According to Easterby-Smith, Thorpe, and Lowe (1991), this study specifically utilizes methodological triangulation by combining quantitative and qualitative techniques in a single research case. Mentzer and Flint (1997) and Mangan, Lalwani, and Gardner (2004) specifically encourage this methodological triangulation for advanced logistics research to gain the rigor sought in other areas of business research and to adequately ground logis-tics research in established theory.

35

TABLE 2

USAF METRICS, DEFINITIONS, AND CALCULATIONS (RAINEY ET AL. 2001)

Metric Definition Calculated as:

Mission Capable Rate

The percentage of possessed

hours for aircraft that can

perform at least one assigned

mission.

Mission Capable Hours X 100%

Possessed Hours

Non-Mission Capable for

Supply (NMCS) Rate


hours for aircraft that cannot fly

any assigned mission due to lack

of parts.

NMCS Hours X 100%

Possessed Hours

Cannibalization Rate

The number of parts removed

from one aircraft to make

another serviceable per sortie

flown.

# Parts Cannibalized from Aircraft X 100%

Total Sorties Flown

Non-Mission Capable for

Maintenance (NMCM)

Rate


hours for aircraft that cannot fly

any assigned mission due to

maintenance.

NMCM Hours X 100%

Possessed Hours

Utilization Rate

Measures the combined

performance of operations and

maintenance to complete flying

missions over a given time

period (bases often track this rate

monthly, here it is an annual

usage rate).

Hours Flown per Year

Primary Aircraft Inventory

Cost per Flying Hour

(CPFH)

The total cost in terms of spare

parts, equipment, fuel, repairs,

and consumables per total flying

hours per year.

Cost

Total Flying Hours


Qualitative DataUtilizing a case study approach reveals details at multiple levels and perspectives of a little

known phenomenon and facilitates theory building (Eisenhardt and Graebner 2007). The qualitative data included the analysis of reports, memos, briefings and other documentation, as well as the use of semi-structured interviews with key informants. In designing the research, a qualitative approach was chosen because, as Yin (2003) argued, this type of approach is preferred when “how” or “why” questions are being asked. The respondents were selected as key informants within the A-10 System Program Office due to either their position or their longevity within the program. An open-ended interview questionnaire was created to solicit the widest range of responses in a semi-structured telephone interview setting. The participants included the Commander, 508th Attack Sustainment Squadron (single individual responsible for all A-10 sustainment activities), a former commander who currently leads the Lockheed-Martin A-10 Support Team, the A-10 Chief Engineer, the A-10 Weapon System Supply Chain Manager (responsible for all A-10 parts and supplier coordination), the A-10 Chief Scheduler (for maintenance and upgrades), a supply support specialist (with 12 years of experience on the A-10), and the A-10 Analyst (conducts all analysis of data collected for the A-10). No cost-specific questions were included in the interview protocol because the A-10 budget is managed from Air Combat Command and the relevant costing data is readily available through public access. The interview protocol questions are included in the Appendix.

In addition to the interview data, insight into the case was provided through review of docu-ments central to the A-10. Historical memoranda documenting significant events in the A-10 service life extension decision shed insight into the motivation and goals of retaining the A-10 instead of acquiring a replacement aircraft. Higher headquarter briefings documented the cost and performance of the A-10 and specifically compared its parameters with other USAF aircraft to establish a baseline of expectations and highlight deviations. Interview data and excerpts from other data sources (e.g. memoranda) are provided throughout the manuscript.

Quantitative DataFor the quantitative portion of this study, aggregate historical data was collected between the

performance of the A-10 aircraft prior to and subsequent to reaching its initially designed service life of 6,000 flying hours. The historical quantitative data is aggregated by month ranging from October 1989 to September 2004. The performance of the fleet is tracked by the responsible major command by month. This study is limited to Air Combat Command as the owning command with the highest level of consistent usage over the period of evaluation. Therefore, aggregate performance encom-passing a range of 283 aircraft operated by the command in Fiscal Year 1990 to 131 aircraft flying in Fiscal Year 2004 is evaluated.

The first active duty aircraft reached the 6,000 hour milestone in 1994 while the last reached the mark in 2000. The fleet average exceeded 6,000 flying hours in July 1997. For the analysis purposes of the data, the range of April 1996 to October 1998 is considered the division range in the data since 78% of the aircraft surpassed the 6,000 flying hour point during this period. This range of data is excluded from analysis. Therefore, October 1989 – April 1996 is defined as operating within the designed service life of the A-10 and October 1998 – September 2004 is defined as exceeding the designed service life of the A-10. Data for this study has been provided by the A-10 System Program Office, A-10 Aircraft Squadron (depot maintenance) and from both the A-10 Weapon System Team and the Flying Requirements Resources Branch within Air Combat Command. All data but the CPFH


is aggregate fleet averages by month; the CPFH is computed on an annual basis for each fiscal year (accounting for inflation) and was available in its current format for the A-10 only since 1994. This data collection is discussed with regard to mission capability rates and cost.

Mission Capability RatesAircraft mission capable rate is a composite enabling USAF leadership to capture a number of

possible trends within a single metric. Expanding upon the definition above, this rate will capture how often the aircraft breaks, how quickly it is repaired, how effectively it is repaired, the degree of spare part inventory support, and a quick snapshot of overall fleet health.

The mission capable rate can be broken down further into two separate categories of rates: non-mission capable for supply (NMCS) and non-mission capable for maintenance (NMCM). These two metrics provide greater focus on reasons for aircraft downtime. The supply rate is somewhat misleading as it identifies only aircraft out of commission for parts rather than tracking total parts that an aircraft is awaiting. For example, if one A-10 is awaiting a main landing gear component, the non-mission capable rate for supply is the same whether there is only this single component backor-dered or if the aircraft is also awaiting shipment of a new flap, engine, and nose tire. Therefore, many maintainers will consolidate the parts shortages to as few aircraft as possible to prevent multiple aircraft from each missing different parts. This process is known as cannibalization as good parts are removed from one aircraft to return another aircraft to service. Together, these two metrics can show the health of the supply system.

The second subcategory is the non-mission capable rate for maintenance. This rate more clearly identifies aircraft maintainers’ challenges of keeping the aircraft available for missions. Increasing non-mission capable maintenance rates often indicate multiple areas for concern. One reason is that more complex maintenance is required to return the aircraft to service following each flight. Another indication of this metric is that greater demands are placed on maintenance personnel due to in-creased numbers of aircraft landing with more complex maintenance required. Further facets include the possibilities of decreased training or proficiency of maintenance personnel, or a lack of spare parts driving repair or rebuild of items that might otherwise be requisitioned.

Cost PerformanceOne measure to track ownership costs within the USAF is the cost per flying hour (CPFH) for

aircraft. During the design stages, investments are being made to support the initial fielding of the aircraft, but costs are generally kept at a minimum until operational fielding. As the first squadron becomes operational, there are few aircraft fielded and an array of support equipment, technical support, training requirements, and parts inventory are levied upon this small fleet size. Over time, as additional aircraft are fielded, the support costs are reduced almost exclusively to operation and maintenance costs, including fuel, parts, servicing, and any other costs directly attributable to fly-ing the aircraft. The total cost per flying hour curve should decrease as a full fleet is fielded, support equipment is already in place, spare parts are available, and the aircraft reaches peak performance. As the fleet nears the originally-designed retirement age, the cost per flying hour will likely rise again as the supply base decreases production in anticipation of aircraft retirements, subsystems reach the end of their useful life, and structural components require replacement. Hawkins and Chiabotti (2005) capture this in depicting projected CPFH and performance for the Joint Strike Fighter in Figure 1.


FIGURE 1

JOINT STRIKE FIGHTER PERFORMANCE AND CPFH FORECASTS (HAWKINS AND CHIABOTTI 2005)

Extending the operational life further will cause a steep increase in the cost per flying hour for a variety of reasons. Original equipment manufacturers who created the production line com-ponents and the initial spares inventory for the aircraft may not have built A-10 parts since 1983. Frequently, these manufacturers may have evolved into new technologies or different fields, may have been purchased by another company, or may cease to exist at all. The USAF does not usually purchase detailed blueprints or design data with many of the spare parts on aircraft. If the original manufacturer is unable or unwilling to produce additional spare parts, the USAF is forced to undergo a prolonged search for another qualified supplier willing to design and produce a replacement part, usually in extremely limited quantities (Report to the Chairman 2003; Staib and Michaelson 2002). This process obviously creates a high cost per unit and has an unfavorable impact on the overall cost per flying hour.

DATA ANALYSIS

The quantitative data was split into two sets: the months within the initially designed service life and the months after. This split resulted in 78 observations (months) in the first data set and 72 in the second. T-tests were performed comparing the two population means after confirming the data

38

FIGURE 1

JOINT STRIKE FIGHTER PERFORMANCE AND CPFH FORECASTS (HAWKINS

AND CHIABOTTI 2005)


met the two required assumptions: normality and equal variances (McClave, Benson, and Sincich 1998). While the data utilized in this analysis is percentage data and therefore truncated at 0 percent and 100 percent, the aggregated nature of the data supports use of the t-tests. With each observation representing the average performance of a range of 131 to 283 aircraft, the central limit theorem predicts the resulting distribution of each data point will in itself be normally distributed (Minieka and Kurzeja 2001).

TABLE 3

T-STATISTICS FOR PERFORMANCE MEASURES

As can be seen in Table 3, there is a significant difference in the means beyond the expected service life (p < 0.01) for mission capable rate, NMCS rate, cannibalization rate, and NMCM rate. Regression analysis was performed on the 78 data points within the designed operating life of the A-10. By discovering the behavior of each performance indicator over time, predictions can be made about the expected performance in the future (Kutner, Nachtsheim, and Neter 2004). In this case, the first set of data was used to predict the expected performance of the A-10 in the beyond service life region. Table 4 provides a summary of the four regressions examining A-10 performance over time, while Figures 2 through 5 graphically depict their respective trends. Each graph has a shaded region from April 1996 through October 1998 illustrating the division of the data into the designed operational life and the extended service life of the A-10 aircraft. The horizontal dashed line is the linear regression equation extrapolated from the first set of data through the entire time period of this research. This data provides meaningful insight into the behavior of the A-10 aircraft since exceeding its designed service life.

As illustrated in Figures 2 - 5 and the tables, the first two propositions are supported. Specifical-ly, in the A-10 aircraft, the period after exceeding the designed service life had a significantly greater downtime awaiting spare parts and saw greater downtime for maintenance. Finally, despite limited data availability, some evidence is presented in Figure 6 that the cost per operating hour is increasing at a significant rate since October 1998.

36

TABLE 3

T-STATISTICS FOR PERFORMANCE MEASURES

10/89 to 4/96 10/98 to 9/04

N µ σ N µ σ t-value Mission Capable

Rate 78 89.34% 0.05% 72 73.00% 0.09% 37.69

NMCS Rate 78 5.67% 0.02% 72 13.96% 0.06% -25.39

Cannibalization

Rate 78 7.34% 0.07% 72 11.94% 0.04% -12.00

NMCM Rate 78 5.00% 0.01% 72 13.04% 0.05% -28.83

Notes:

1 - All t-values significant at p < 0.01


TABLE 4

REGRESSION RESULTS FOR PERFORMANCE MEASURES

FIGURE 2

MISSION CAPABLE RATE OVER TIME

37

TABLE 4

REGRESSION RESULTS FOR PERFORMANCE MEASURES

Independent Variable = Time (monthly intervals)

Performance Standardized

Coefficient

(b) N r2 F 95% C.I.

Mission Capable Rate -7.65 78 0.57 122.70 -9.30, -6.28

Non-Mission Capable

Rate-Supply

5.46 78 0.65 168.48 4.63, 6.30

Cannibalization -4.29 78 0.20 23.36 -6.10, -2.50

Non-Mission Capable

Rate-Maintenance

2.19 78 0.21 24.90 1.32, 3.06

Notes:

1 - Regression slope estimated from October 1989 to April 1996

2 - All standardized coefficients significant at p < 0.01

Mission Capable Rate

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Oct-89

Apr-90

Oct-90

Apr-91

Oct-91

Apr-92

Oct-92

Apr-93

Oct-93

Apr-94

Oct-94

Apr-95

Oct-95

Apr-96

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FIGURE 3

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FIGURE 5

NON-MISSION CAPABLE RATE FOR MAINTENANCE OVER TIME

FIGURE 6

COST PER FLYING HOUR OVER TIME (AIR COMBAT COMMAND 2005)

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Figure 6 illustrates the life cycle cost challenges described above. It is important to note the data reflects only the maintenance, spares, and fuel costs for operating and maintaining the A-10. Further, fuel costs per flying hour have remained nearly constant from Fiscal Years 1994 to 2004 (Air Com-bat Command 2005). Figure 6 graphically depicts the significant cost increase in terms of parts and maintenance required since the A-10 exceeded 6,000 flying hours. The Chief Scheduler for the A-10 added that major overhaul inspections performed at depot, upgrades, modifications, and Service Life Extension Program are not included in the above figures and are forecast to exceed $36 million in Fiscal Year 2005 for Air Combat Command alone. Grossman (2003) identifies over $1 billion in A-10 upgrades and life extension programs through Fiscal Year 2011.

In calculating life cycle costs for the A-10 and its potential replacement, termed A-X, there were a number of assumptions bounding the model. The most significant is the actual replacement aircraft. The model of the United States Marine Corps’ (USMC) H-1 replacement program was utilized for this purpose. As the USMC was faced with diminishing budgets and skyrocketing costs of maintain-ing an old fleet of AH-1 and UH-1 helicopters, the Secretary of the Navy approved the upgrade pro-gram for both helicopters. Complementing a vast array of modernization programs and installation of improved engine/rotor systems, the most significant portion of the upgrade involved completely renewing the airframes. The helicopters are returned to Bell Helicopter, completely overhauled, and returned back to the USMC as “zero-time” airframes. This program is predicted to cost $897 million to produce the 180 helicopters, but will save the USMC over $3.9 billion in maintenance and spare part costs (Burgess 1998; globalsecurity.org, 2006).

As one of the options explored for replacing the A-10 (Report to the Chairman 1988) and having the most well-defined cost parameters available, this upgrade and overhaul model was used to com-pare the cost of extending the service life of the A-10 fleet with renewing the airframes. The replace-ment is assumed to have incorporated all upgrades and modifications the A-10 received to date and began implementation in 1997 over a 5-year period. Total cost of the modification was $2.5 billion (Report to the Chairman 1988). The renewal of the airframes also avoids the substantial research and development costs associated with a completely new airframe. Since the cost per flying hour figures are known for the previous 23 years of the A-10, this data was translated to the A-X and adjusted for inflation to constant year 1997 dollars as are the A-10 calculations.

For the A-10, current increases in cost per flying hour are predicted to continue at a steady rate. Additional costs include the current service life extension program, precision engagement modifi-cations, and other upgrades included in Grossman’s (2003) $1 billion estimate through 2011. The period of dramatic increase between 2007 and 2012 are a result of acquiring a replacement wing for the A-10. Based upon interviews with A-10 program office personnel, current repair methods are insufficient to maintain the airworthiness of the aircraft to 2028, the new planned retirement date for the A-10. There is currently a bid solicitation seeking manufacturers of the new wing with initial cost estimates ranging from $700,000 to $1.3 million per wing, depending upon the final engineering design.

With the hindsight of 17 years of usage, dwindling supplier base, and structural fatigue, it is clear that replacement/airframe renewal would have been a lower cost option for the USAF than ex-tending the service life of the A-10 in its current form. Figure 7 shows this graphically. An important note from discussions with the current A-10 commander is that while the USAF may not have had $2.5 billion readily available in the early 1990s given the struggle to garner support for the JSF and


F-22 explained earlier, the USAF is now faced with even tighter operational budgets and an A-10 aircraft that is nearly 30% over budget annually.

FIGURE 7

CUMULATIVE LIFE CYCLE COSTS OF THE A-10 VERSUS A REPLACEMENT AIRCRAFT, A-X

MANAGERIAL RECOMMENDATIONS

The earlier discussion of performance and cost risks connected to service life extension, coupled with the A-10 example above, provides some clues to supply chain practices that may affect capital asset performance when its lifecycle is extended. Two supply chain practices that are proposed to help organizations successfully manage lifecycle extensions are providing incentive-laden contracts that promote stronger supply chain relationships, and supply continuity planning.

Contracting to Promote Closer Supplier RelationshipsOne possible method for managing capital asset lifecycle extensions is to re-evaluate the man-

ner in which firms acquire these purchases. The acquisition of expensive, highly specific, technical equipment such as the A-10 may require the development of stronger and closer relationships with multiple firms in the supply chain (Golicic and Mentzer 2005) to ensure continued support, even after its projected lifecycle. Therefore, instead of pitting suppliers against themselves in adversarial relationships with the government, firms could centralize large group buys based upon minimizing

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CUMULATIVE LIFE CYCLE COSTS OF THE A-10 VERSUS A REPLACEMENT

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total ownership costs and delivering the highest in-service rates possible given fiscal constraints (Mansfield 2002; Staib and Michaelson 2002). An extensive literature base expounds the benefits of strategic buyer-supplier relationships. In general, industry savings of 3 – 20 percent per year are realized through these strategic alliances, which translate to a conservative estimate of $1.5 billion in potential savings for the United States Air Force (Staib and Michaelson 2002).

Purchasing organizations need to utilize an appropriate method of sourcing to best manage sup-ply chain relationships. This alignment of sourcing strategy with item characteristics will achieve the maximum value to the buying firm over the long term, which translates to lower total cost of own-ership (Smeltzer, Manship, and Rossetti 2003). Numerous prior studies have shown the benefits of long-term supplier contracts on firm performance (Dyer and Singh 1998; Hartley, Zirger, and Kamath 1997; Monczka, Handfield, and Ragatz 1998; Petersen, Handfield, and Ragatz 2003). As typical in industries where arm-length transactions continue to dominate the purchasing department’s approach to suppliers, the government’s approach contributes to the challenge of extending aircraft life cycles. From a transaction cost economics perspective, asset specificity and uncertainty in demand would suggest most firms utilizing specialized capital equipment would benefit by internal manufacture of the parts. By engaging in limited quantities, short duration contracts, firms attempt to promote competition and earn the lowest price for items. However, when the products required have stringent specifications, a lengthy supplier qualification program, and short-term demand, the price per item escalates rapidly. Aligning the supply and contracting structure to facilitate long-term relationships with suppliers is one method shown to promote symbiotic relationships, reduce risk, and improve performance throughout the supply chain (Hartley, Zirger, and Kamath 1997; Monczka, Handfield, and Ragatz 1998).

Managers making capital asset acquisition decisions may want to consider the use of long term contracts with suppliers prior to extending the service life of capital equipment when high degrees of asset specificity and outcome uncertainty are involved. By implementing long term contracts with suppliers, the outcome uncertainty is reduced for both parties despite retaining high asset specific-ity. The approach described mimics a vertical (ownership) structure since the buying firm would be closer to a make role and outside suppliers would simply provide manufacturing expertise and raw materials to produce spare parts.

The owners of the capital equipment would realize cost savings and performance improvements by rejuvenating the supply chain prior to the emergent need for spare parts. In a parallel example, the U.S. Coast Guard subcontracted original equipment manufacturers to maintain their fleet of aging HU-25 aircraft and H-65 helicopters. Through the use of long-term performance-based contracts, the Coast Guard has seen a dramatic increase in the readiness of their fleet. Honeywell and Rockwell Collins have contracts to ensure parts meet availability and schedule deadlines at Coast Guard Air Stations throughout the country. Prior to implementing the contract, Coast Guard programs closely paralleled the A-10 program. The mission readiness rates fell far below the 85 percent standard while the average total supply chain time, from ordering a part to receiving the part, exceeded 189 days. Since implementing the long-term contractor support of the aircraft, the Coast Guard realized a 30 percent improvement in availability rates and decreased the average total supply chain time to less than 45 days (Chandler 2005; Wylly 2006). Rockwell Collins also had noteworthy success with management of the US Navy’s F/A-18 communications electronics. The F/A-18 was requiring nearly 43 days of total supply chain time to fulfill sensitive electronics spare part requests. After implement-


ing a performance-based long-term contract with Rockwell Collins, the total supply chain time has been reduced to less than two days for the highest priority parts and less than five days for all other parts (Wylly 2006). These are just two examples from over 50 performance-based logistics contracts currently active in the US military (pblprograms.com 2007) and show support for the concept that capital equipment meeting TCE’s variables of high asset specificity and high outcome uncertainty can be better maintained through the use of long term contracts. Similar results should be expected from a wide range of industries with similar challenges, including farming, mining, assembly opera-tions, and bridge or road infrastructure construction businesses.

Supply Continuity PlanningSupply continuity planning, which is a subset of business continuity planning, involves the iden-

tification of potential problems ahead of time, as well as the assets required to ensure an organization is able to maintain a competitive advantage from unforeseen events (Elliott, Swartz, and Herbane 1999; Zsidisin, Melnyk and Ragatz 2005). The acquisition of capital equipment, such as the A-10, often has inherent uncertainty with regard to performance and spare parts supply. This risk is ampli-fied when the equipment exceeds its expected lifespan from problems such as not having qualified suppliers, insufficient tooling, and the lengthy process of validating those parts and processes when new suppliers are introduced.

During the negotiation process with equipment suppliers, purchasing organizations should take the product, process, supply chain structure and design issues into consideration at the same time. This approach, also known as 3-dimensional concurrent engineering (3DCE) (Fine 1998), should include the evaluation of suppliers at multiple supply chain tiers, such as those firms that manufacture key repair part items for their viability during, and even after, the expected life of the equipment. Contingencies such as inserting contractual clauses that allow the purchasing organization to acquire critical parts tooling and having suppliers willing and available to manufacture those parts can result in improved performance and cost if a decision is made to extend the life of the equipment. This approach removes some of the start-up cost barriers to new entrants in the supply market. If firms encountering challenges of extending the life of specialized capital equipment possessed the skills and equipment for manufacturing as well as the design specifications for the parts, the purchasing departments would be able to source strategic alliances with technically skilled suppliers without requiring massive investment in tooling or design. As the A-10 WSSCM elaborated, the difficulty of qualifying new suppliers and the decrease in the number of bids for new contracts illustrates the immense barrier to entering competition for part contracts. For these situations where TCE’s asset specificity and outcome uncertainty variables are both high, there is less likelihood of new supplier interest in short term contracts. Further, capital asset acquisition decisions inherently have a long-term orientation that extends well beyond the tenure of many managers. Supply continuity planning can help serve as a bridge between leadership changes in the firm to ensure that support will continue to exist in the organization’s supply chains.

CONCLUSION

Through the example of the A-10 aircraft’s performance and cost metrics, we have demon-strated one example of the hazards of extending a capital asset beyond its originally designed life cycle. The development of supply chain relationships and the implementation of supply continuity


plans are argued as being two practices that firms may wish to consider when extending the lifecycle of capital assets. Only through the successful rejuvenation of the supply base, detailed engineer-ing analysis of the structural health of the equipment and identification of parts requirements, and proactive supply chain management involvement can the infrastructure be prepared for service life extension programs.

The primary limitation of this study is the reliance on a single case example. As an exploratory study, this provides great opportunity for future research of this topic. The first extension could be to evaluate other military and commercial aircraft in the same manner and determine if the proposed performance and cost curves hold for a variety of aviation conditions. A like approach could be taken in other fields experiencing longer-than-anticipated usage of products. Industries utilizing specialized capital equipment such as manufacturing machinery, farming, and heavy construction equipment may be outstanding candidates for research. Additionally, specific concerns such as bridge and road infrastructure repair, mine safety, and port modernization could be examined to determine whether the information presented in this research could assist other agencies. An additional limitation of this study is the lack of aircraft-by-aircraft performance metrics. Advantages and limitations are present-ed by the use of aggregate monthly data as discussed by Gilster (1970) in his analysis of B-52 aircraft maintenance costs. The use of average values will reduce the effect of outliers on the population set and provide meaningful data as the mean values are likely to represent a normal distribution given the large sample sizes they represent for each month’s data. Conversely, analysis of the mean values may mask the variance among aircraft or locations, resulting in a loss of useful data (Gilster 1970). However, due to the exploratory nature of this study, the disparity found between the two groups of data, and the essence of some of the measures in this study (for example, CPFH is only tracked at a command level, never for individual aircraft), the analysis of mean data produces interesting and meaningful insights.

Once additional data is evaluated from multiple sources, a model should be formulated and tested to relate performance and cost throughout a product’s life cycle. Building upon this model, firms can then identify customer support strategies to maintain desired service levels within cost con-straints. If the supply management strategies discussed were implemented in the Air Force, a follow-up comparison of performance and cost data would be extremely useful to validate the model.


APPENDIX

SEMI-STRUCTURED INTERVIEW PROTOCOL.

Interview Protocol: We greatly appreciate your time and support of this research project. Name: _________________________

1) Please state your current and past positions relating to the A-10 aircraft and provide a brief description of your responsibilities in those capacities.2) Have you ever experienced parts availability or delivery problems with the A-10 aircraft? Could you describe any?3) Have you ever experienced maintenance problems with the A-10 aircraft? Could you describe any?4) Have you ever experienced problems procuring a part for the A-10 due to obsolescence? Due to a company with proprietary rights no longer in business or no longer producing the required part? Due to technical specifications? 5) Are there any other issues or facets of the A-10 aircraft that you would like to discuss?

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ABOUT THE AUTHORS

Shawn R. Jones (Ph.D. Michigan State University) is an Assistant Professor at the Department of Marketing and Supply Chain Management, Fogelman College of Business and Economics, The University of Memphis. He received his M.S. in Logistics Management from the Air Force Institute of Technology. He served as an Aircraft Maintenance Officer in the United States Air Force attaining the rank of Major. His research interests include managing information technology systems, forecast-ing to meet customer support requirements, and the operational performance of supply chains.

George A. Zsidisin, C.P.M. (Ph.D. Arizona State University) is an Associate Professor at the Department of Management, Bowling Green State University. He has published over 40 articles in both academic and practitioner journals, as well as given numerous presentations to companies, groups, and conferences. His research interests include supply risk and its management, early sup-plier involvement in new product development, and the role of information technology in supply management.

performance implications of product life cycle extension: the case of the a-10 aircraft

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