Research for Buying Power

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Improving Navy's Buying Power Through Cost Savings
October 1, 2006

The Department of the Navy wants to recapitalize but finds that it does not have as much buying power as it used to. Last year, CNA examined the trends in the Navy's budgets and prices to understand why the Navy could not buy as many weapons platforms as it used to: the study found that the Navy had less to spend on procurement than before and that the Navy's mix of ships and aircraft cost more on average now than before. To reverse the trend and buy more platforms, the Navy needs to devote more money for procurement and/or buy less expensive platforms. This study examined various initiatives or savings opportunities (total of 17) that would allow the Navy to allocate more money for procurement. Taken together, the total savings from these initiatives are about $7 billion to $10 billion (or 5 to 8 percent of the Navy’s annual budget). We assessed the risk associated with these initiatives and deemed most to be minimal to moderate risk in terms of cost uncertainty, effects on readiness, or other effectiveness measures. Nonetheless, tough decisions must be made and cultural and other barriers must be overcome before the Navy may reap the savings.

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Changes in the Navy's Buying Power: Evidence on Basic Questions
August 1, 2005
This study examined the trends in the Navy’s budget and prices of its platforms (ships and aircraft) to understand why the Navy cannot buy as many platforms as it used to. We found that the Navy had less to spend on procurement than before and that the Navy’s platforms cost more now than before, leading to the erosion in the buying power. The major reasons for the Navy’s having less funding available for procurement are: the overall budget is not high by historical standards; the R&D expenditure is at a historic high; and the Military Personnel and the Operations and Maintenance appropriations, while below the historic average, have not come down as much as endstrength and force size. The major reasons for the Navy’s platforms costing more than before are: the Navy is buying a richer mix of platforms, leading to higher average cost; individual platforms are more capable than their predecessors and the additional capabilities cost more; the inflation experienced by the defense manufacturers are higher than the general inflation; the Navy is buying smaller quantities of platforms causing higher unit costs; and the defense industry consolidation may have changed the price behaviors of the remaining contractors.
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