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The Need To Rationalize Navy ship Maintenance Capacitu

IMA has just completed a detailed analysis of the impact of fleet downsizing on the U.S. ship repair business. The 200+ page report examexamines the size and composition of the future fleet, projects demand and supply of available ship maintenance capacity, examines downsizing and closure options, and proposes a strategy for rationalizing the ship repair industry. This article highlights some of the report's findings and conclusions.

KEY ISSUES Defense planners are faced with the difficult task of downsizing and/ or closing Navy ship repair facilities. This issue is highly politicized.

The local shipyard which employs several thousand workers generates lots of political support, and Congress can be expected to play a major role in shaping closure and downsizing decisions. However, if not properly handled, the entire industrial base available for ship repair could be irrevocably damaged by a badly designed downsizing strategy. Failure to take proper action can result in significantly higher costs to maintain the Navy fleet. Even more important, a poorly designed strategy which attempts to ration work, rather than close facilities, could irrevocably damage the entire industrial base.

Among the key questions which need to be addressed by policymakers are: 1) As submarine and surface ship repair work available to shipyards shrinks over the next 10 years, should the available work be channeled to an increasingly smaller number of repair yards in order to maintain a critical mass of activity in each remaining yard? 2) Would a government policy to distribute the increasingly smaller volume of work to all existing yards result in increased cost of naval ship repair and cause a long term decline in industry capability? 3) Since the major commercial yards build and repair both naval and commercial ships, while public yards are limited to naval ship repair only, would channeling an increasing percentage of available business to the commercial sector result in lowered cost and spur capital expenditures in new processes and facilities? 4) Would a properly planned downsizing of the public shipyards provide an opportunity for redeployment of government assets and personnel to alternative uses? These questions are difficult to answer. They require hard information about future maintenance workload, resulting facility usage and comparative costs under various downsizing options. Our report attempts to provide this hard information. THE FUTURE BUSINESS SITUATION One thing is very clear—budget pressures and changed military requirements will result in a significant downsizing of the U.S. Navy's fleet over the next several years. Plans being discussed would cut the Navy operating inventory from 460 ships today to 340 ships by 1995 under Defense Secretary Aspin's proposal, or 320 ships by 1999 under a recent Navy proposal (See Exhibit 1).

This would result in a much smaller fleet than that envisaged under the 600 ship Navy plan of the 1980's, and would be substantially smaller than the plan presented by the Bush Administration last year. Among the cuts being discussed is a 50 percent reduction in the number of attack submarines, early retirement of nuclear powered cruisers, retirement of several aircraft carriers and a large scale reduction in the number of support ships.

This radical surgery on the Navy's fleet will seriously impact future ship maintenance requirements. A shrunken fleet—in which only the EXHIBIT 1 NAVY FLEET UNDER VARIOUS PROPOSALS Q, 6 0 0 2 500 ^ 400 Z 300 ja 200 I 100 Z 0 460 600 425 340 320 Today Reagan Plan Bush Plan Aspin "C" Plan Current Navy Plan Source: IMA Associates, Impact of Fleet Downsizing on the Economics of Navy Ship Maintenance, Report No. 7123 most modern Navy ships are retained— will generate fewer ship repair and maintenance job starts. As a result, there will be fewer job opportunities for existing yards. CURRENT SHIP MAINTENANCE CAPACITY A wide network of ship repair facilities is currently available to perform Navy ship repair. It consists of a variety of governmentowned and commercial facilities (see Exhibit 2).

1) The Navy operates eight shipyards in which depot level maintenance is performed. Six are qualified for nuclear work, two are limited to work on conventional ships. The Navy also operates two repair facilities in the Pacific, two Trident refit facilities and a variety of shore intermediate maintenance facilities and tenders at which ship repair is performed.

2) Two commercial yards are qualified to perform naval nuclear work. One yard builds and overhauls nuclear submarines and carriers. The other builds submarines.

Another 35 commercial yards are active in the repair of conventional combatant and support ship repair. Six of these yards both build and repair Navy ships. Several foreign yards are also frequently used by the Navy for ship repair.

These government-owned and commercial shipyards draw on the same workbase. The extent to which this workbase declines will determine the level of opportunity available to the entire sector. The extent to which Navy assigns the decreasing amount of available work to its own yards will determine the rf sidual opportunities available to th commercial sector.

THE NEED TO DOWNSIZE THE INDUSTRIAL BASE Given the significant reduction ii future fleet inventory, it will be nec essary to rationalize and downsizi the ship repair industrial base ovei the next several years. Thij downsizing has already begun ir both the public and commercial sectors. There are currently aboul 54,000 workers employed in the eight naval shipyards. This compares to 65,900 two years ago. By September 1995, the plan is to reduce the public yard workforce to 39,200 workers.

The Philadelphia Naval Shipyard has been ordered closed as a result of the 1991 Base Closure Commission report. In the commercial sector a number of yards have closed or downsized and many other yards have reduced their labor force to reflect lowered throughput.

Industrial base downsizing to date has focused on non-nuclear qualified facilities. With the expected reduction in the submarine fleet, the number of nuclear-qualified shipyards needed for ship maintenance and overhaul will become an increasingly important issue. The Department of Defense (DOD) will be forced over the next year or two to distribute work among the six public yards and two commercial yards able to perform nuclear submarine maintenance— in a period where there simply will not be enough work to keep all of these facilities busy. One option available to the Navy is to retain all of the existing facilities, but reduce the amount of work available to each. This "rationing" option, according to the General Accounting Office (GAO), is the current Navy plan. GAO says the Navy plans to retain all of the existing shipyards in the face of declining activity, by making reductions in personnel in each of the yards. This rationing policy would be a viable option if all shipyard costs varied with the level of yard activ- $ $ MOLAND ity. However, there will be a cost penalty associated with rationing to the extent that some yard operating costs are independent of the level of production activity. A 25 percent reduction in production activity would result in total yard operating cost in a representative naval shipyard dropping from $500 million to $375 million—assuming all costs are variable. Because all costs are not variable, total yard operating cost instead falls to only $425 million—a drop of 15 percent. The result is a MONITORING, higher unit cost-which in naval shipyard terms means a higher stabilized billing rate.

ARE THERE FIXED COSTS IN NAVAL SHIPYARDS? The amount of cost penalty associated with rationing depends on the degree to which shipyard costs are fixed, rather than variable with downturn in production. Our report examines this question in great detail and some results are reported below.

SYSTEMS, DATALOGGERS Labor represents 68 to 70 percent of the total cost incurred by the eight naval shipyards. Because this is a major cost item, we focused our examination on the variability of labor to changes in workload to see the degree to which labor cost declines as workload declines.

In examining individual shipyards, we found that the total number of employees does not decline in proportion to changes in the level of production activity. For example, in one yard the production decline noted over a five year period (1989 to 1993) was 41 percent. However, total employment in that yard declined only 36 percent during the same period. There was significant "stickiness" in departments such as public works, nuclear engineering, OSHA, comptroller, supply office and radiological control.

What does this mean? Using the shipyard cited above, if total employment had fallen in proportion to production activity, the workforce would have fallen to 4,960 employees. Because the labor force in the yard has some fixed or semi-fixed element, the actual workforce declined to 5,390. In effect, the inability to downsize in proportion to workload resulted in a "labor penalty" of 430 employees—representing an increased cost of $17.5 million. This penalty takes on a great significance when the same phenomenon is occurring in all of the naval shipyards and repair facilities as a result of a downturn of activity. INDUSTRIAL BASE IMPACT OF RATIONING We conclude in our report that a policy to ration work, and not close redundant facilities, will result in government-owned yards operating below their optimum level of production— creating inefficiencies which impact productivity and increase costs.

Equally, if not more important, naval ship repair currently absorbs yard overhead and provides a flow of job opportunities to U.S. commercial yards. A rationing policy will naturally cause the Navy to assign a greater portion of work to government- owned facilities. With less Navy repair work, U.S. yards will find it even more difficult to be competitive in the commercial sector and a withering of the industrial base available to the Navy. This is particularly significant given the fact that naval shipyards do not build ships. They are limited to repair and maintenance. Retaining the ability to build ships is an essential component of national defense strategy. It would be extremely short-sighted to retain all of the government-owned repair facilities at the expense of strangling the firms able to deliver new ships to the Navy.

Report number 7123, "Impact of Fleet Downsizing on the Economics of Navy Ship Maintenance," is available for $1,200. To order please contact: IMA Associates, Inc., 600 New Hampshire Ave., NW, Suite 140, Washington, D.C. 20037. Telephone: (202) 333-8501. Fax: (202) 333-8504.

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