NPS-LM-18-021 ACQUISITION RESEARCH PROGRAM SPONSORED REPORT SERIES Cost of Compliance on Munitions Consolidation from Lualualei to West Loch December 2017 LCDR Christopher M. Lebel, USN LCDR Gilbert P. Uy, USN Thesis Advisors: Geraldo Ferrer, Professor Simona Tick, Lecturer Graduate School of Business & Public Policy Naval Postgraduate School Approved for public release; distribution is unlimited. Prepared for the Naval Postgraduate School, Monterey, CA 93943. Acquisition Research Program Graduate School of Business & Public Policy Naval Postgraduate School The research presented in this report was supported by the Acquisition Research Program of the Graduate School of Business & Public Policy at the Naval Postgraduate School. To request defense acquisition research, to become a research sponsor, or to print additional copies of reports, please contact any of the staff listed on the Acquisition Research Program website (www.acquisitionresearch.net). Acquisition Research Program Graduate School of Business & Public Policy Naval Postgraduate School ABSTRACT With the object of ensuring that all ordnance magazines in Hawaii are in compliance with NOSSA regulations, this project conducts a systematic cost of compliance analysis to identify the pros and cons of either constructing new magazines at West Loch and consolidating ordnance operations from Lualualei to West Loch, or only upgrading the ordnance magazines in Lualualei. This analysis is performed from the perspective of the Department of Defense in order to capture all costs and benefits associated with the Army and Navy, the main stakeholders in this study. The project developed a cost of compliance decision support model in Excel to systematically examine the relative strengths and weaknesses of the available alternative options. The model identifies tangible costs and benefits to estimate a net present value for each option. To account for uncertainty, the researchers used Crystal Ball to implement simulated values for cost variables used in the Excel based model to validate the robustness of the average net present value and to show the probability of net costs exceeding the net benefits. The analysis conducted in this project point to consolidation as a better course of action to take in the long term. Acquisition Research Program Graduate School of Business & Public Policy - i - Naval Postgraduate School THIS PAGE INTENTIONALLY LEFT BLANK Acquisition Research Program Graduate School of Business & Public Policy - ii - Naval Postgraduate School ABOUT THE AUTHORS LCDR Gilbert Uy graduated from Tufts University in Medford, MA in 2002 with a Master of Science degree in Computer Science. He joined the U.S. Navy in 2004 and commissioned as an officer in 2007. He served onboard the USS Rodney M. Davis (FFG 60), USS Denver (LPD-9), USS McClusky (FFG-41), and USS Shiloh (CG-67). His shore tours include COMLOGFORNAVCENT Bahrain, and DLA Distribution San Diego. He married his wife Anna in September 2006, and they currently have two children. His next duty station will be at DCMA Dallas where he will serve as administrative contracting officer. LCDR Chris Lebel graduated from St. Edwards University in Austin, TX in 2003 with a Bachelor of Arts degree in Business Admin. He was commissioned as an officer in the U.S. Navy in 2006. He served onboard the USS Arleigh Burke (DDG-51) and USS Emory S. Land (AS-39). His shore tours include NAVCONBRIG Charleston, FLC Pearl Harbor, and COMLOGFORNAVCENT Bahrain. His next duty station will be at USS Boxer (LHD-4) where he will serve as the Assistant Supply Officer. Acquisition Research Program Graduate School of Business & Public Policy - iii - Naval Postgraduate School THIS PAGE INTENTIONALLY LEFT BLANK Acquisition Research Program Graduate School of Business & Public Policy - iv - Naval Postgraduate School ACKNOWLEDGMENTS To Dr. Geraldo Ferrer and Dr. Simona Tick, the success of this report would not have been possible without your mentorship and guidance. Your patience with us during the last nine months were greatly appreciated. The time and level of effort you gave in this journey was far above and beyond. We could not have picked better advisors for our project. To Navy Munitions Command East Asia, thank you for giving us the opportunity to provide you a useful tool in the ordnance consolidation analysis for Hawaii. This project taught us many things not only about ordnance but how important decisions like these effect much higher echelons and the joint arena. Acquisition Research Program Graduate School of Business & Public Policy - v - Naval Postgraduate School THIS PAGE INTENTIONALLY LEFT BLANK Acquisition Research Program Graduate School of Business & Public Policy - vi - Naval Postgraduate School NPS-LM-18-021 ACQUISITION RESEARCH PROGRAM SPONSORED REPORT SERIES Cost of Compliance on Munitions Consolidation from Lualualei to West Loch December 2017 LCDR Christopher M. Lebel, USN LCDR Gilbert P. Uy, USN Thesis Advisors: Geraldo Ferrer, Professor Simona Tick, Lecturer Graduate School of Business & Public Policy Naval Postgraduate School Disclaimer: The views represented in this report are those of the author and do not reflect the official policy position of the Navy, the Department of Defense, or the federal government. Acquisition Research Program Graduate School of Business & Public Policy - vii - Naval Postgraduate School THIS PAGE INTENTIONALLY LEFT BLANK Acquisition Research Program Graduate School of Business & Public Policy - viii - Naval Postgraduate School TABLE OF CONTENTS I. INTRODUCTION ...................................................................................................1 II. BACKGROUND .....................................................................................................5 III. LITERATURE REVIEW ......................................................................................11 A. COST–BENEFIT ANALYSIS (CONCEPTS AND PRACTICE) ............11 B. IDENTIFICATION OF RELEVANT COSTS IN THE DECISION TO CONSOLIDATE OR MAINTAIN TWO MARINE CORPS TRAINING13 C. COST–BENEFIT ANALYSIS OF THE 2006 AIR FORCE MATERIEL COMMAND TEST AND EVALUATION PROPOSAL..........................14 IV. METHODOLOGY OF ANALYSIS .....................................................................15 A. HOW TO PERFORM A CBA ...................................................................15 B. COST OF COMPLIANCE ........................................................................17 1. Relevant Costs ...............................................................................18 2. Sunk Costs .....................................................................................24 3. Intangible Costs .............................................................................25 V. ANALYSIS AND FINDINGS ..............................................................................29 A. CRYSTAL BALL RESULTS....................................................................29 B. IMPLICATIONS FOR FURTHER RESEARCH .....................................32 VI. CONCLUSIONS....................................................................................................33 A. CLOSING THOUGHTS AND CONSIDERATIONS ..............................33 B. RECOMMENDATIONS ...........................................................................33 APPENDIX A. MAGAZINE PICTURES .........................................................................35 APPENDIX B. EMAIL CORRESPONDENCE................................................................37 LIST OF REFERENCES ...................................................................................................41 Acquisition Research Program Graduate School of Business & Public Policy - ix - Naval Postgraduate School THIS PAGE INTENTIONALLY LEFT BLANK Acquisition Research Program Graduate School of Business & Public Policy - x - Naval Postgraduate School LIST OF FIGURES Figure 1. Geographical Locations of Lualualei and West Loch. Source: PACFLT (2003). ..........................................................................................................6 Figure 2. Magazine Layout of Lualualei Annex. Source: U.S. Army Corps of Engineers (2013). .........................................................................................7 Figure 3. West Loch Layout. Source: PACFLT (2003). .............................................8 Figure 4. Distance between Lualualei and West Loch. Source: PACFLT (2003). ...19 Figure 5. Crystal Ball Results for COAs 1 and 2 for a 25-Year Timeframe .............29 Figure 6. Crystal Ball Results for COAs 1 and 2 for a 50-Year Timeframe .............30 Figure 7. Crystal Ball Results for COAs 1 and 2 for a 75-Year Timeframe .............30 Figure 8. Crystal Ball Results for COAs 1 and 2 for a 100-Year Timeframe ...........31 Acquisition Research Program Graduate School of Business & Public Policy - xi - Naval Postgraduate School THIS PAGE INTENTIONALLY LEFT BLANK Acquisition Research Program Graduate School of Business & Public Policy - xii - Naval Postgraduate School LIST OF TABLES Table 1. Average Increase of the Total Contract Cost for Lualualei from FY10– FY17. .........................................................................................................21 Table 2. Estimated NMC EAD PH Contract Reduction for COA 1. Source: Martin (2017b). ..........................................................................................22 Table 3. NMC EAD MILCON Plan from Phase 1 to Phase 5. Source: Martin (2017c). ......................................................................................................23