Calhoun: The NPS Institutional Archive Theses and Dissertations Thesis Collection 1994-06 Integration of warranties into an aircraft engine acquisition strategy Caldwell, Kent G. Monterey, California. Naval Postgraduate School http://hdl.handle.net/10945/42884 NAVAL POSTGRADUATE SCHOOL Monterey, California T C THESIS DEIECTE AUG G19 1994 3 INTEGRATION OF WARRANTIES INTO AN AIRCRAFT ENGINE ACQUISITION STRATEGY by Kent G. Caldwell June, 1994 Thesis Advisor: Alan W. McMasters Approved for public release; distribution is unlimited. 94-26382 •"'• 4 8 18 181 REPORT DOCUMENTATION PAGE Form Approved OMB No. 0704 Putablic rmorng burden for this coUectuon of mfmasim is csumued to average I how pe response. including the tune for revmwung uutmuti. seaching existng data souwc. gahenag asd maintaining the dat needed, and completing and reviewing the collocion of infamation. Send commwnta regrdig his brtdm esinmate or any other aspect of this colectuo of inforzation. inhcdinng sugestieo for reducing this burden, to Washington Headquattn Sarvces. Directorate for Informadon Opeaions and Reports. 1215 Jeffersen Davis Highway. Suite 1204. Arligton. VA 22202-4302. and to the Office of Masagemont and Budget. Paperwork Redutiaon Project (0704-0188) Washington DC 20503. 1. AGENCY USE ONLY (Leave blank) 2. REPORT DATE 3. REPORT TYPE AND DATES COVERED June 1994 Master's Thesis 4. TITLE AND SUBTITLE INTEGRATION OF WARRANTIES INTO 5. FUNDING NUMBERS AN AIRCRAFT ENGINE ACQUISITION STRATEGY 6. AUTHOR(S) Kent G. Caldwell 7. PERFORMING ORGANIZATION NAME(S) AND ADDRESS(ES) 8. PERFORMING Naval Postgraduate School ORGANIZATION Monterey CA 93943-5000 REPORT NUMBER 9. SPONSORING/MONITORING AGENCY NAME(S) AND ADDRESS(ES) 10. SPONSOkINGIMONrrORING NAVAL AIR SYSTEMS COMMAND CODE AIR-536 AGENCY REPORT NUMBER ARLINGTON, VA 11. SUPPLEMENTARY NOTES The views expressed in this thesis are those of the author and do not reflect the official policy or position of the Department of Defense or the U.S. Government. 12a. DISTRIBUTION/AVAILABIIJTY STATEMENT 12b. DISTRIBUTION CODE Approved for public release; distribution is unlimited. *A 13. ABSTRACT (maximum 200 words) Within the Department of Defense there continues to be considerable confusion and debate over the effectiveness of the warranty clauses required on major weapon system production contracts. Despite the fact that they have been mandated by law since 1985, and that their costs are estimated at over two percent of total hardware costs, a uniform process to ensure their proper development and administration does not exist. Because of the politics involved, Program Managers have received considerable direction in the form of "thou shalt", but virtually no guidance as far as "how to". Fortunately, significant efforts have been made by individual programs to correct problems experienced in the past and execute warranties that make sense. Their focus, however, has been on improving warranty administration. In contrast, this thesis looks at the warranty development process and discusses the potential improvements from the early integration of the warranty development into an aircraft engine's acquisition strategy. The findings of this report support avoiding insurance warranties, changing the Navy's "no-cost" warranty policy, and including warranty reviews as part of the Milestone review process. There is potential for significant reductions in life cycle costs from this approach and universal applicability across all platforms and services. 14. SUBJECT TERMS Aircraft Engine Warranty, Weapon System Warranty, 15. NUMBER OF Acquisition Strategy. PAGES 217 16. PRICE CODE 17. SECURITY CLASSIFI- 18. SECURITY CLASSIFI- 19. SECURITY CLASSIF- 20. LIMITATION OF CATION OF REPORT CATION OF THIS PAGE CATION OF ABSTRACT ABSTRACT Unclassified Unclassified Unclassified UL NSN 7540-01-280-5500 Standard Form 298 (Rev. 2-89) Pescribed by ANSI Std. 239-18 Approved for public release; distribution is unlimited. Integration of Warranties into an Aircraft Engine Acquisition Strategy by Kent G. Caldwell Lieutenant Commander, United States Navy B.S., State University of New York, Brockport, 1979 Submitted in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE IN MANAGEMENT from the NAVAL POSTGRADUATE SCHOOL Author: Kent 6. Caldwell Approved by: Alan W. McMasters, Principal Advisor David R. Henderson, Associate Advisor David R. Whipple, Chairman Department of Systems Management ABSTRACT Within the Department of Defense there continues to be considerable confusion and debate over the effectiveness of the warranty clauses required on major weapon system production contracts. Despite the fact that they have been mandated by law since 1985, and that their costs are estimated at over two percent of total hardware costs, a uniform process to ensure their proper development and administration does not exist. Because of the politics involved, Program Managers have received considerable direction in the form of "thou shalt", but virtually no guidance as far as "how to". Fortunately, significant efforts have been made by individual programs to correct problems experienced in the past and execute warranties that make sense. Their focus, however, has been on improving warranty administration. In contrast, this thesis looks at the warranty development process and discusses the potential improvements from the early integration of the warranty development into an aircraft engine's acquisition strategy. The findings of this report support avoiding insurance warranties, changing the Navy's "no-cost" warranty policy, and including warranty reviews as part of the Milestone review1 process. There is potential for significant reductions in life cycle costs from this approach and universal applicability across all platforms and services. Availability Codes Avail and or Dist Special Hii ' 4/I TANlZ OF COWIUS I. INTRODUCTION ................... 1 A. BACKGROUND ................. .................. 1 B. OBJECTIVES ................. .................. 3 C. RESEARCH QUESTIONS ............. .............. 4 D. SCOPE .................... ..................... 4 E. RESEARCH METHODOLOGY ............ ............. 6 F. ORGANIZATION OF STUDY ............ ............. 8 II. BACKGROUND ............ .................... .. 10 A. WARRANTY DEVELOPMENT IN THE PRE-MANDATED ERA . 10 B. POLITICS, THE LAW, AND CONGRESSIONALLY MANDATED WARRANTIES ........... .................. 13 1. Section 794 ........ ................ .. 13 2. Section 2403 ......... ............... .. 14 3. The DoD Responds ....... ............. .. 15 4. Weapon System Warranties in Practice . 15 5. Continued Congressional Concern ........ .. 16 6. The DoD Responds to Change .. ........ .. 17 7. Current Warranty Legislative Initiatives 18 8. The DoD Divided ...... .............. .. 19 C. DIRECTIVES AND POLICY GUIDANCE .. ........ .. 20 1. Directives ........... ............... .. 20 iv a. Federal Acquisition Regulation (FAR) . 21 b. Defense Federal Acquisition Regulation Supplement (DFARS) ... .......... 22 c. Department of Defense 5000 Series Instructions ....... ............. .. 23 d. SECNAV INSTRUCTION 4330.17 ........... 24 e. NAVAIR INSTRUCTION 13070.7 ...... .. 24 2. SECNAV Policy Guidance ... .......... .. 25 3. NAVAIR Policy Guidance ... .......... .. 26 D. ACQUISITION STRATEGY, PROGRAM MANAGEMENT, AND WARRANTIES ........... .................. 27 E. NAVY AIRCRAFT ENGINE PROGRAM MANAGEMENT . 29 1. Acquisition Management ................... 29 2. Logistics Management ..... ........... .. 30 3. Component Improvement Program ......... .. 30 4. Fleet Inventory Management .. ........ .. 31 5. Maintenance Management .. i III. ECONOMIC PRINCIPLES OF WARRANTIES .. ....... 33 A. WARRANTY THEORY ........ ................ .. 33 1. Warranty Defined ....... ............. .. 33 2. Warranties in Weapon System Procurement . 34 B. CLASSIFICATION OF WARRANTY TYPES .. ....... .. 36 C. WARRANTY COSTS ......... ................ 37 1. Assurance Warranties ..... ........... .. 39 2. Insurance Warranties ..... ........... .. 39 v 3. Incentive Warranties ... ........... .. 40 D. THE mNO-COST* WARRANTY ........... ........... 40 E. WARRANTIES AND LIFE CYCLE COSTS ... ........ .. 42 F. WARRANTIES AND THE COMPONENT IMPROVEMENT PROGRAM (CIP) .............. ..................... .. 47 IV. ANALYSIS .............. ..................... .. 49 A. ECONOMIC ANALYSIS ........ ............... .. 49 1. The Law (10 U.S.C. 2403) ... ......... .. 49 2. The FAR and DFARS ...... ............ .. 56 B. POLICY ANALYSIS ........ ................ .. 60 1. Secretary of Defense ... ........... .. 60 2. Secretary of the Navy ... ........... .. 64 3. Naval Air Systems Comnand ... ......... .. 65 C. PROGRAM MANAGEMENT ASSESSMENT ... ......... .. 65 1. Congressional Intent ... .......... .. 66 2. Secretary of Defense ... ........... .. 67 3. Secretary of the Navy and Chief of Naval Operations ......... ................ 73 4. Naval Air Systems Conmmand ... ........ ... 74 V. AIRCRAFT ENGINE WARRANTY ANALYSES ... ......... .. 79 A. FOCUS OF ANALYSIS ........ ............... .. 79 1. Essential Performance Requirements . .. 79 2. Uncertainty, Risk, and Statistical Significance ......... ............... .. 80 vi 3. Program History and System Life Cycle . 81 B. ROLLS-ROYCE F405-RR-402 .... ............ .. 82 C. ROLLS-ROYCE F402-RR-408 .... ............ .. 90 D. GENERAL ELECTRIC F404-GE-400/402 .. ....... .. 94 1. F404-GE-400 Lot XI ..... ............ .... 96 2. F404-GE-400 Lot XII .... ............ .. 99 E. GENERAL ELECTRIC F110-GE-400 ..