The Army and General Dynamics collaborate to help sustain the Scranton Army Ammunition Plant against market and fiscal pressures.
by Ms. Melissa Markos
Much has changed since the 15-acre Scranton Army Ammunition Plant (SCAAP) opened in 1951 to manufacture large quantities of artillery and mortar shell bodies, ranging from 105 mm to 8 inches in caliber on high-capacity production lines. Increasing costs from government regulations for antiterrorism and security, environmental protection and emergency management, along with decreased demand for ammunition, have brought the financial viability of the Pennsylvania plant into question.
But SCAAP, the youngest of the six government-owned, contractor-operated (GOCO) plants producing ammunition for the U.S. military, remains a vital asset. The challenge is how to continue operating as a fiscally supportable part of the industrial base.
Addressing that challenge, in collaboration with industry and other government agency stakeholders, is the responsibility of the Office of the Project Director for Joint Services, part of the Program Executive Office for Ammunition.
In the GOCO Army ammunition plants, the government owns all of the property and equipment, and the operating contractor has full use of, cares for, maintains and invests in the facility. SCAAP’s current operating contractor is General Dynamics Ordnance and Tactical Systems (GD-OTS).
The strategy developed for SCAAP is an example of the need to balance government-owned industrial base capacity against cost and competitive factors in an environment of declining federal spending.
HIGH COST OF FACILITY OPERATION, MAINTENANCE
The government spells out its requirements for maintenance, care of government property in possession of a contractor, environmental protection, safety, antiterrorism measures and security, and occupational health and industrial hygiene in performance work statements (PWS) as part of the property management contract.
The government does not directly pay the costs of carrying out these facility PWSs. The operating contractor must build the costs into overhead prices for products and services. While each GOCO facility is different, most need to compete for production work, including GD-OTS at the Scranton plant. There is no guarantee that government work awarded to the facility will cover the cost to operate it.
When there is a large amount of work at the facility, the overhead is easily shared over many programs. However, as production requirements drop, the programs need to support a larger share of the overhead expense.
Additionally, these facilities, including SCAAP, are built to be efficient at large production rates. When demand for ammunition is low, there is a lot of excess capacity, which may be needed again in the future. It generally costs less and is less risky to maintain that capacity through the lean years than to have to rebuild capacity quickly when needed.
NOT ENOUGH WORK
The metal ammunition parts produced at SCAAP dropped to a 15-year low in 2014. (See Figure 1.) The number of employees at SCAAP has dropped more than 70 percent over the past decade.
A number of factors have driven this shrinkage, straining SCAAP’s financial viability:
Since the end of the war in Iraq in late 2011, the demand for ammunition has significantly decreased. For example, the demand for conventional 155 mm artillery dropped 75 percent in the years after the end of the war, compared with the previous decade. The 2013 sequestration resulted in a 20 percent cut in the amount of ammunition being procured, further exacerbating the situation.
With resource and fiscal restrictions, the Army sought out and implemented innovative cost savings initiatives. One notable effort is the recapitalization of the 155 mm Dual-Purpose Improved Conventional Munition (DPICM) and 105 mm M1 projectile bodies. The Army is disassembling DPICM rounds that are designated for demilitarization and using the artillery projectile bodies for a new extended-range round. The Army is also recapitalizing a large volume of M1 rounds each year at the government-owned, government-operated Blue Grass Army Depot in Kentucky and McAlester Army Ammunition Plant in Oklahoma, which are reusing the projectile bodies. While saving the Army about $65 million annually, these cost-saving strategies also reduce the requirement to produce new artillery projectile bodies at plants such as SCAAP.
Another fundamental cost-saving strategy employed by the Army is to award production contracts competitively where possible. In 2012, a competing facility won a five-year contract for 120 mm mortar shell bodies that SCAAP historically had built. With the reductions in demand for other types of artillery and mortar bodies, GD-OTS proportioned more of the cost burden from the government regulations into its overhead price for the 120 mm, leaving it unable to provide a competitive price. Losing the 120 mm work further stressed SCAAP’s financial situation.
SURVIVING THE DROUGHT
One way the government can support GOCO facilities is by reducing the requirements it places on them while ensuring the necessary care and maintenance of the facilities.
In June 2013, the Office of the Project Director for Joint Services, the Joint Munitions Command and GOCO operating contractors formed a tiger team to review and reduce PWS requirements to the minimum necessary to run the GOCO facilities. The team evaluated every requirement, from how many guards need to be at each gate, to the number of boiler inspections each year, and compared the requirements against commercial best practices. It was a difficult process and significant changes were closely scrutinized because of the importance of security; the need to ensure that government property is maintained; and ensuring that Occupational Safety and Health Act environmental and safety laws were met. SCAAP’s next property management contract could save 5 percent in overhead costs, although new cybersecurity requirements may eat up those savings.
At the same time, GD-OTS carried out several rounds of layoffs. The workforce went from an average of 350 employees (between 2002 and 2012) to 150 in 2015. The company also negotiated with its employees to gain greater flexibility in job assignments, allowing one operator to work on various equipment and operations. These measures contributed significantly to the company’s ability to reduce overhead rates at SCAAP.
A more obvious solution—to bring more work to the Scranton plant—has proved difficult for both the contractor and the government. The government encourages operating contractors to solicit work for the commercial market or to lease unused facilities to tenants as a way to reduce facility overhead, and GD-OTS has been able to bring in commercial work, which sustained the facility through 2015. However, that market is very volatile and not reliable as a sustainment strategy. GD-OTS’s capabilities are so specialized that many of the markets they serve are opting for foreign imports.
Another commonly argued strategy, for the government to direct workload to government-owned facilities, theoretically ensures that they have sufficient workload to cover maintenance costs and retain critical skills. However, this approach works against commercial facilities with the capability to make the product as well as the government’s ability to obtain competitive pricing.
In 2014, there simply was not sufficient ammunition production work available to cover the overhead costs, even if the Army directed all of it to SCAAP. The Army could not terminate the 120 mm mortar shell body contract with another supplier and direct those orders to SCAAP in a timely manner. The 155 mm DPICM program was supporting both the Blue Grass and McAlester facilities, as well as saving the government significant money. As it was, the procurement requirements for 155 mm artillery were at a 15-year low.
A STRATEGY FOR SURVIVAL
In October 2013, the government and GD-OTS developed an enhanced strategic plan for SCAAP to address the key manufacturing processes that were the least efficient at low production volumes and propose flexible manufacturing cells that would be more efficient at lower volumes. In FY14, the government awarded GD-OTS $32.2 million in production base support projects to execute the strategic plan. The modernization projects included the installation of flexible rough and finish turning lines, batch heat treat systems, and local boilers for specific processes. These low-volume, higher-efficiency production lines will be completely installed and operational by the end of FY16. These modernization efforts will allow SCAAP to achieve more competitive pricing when producing lower quantities of shell bodies, not only for government work but also for the wider world market.
In FY17, the government intends to compete the property management contract for SCAAP. To level the playing field and entice competition for the facility, the government purchased GD-OTS’s intellectual property related to production in the facility and plans to provide it to the successful offeror. Additionally, the government will award a 10-year production contract for artillery projectiles and mortar shell bodies in conjunction with the property management contract. To help ensure government work at the facility, both contracts will be under one solicitation, awarded to one contractor.
Another feature of the upcoming property management contract allows the operating contractor to lay away portions of SCAAP, or even the entire facility, while preserving it to satisfy future DOD surge requirements for artillery and mortars. This will give the contractor the flexibility it needs to be efficient, while giving the government the assurance of surge capacity available when needed.
As the Army continues to operate under a constrained budget, we need to continually assess what capabilities and assets need to be sustained. For those required in the future, new business models should be explored to allow operating contractors maximum flexibility to adjust to the inevitable ebb and flow in ammunition demand, while providing the government the assurance it needs that ammunition production will be ready when needed. SCAAP serves as a case study in utilizing new methods to preserve large production capacity for surge.
For more information, contact the author at firstname.lastname@example.org.
MS. MELISSA MARKOS is an associate project director for industrial base sustainment in the Office of the Project Director for Joint Services, Picatinny Arsenal, New Jersey. She holds an executive master’s degree in technology management from the University of Pennsylvania and a master of engineering from Stevens Institute of Technology. She earned her bachelor of mechanical engineering from the University of Delaware. She has 14 years’ acquisition experience, is Level III certified in program management and is a member of the Army Acquisition Corps.
This article was originally published in the July – September 2016 issue of Army AL&T magazine.
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