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Image courtesy of BAE Systems |
Jake Moir, the MD of Gresham Power, looks back at the changes in defence procurement over the past 25 years and explains to CIE how small businesses that have adapted in order to survive have emerged stronger as a result.
A good few years ago now I remember being contacted by a leading warship builder. At that time the new Type 45 Destroyer was at an early stage and called Project Horizon. The enquiry was about an Mk15 Static Frequency Converter that we had widely installed in the British Fleet at that time. The equipment had been designed in the late 70’s and in pointing this out I suggested that the new vessel might look to be provided with something smaller and lighter – altogether racier.
The response was: “It works doesn’t it?”
My answer: “Oh yes it’s extremely reliable”.
The next response was: “It’s got a NATO stock number hasn’t it?”
My answer: “Yes”
Close of conversation: “OK – that’ll do.”
This conversation – which really did take place – neatly encapsulates the contradictions in product development. Our products support weapons systems, navigation systems and command and control systems by converting power from the vessel’s generators– either frequency or current – on demand to whatever is required by the load equipment, we also provide battery support for emergencies. While the end systems we support may constantly be pushing the frontiers of technology they have one constant need and that is reliable power. Without that the most sophisticated system is just ballast.
The idea that we are constantly striving for “smaller and lighter” is not the reality. The real pressure is on price - and innovation is essentially price rather than performance driven.
In the mid 1980s a 5kVA Static Frequency Converter (SFC) sold for about £55k – 25 years on we are looking at under half that. Take inflation into account and the reduction is colossal. Small niche suppliers like Gresham can only survive by adapting technology to price. In order to grow revenues we have to sell many more equipments – or diversify and we have done this by moving along the electrical supply route. From Rectifiers that start helicopters we have now moved to suppling complete Heli-Deck systems. From on board systems we have extended to ship to shore supply boxes. At the same time we have sought to reduce procurement and manufacturing costs by extending the commonality of sub-assemblies and power modules.
Multi-ship builds have enabled us to move to batch manufacture removing the peaks and troughs of the old “one off prototype” wiring process. Our financial strength and strong cash flow emanating from our commercial business together with cash positive structuring of major contracts has increased our ability to maximise profit and cash.
Naval procurement
The entire structure of Naval procurement has changed over the last 25 years. In the days of the Type 23 Frigate the equipment was designed under close MoD supervision driven by the various Marine Engineering (ME) Sections at Foxhill, near Bath. Design control was down to component level and once equipment was defined to the shipbuilder there was little room for the latter to negotiate on price. Profitable Integrated Logistics Support (ILS) work was, at our level at least, delegated to a myriad of sub-contractors and “book-writers”. Manufacture and limited spares support was the essential source of profit. With substantial vessel builds (Type 23 stretching to 15 vessels) these were indeed golden years. Along with these came the Sandown Mine Hunters to say nothing of the Vanguard Submarines as well as Landing Platform Helicopter and the Landing Platform Docks.
By the early 1990’s things were changing. The MoD was no longer defining what equipment was put on their ships. Shipbuilders had become Prime Contractors and the whole basis of the SME’s existence changed. While the MoD still defined some of the more vital systems, the Prime Contractor was charged with providing a vessel at a price against a specific performance requirement. Our equipment was now specified and chosen by the Prime Contractor with all the pricing pressures that involved.
In the early stages of this seismic shift small businesses suffered since the Prime Contractor used to ILS documentation from the MoD expected that flow of information to continue. While the MoD had paid subcontractors to provide this, the supplier was now expected to take on this burden – initially without payment. This new burden upon engineering resource was costly and disruptive, generating pressure on profit margins at the very same time as the customer placed pricing pressure upon acquisition costs. In time, however, the additional burden became a blessing as much Engineering activity – handbooks, spares lists, reliability and maintainability data and training courses became chargeable. The effect of an Engineering overhead generating revenue and profit changes the balance of the business and went some way to addressing the pressure on equipment prices. The speed with which small businesses recognised these changes and adapted to them determined their ability to survive and then grow. Many did not survive.
Business survival
The key was to recognise the full implications of the changes that the business need to make. The old system of “allowed” levels of profit on top of a generous overhead recovery structure was replaced by commercial competition. To survive businesses had to move away from a defined level of profit and recognise that they were in a competitive environment.
The old model was that the selling price was the estimated cost to produce plus the desired level of profit.
So Cost + Profit = Price
Businesses needed to understand that price was determined by the market and move to the “Toyota” model so:
Price – Cost = Profit
The only way to make a profit (other than through innovation) was a steady reduction in cost
This was achieved by restructuring Contracts and cash flow to allow optimum batch builds for the manufacturer’s benefit rather than building to meet specific delivery dates. Equipment was designed to utilise as many common modules as possible – thus increasing the size of manufacturing batches. For the customer it simplified and streamlined the holding of spares while simplifying on board repairs. Again with common spares batch building became the norm.
Two further developments sustained the SME. As the Prime Contractor moved into the main procurement role, additional layers of procurement emerged. In the 1980’s design was against a procurement specification and often the supplier had no real visibility of the application. As the procurement emphasis changed, supply was frequently to a system manufacturer rather than to the shipbuilder. For the final buyer (the MoD) this created another layer of profit inflating the end cost. For the SME it provided the security of “design in” and the knowledge that (as long as the equipment worked) every time the system supplier picked up another Contract then second or third tier supply would follow.
The same underwriting of design came with the UK shipbuilders reacting to overseas demand in the 1990’s and 2000’s. As a niche supplier we found ourselves designed into UK built vessels for Oman and Qatar as well as Malaysia. When the Spanish shipbuilder Bazan (now Navantia) built Cazaminas mine hunters based upon the UK “Sandown” Class we were able to transfer supply of much of the power conversion equipment to Spain. And we had already benefited from this sort of transfer through the sale of the “Sandown” Class to Saudi Arabia.
Once close contact had been established with Spain it was a logical development to offer equipment to their F-100 Frigates. Once that supply had been established we were able to leverage our products as Navantia successfully marketed their vessels internationally so that we are currently supplying to Australia for their “Hobart” Class based upon the Navantia design.
Small businesses such as Gresham can benefit from their size providing that that they have the flexibility to recognise change and to adapt quickly and positively. There is much equipment in service littered with the names of those who failed to do so.
