Staying afloat | Facing a potentially devastating gap in warship orders, Bath Iron Works banks on improving its efficiency

Anyone trying to divine the future of Bath Iron Works in the last year had his pick of apparently alarming indicators. In March, the Navy's assistant secretary for research, development and acquisition told Congress that keeping a new destroyer program on schedule was critical to the strength of shipbuilders like BIW. In August, the Navy's proposed five-year shipbuilding budget called for building just four ships in fiscal year 2006, half the number budgeted for 2005, prompting the American Shipbuilding Association to release a survey indicating that those cuts would create major layoffs at the country's biggest yards. Then, last month, BIW announced it was laying off 67 workers to help deal with what it called normal changes in its workforce needs during a long-term production cycle.

Concern over BIW's stability is understandable, since its 6,500 employees make the company Maine's second-largest employer. But as recently as 10 years ago, that figure was closer to 12,000, which helps make every blip in the Navy's budget or shift in the yard's employment level seem portentous. The problem is, those blips may actually distract people from the shipyard's most troubling issue.

During the next two years, BIW is facing an uncertain transition between building the Navy's current destroyer, which has sustained the company for nearly 20 years, and the next-generation model. BIW is scheduled to begin building the last of its DDG-51 destroyers in 2005, but due to delays in the new DD(X) program, it may not begin building the first of those ships until 2007 ˆ— creating a potential gap in its workload that could force the company to let go an undetermined number of workers.

Even when production starts, the Navy is expected to order fewer DD(X) destroyers than the 62 DDG-51s it has contracted for over the years, meaning fewer ships for BIW to build. Compounding that slowdown, new threats such as the war on terrorism and the insurgency in Iraq have left the U.S. Navy struggling to determine exactly what types of ships it needs, which in turn leaves suppliers like BIW in the dark about what other designs it may be bidding on in the future.

For BIW President Dugan Shipway, the way to deal with these uncertainties is to focus on the one thing he can control: the shipbuilding process in the BIW yard. Since taking over 18 months ago, Shipway has focused on making BIW a more efficient and cost-effective shipbuilder so it can survive a potential slowdown, and still compete for whatever new contracts the Navy may roll out in the future. "We have to be competitive in a low production environment, when we're not getting two ships a year," says Shipway. "It could be one ship a year, or maybe less. I can't predict what the environment is going to be like, but I know we must be ready for it."

The fact is, BIW currently is not the fastest or cheapest of the Navy's large warship builders, say shipbuilding analysts and BIW executives. It can cost BIW about $528 million to build a DDG destroyer, but Ingalls shipyard in Pascagoula, Miss., which also builds DDGs, can complete the job for about $492 million ˆ— $36 million, or seven percent, less, according to a 2002 Department of Defense contract. But the good news for BIW is that its parent company, General Dynamics, invested nearly $300 million in the late 1990s to modernize and streamline Bath's manufacturing process. Thanks to a new dry-dock and land-based construction system, among other upgrades, BIW says it already has reduced its costs and labor-hours to build DDGs, though Shipway declines to specify by how much for competitive reasons.

As small as individual improvements may be, their cumulative impact could decide BIW's fate. While some analysts say the Navy and the Congress would never allow BIW to wither and die ˆ— Congress could approve one more DDG destroyer to bridge the gap or some other stop-gap measure ˆ— other analysts, and BIW management, say that's a dangerous assumption. The number of U.S. shipyards building surface combatants like destroyers has declined from six shipyards in 1975 to just two today ˆ— BIW and Ingalls. "Most people would say you get stronger management and a better work culture from Bath than from the Gulf [coast] shipyard; the question is whether that will be enough to overcome the other challenges. There's a view within the Navy that there's no point in having competing shipyards when politics end up canceling out the price advantage," says Loren Thompson, who studies national security issues for the Lexington Institute, a public-policy think tank in Washington, D.C. "Anyone who thinks the Navy can't do without Bath doesn't understand the modern Navy."

From small changes, will big things one day come?
For its part, the Navy says BIW remains "a valued industry partner," but acknowledges that managing the DDG to DD(X) transition is critical to maintaining the Navy's industrial base. "Any assessment of the workload projections arising from the transition from DDG-51 to DD(X) production would be premature at this time," said Lt. Pauline Pimentel, a Navy spokeswoman. "We are confident we can manage the DDG-51 transition to DD(X) and maintain the viability of the surface combatant industrial base."

Still, during his career as a Navy officer and then as an executive with General Dynamics' Electric Boat submarine shipyard in Connecticut, Shipway has seen what can happen to shipbuilders when the Navy changes plans or lowers the demand for a certain type of ship. In the late 80s, Electric Boat expected to build 29 Seawolf submarines before the Navy began scaling back the program in the 1990s; Electric Boat ended up building only three Seawolfs, and employment at the yard fell from about 20,000 in the 1970s to about 7,000 in the mid-90s, before rebounding to 11,000 today.

BIW's biggest vulnerability is that it builds only one type of ship for the Navy, DDG destroyers. That means all of BIW's fixed overhead ˆ— including factors familiar to every Maine business, such as energy costs, health insurance payments, taxes and so on ˆ— must be accounted for in the price it charges the Navy to build DDGs. Ingalls, on the other hand, builds DDGs as well as two other types of Navy ship, allowing it to allocate overhead costs among several ship programs.

Having little influence over BIW's energy costs and other external factors helped tighten Shipway's focus on improving the shipbuilding process. That effort also got a fast start in 2001, before Shipway's tenure, when BIW opened a new land-level transfer facility and dry-dock launching system. The new infrastructure altered the way BIW completes the final stages of destroyer construction (see "How to build a warship," below), and eliminated the old, stern-first sliding launches that were dramatic but inefficient.

Building on an incline required BIW to launch ships when they were only 60% complete, before the weight of the ship risked damaging the hull as it slid into the water. But projects done on the water are the most expensive and time-consuming, because they require working and moving materials in tight confines. The new land-level transfer facility allows BIW to build larger individual segments that can be mostly finished and pieced together horizontally on land. Now, ships launched through the dry dock are about 85% complete.

Working with those infrastructure improvements, Shipway, BIW's union leaders and the employees in the yard are now involved in an ongoing process to adapt their techniques and develop new practices that further increase efficiency or cut costs. Since taking over in 2003, Shipway's main goal for BIW has been to reduce the number of labor hours it takes to build DDG destroyers to equal or better than Ingalls ˆ— which likely will mean dozens of small changes spread out along the production line. "Where [Shipway] can add value obviously is through-put in the yard," says Guy Stitt, president of AMI International, a naval analysis and advisory firm in Bremerton, Wash., adding that doing so is still "a formidable task."

Shipway has begun by calling on every employee to consider ways they could do their own jobs faster or cheaper, much like the team working on DDG sonar domes has done. For each of its last three outfitting jobs, the sonar dome team has implemented changes that include new job planning processes, a new jig that makes it easier to handle the dome's hundreds of transducers and new installation methods. They've also changed the staging setup and even improved ventilation to make working in the dome's tight confines more comfortable. The result has been a 35% reduction in the total labor hours over the past three domes.

The push for change may not always deliver improvements, though. Mike Keenan, president of Local S6, BIW's largest union, says that although there have been good ideas developed by the workers on the ground and adopted into the building process, other suggestions are ignored by managers. Other times, Keenan says, area supervisors' changes in workers' daily assignments, ostensibly made to improve efficiency, have backfired. "Managers are supposed to listen to employess and then do their job and follow through," says Keenan "But they only follow through on certain areas, and some [area supervisors] listen and some do not."

Shipway insists that enough changes already have been adopted that BIW's overall costs are "improving," but he declines to be more specific in order to keep Ingalls guessing about BIW's competitive position. As BIW gets set to deliver 11 more DDGs through the end of the decade, Shipway also says the yard is on track to show improvement he hopes will convince the Navy that BIW is an affordable choice for future projects. "The people who are buying ships want to see results, not just hope and unsubstantiated claims that we're doing better and better," says Shipway.

A need for flexibility
At the same time he's watching how efficiently BIW finishes the DDG program, Shipway also is looking for new projects to help keep the workforce busy in the future. Though BIW is part of the team developing a new, smaller vessel called a littoral combat ship, its partner, Australia-based Austal, will handle construction of the ships at its Alabama shipyard.

That leaves BIW waiting to see what additional Navy ship programs it could compete for in the future. That position is especially challenging, say analysts, because the Navy hasn't clearly defined what it believes its future needs will be. Though Chief of Naval Operations Admiral Vern Clark has said the Navy needs at least 375 ships to maintain an effective fleet, there are only about 300 ships in the fleet today. Moreover, requests for ships in approved programs like DD(X) have declined in recent years, as seen in the Navy's proposed six-year shipbuilding plan released in August. "The big problems in the shipbuilding sector are really beyond the ability of Bath's management to influence," says Thompson of the Lexington Institute. "They happen to be related to what kind of Navy we need and where the Navy wants to build its ships."

Though the Navy says its fleet strategy is spelled out in "Sea Power 21," a long-term organizational plan developed after Sept. 11, it also acknowledges there could be changes to that plan. "The Navy is always evaluating emerging threats and what forces will be required to defeat those threats," says Lt. Pimentel. "In order to help the Navy meet these threats in a cost-effective manner, our industry partners will need to continue to become more efficient, flexible and effective."

In the meantime, BIW remains interested in pursuing options such as building warships for foreign governments. Earlier this year, BIW looked into building small destroyers known as Corvettes for Israel, but Israel ultimately opted not to purchase any of the ships. And Shipway acknowledges that foreign contracts are likely to be rare, since foreign governments, like the U.S. government, prefer to spend the billions of tax dollars it takes to buy warships with domestic suppliers.

As for commercial shipbuilding, both BIW executives and industry analysts say to forget it. Worldwide commercial shipbuilding capacity greatly exceeds demand, and with Asian countries emerging as large shipbuilding centers, U.S. shipbuilders' labor costs are already uncompetitive.

That leaves the U.S. Navy as BIW's primary customer, underscoring the importance of politics in determining the shipyard's future. "I think Mr. Shipway's approach has got to be having the government or the Navy recommit to the industrial base. Right now, the indicators are there will not be enough programs to support the workforce," says Stitt of AMI International. "Bath's most important role over next year or two years is winning that battle on Capitol Hill and the Pentagon, not at the shipyard."

Sen. Susan Collins, who sits on the Senate Armed Services Committee, has been working throughout the year to try to counter short-term funding changes as well as solidify BIW's long-term viability. This summer, she helped put $88.4 million in accelerated DD(X) funding in the fiscal year 2005 Defense Appropriations bill to keep that program on schedule. "As a member of the Senate Armed Services Committee, I will continue to work to ensure that there is no gap in projects for BIW as the Navy transitions to a new generation of ships," said Collins in an e-mail statement. "I have worked closely with Dugan Shipway and stand ready to assist in any way possible, to maintain the future viability of the shipyard."

Shipway praises Collins and the rest of Maine's delegation for their support. But the accelerated funding coming in 2006 prevented the gap between DDG and DD(X) production from getting worse, says Dirk Lesko, BIW's director of strategic planning and communications. A gap still exists. And what happens next in Congress or with the Navy's five-year budget is, like energy prices and the cost of health insurance, out of BIW's control.

That brings Shipway back to his single-minded focus: making BIW as efficient as possible, whether those improvements help the shipyard land future contracts, give Maine's delegation more ammunition to lobby for advanced procurements or just ensure that BIW isn't forced to close entirely if production slows down. "My real challenge is to make sure the yard can continue to offer quality manufacturing jobs here in Maine," says Shipway. "The number [of jobs] may not be as high as it was five years ago, and it may not be the same number that we're at now. But whatever the number, they will be quality manufacturing jobs."