The U.S. Air Force, faced with an aging aircraft fleet, is turning to 3D printing to dramatically cut down the time and cost of manufacturing spare parts. Travis Air Base, located in California, is printing toilet seat covers, cutting the time it takes to field the new parts from a year to less than two days.
That was from the article, “The USAF’s First Certified 3D-Printed Part Is a Toilet Seat Cover.” This news is actually about a year old. But don’t get too excited. The recurring direct cost of the toilet seat is $300, while the total burdened cost is $10,000. Senator Chuck Grassley seems to have started the outcry on the DOD spending $10 grand on the toilet seat cover.
Dr. Will Roper, the current Assistant Secretary of the Air Force for Acquisition, Technology and Logistics, confirmed that “the price to buy a new” 3D-printed toilet seat cover used in a C-17 cargo plane “is $10,000.” Though the cost to print one toilet seat cover is $300, the total price tag to taxpayers is $10,000 due to unnecessary process costs…
This disturbing report comes nearly four decades after a similar report came to light during the Reagan administration, in which the Defense Department spent $640 on a C-5 toilet seat.
Note that the $640 toilet seat cover for the C-5A was a maor scandal in the 1980s. If we start with that high base of $640 in the mid-1980s, then we arrive at a nominal growth rate of about 8 percent annually over 35 years. That seems to be in line with the growth rate of prices for most defense goods. But it says nothing about the level of spending, which was crazy to begin with.
However, if the toilet seat costs come down to their marginal cost of $300 due to additive manufacturing, then we would have bent the cost curve, representing a negative 2 percent growth (decay) over 35 years. And we should also consider the time component, from 2 years to 2 days of lead time to field the item. That increase in optionality is valuable in of itself.
A major issue here is one that the DOD has yet to grapple with. Direct costs in the real world are falling relative to total costs incurred. But DOD officials want to keep contractor overhead rates low, which the contractors respond by shifting costs around rather than decreasing total costs. So in defense contracts, objects of expenditure that look like indirect/overhead costs get charged directly to the contract.
Grassley finds the overhead costs “unnecessary process costs.” It isn’t clear that the costs are unnecessary, or totally attributable to processing and distribution as implied. It could be reimbursing substantial fixed costs spent upfront on the 3D printer.
In the regular economy, with the production of intangible assets like software, additive manufacturing, etc., the overhead costs are literally the whole business. The costs associated with the 3D printing machine and other capital expenditures, training, organization, etc., were fixed and upfront. The marginal cost of reproduction is negligible compared to this start up cost. So businesses in the 21st century are mostly about recovery of historical cost choices rather than marginal recurring costs.
In this toilet seat case, the overhead charges were 3,233% on top of the $300 diret charge to get $10,000. (Note, this is actually a wrap rate because it is “fully burdened,” ‘including all indirect costs like fringe, overhead, G&A, FCCM).
You’ll never see a 3.2 thousand percent overhead rate being negotiated with DCMA, because that would force you to ask, what costs is this rate absorbing? Was that recovery of the R&D and indirects only for the toilet seat? What if I bought a hundred or a thousand toilet seats, would the overhead rate stay at 3,233 percent per unit?
Remember, the overhead rate is common costs with the rest of the business (or cost pool). A 3D printer can with low expense be reprogrammed to produce other spares and repairs. What other operations are going on that will later benefit the DOD? And will the rates come down significantly later on to reflect that upfront cost reimbursement?
In other words, is the toilet seat cover absorbing massive amounts of common costs that will contribute to future production of different items? If it were, then future prices will be closer to $300 than $10,000.
But I suppose that depends on the type of financing. If the DOD paid for start up costs separately through R&D, then it the price should be closer to $300 now and into the future. If the start up was financed privately, then the costs should have been spread move evenly over time. Lyft, for example, still doesn’t expect to be profitable until (hopefully) 2021. But then again, DOD contractors always have quick access to full reimbursement.
Hopefully this discussion shows that the price of goods and services resulting from intangible assets is highly abstract. One has to know the particulars of the operations, financing, future products, consumer demand, network effects, and cost recovery. Usually in the market this is worked out in real time with prices emerging rather than being worked out ahead of time with the single (monopsonist) customer.
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