Case Of Co-production Research Articles

On the Separation of Production from the Developer

THIS paper is an attempt to present and test a model which allows one to estimate the costs of transferring production from the developer to some other producer and the optimal time for this separation. This topic has been discussed so frequently and is so familiar in R & D circles that it hardly seems worthwhile to provide a rationale for the motivation of this study.' However, for those who are not recent travelers in R & D circles, a brief explanation is offered as to why the feasibility of separating development from production is an interesting subject. At present the major weapon procurers, the Department of Defense, the army, the navy, and the air force, believe that from an economic viewpoint separation is infeasible. The reason is that the customer feels that he has such a large investment in facilities and the development contractors have acquired so much engineering and production experience that the cost of seeking a new source of production would be prohibitive. This attitude on the part of the customers of course precludes competition in the production phase of a weapon system program and all the benefits of such competition. There is a question as to whether or not separation is truly infeasible. The costs of separation have never been satisfactorily measured. Furthermore, while the Department of Defense and the several branches of the armed services profess the infeasibility of separation, they often inconsistently award the development contract to one firm and then present some or all of the production run to another firm. In several instances, a development contract was awarded to a government arsenal and the ensuing production run to a civilian company. More important for our purpose are those situations in which the customer switched some production from the developer who was also a potential producer to a new producer. Only in such cases can one fruitfully discuss the cost of switching production from the developer to a new firm. These cases which are few in number fall under the title of co-production. Co-production is a term used to denote the situation in which the developer continues production while another firm is brought in as a second production source. Though co-production does not represent a case of separation in the strict sense of the word, data from such cases of co-production can be used to measure the costs of a possible * Any views expressed in this paper are those of the author. They should not be interpreted as reflecting the views of The RAND Corporation or the official opinion or policy of any of its governmental or private research sponsors. This paper benefited from the comments of Noel Edelson, T. K. Glennan, Jr., and Richard R. Nelson.