Real Options Valuation in the Design of Future Surface Combatants: Modular Payloads on LCS Freedom and Independence and San Antonio Classes with Standard Interfaces and Planned Access Routes

This report has been professionally converted for accurate flowing-text e-book format reproduction. In a rapidly evolving world, the U.S. Navy must build an affordable, sustainable fleet of surface combatants that is capable of keeping pace with any threat. This can only be accomplished with a highly sophisticated fleet of reconfigurable vessels capable of meeting their service-life expectancy of 40 years. Modular Adaptable Ship (MAS) designs that include flexibility, decoupled payloads from the platform, standard interfaces, planned access routes, and growth margin for future technological advances present a viable option for the U.S. Navy. If the design approach to future surface combatants incorporates the use of Real Options Valuation (ROV) within the Integrated Risk Management (IRM) framework to account for unknown risk at the time of design, a reasonable portfolio of design options can be presented throughout the various stages of production. From our examination of the use of modular payloads on the Freedom (LCS-1) and Independence (LCS-2) classes and the planned access routes and growth margin for modernization on the San Antonio (LPD-17) class, a strong case can be made that a surface combatant designed with flexibility and adaptability would afford benefits, ultimately, to all entities within the Department of Defense.

This thesis examined the effects of a modular approach to designing and building flexible and adaptable ships on cost and value by looking at two case studies. Case Study 1 examined the cost- and time-saving benefits of designing a surface combatant with weapons modules as compared to a structurally integral weapons payload. The original missile module for LCS was the U.S. Army's XM-501 Non-Line-of-Sight (NLOS). When the program was canceled in 2010, LCS was left without a missile module. The benefit of a modular design allowed LCS to continue production while an alternate missile module was developed in parallel. Case Study 2 examined the long-term cost-saving benefits of having reserved weight and space for the future installation of the MK-41 VLS on the San Antonio class (LPD-17). LPD-17 through LPD-27 have trunk access and cooling requirements already in place for future installation, whereas LPD-28 will have weight and space reserved for VLS but will not install integration capabilities during production. Additionally, Case Study 2 reviewed the benefits of having designed one large main passageway that allows for ease of maintenance, troop movements, and technological upgrades.

Chapter II focuses on the current status of the Danish, German, French, Italian, Australian, and American navies with regards to their fleets of modular, flexible, and adaptable ships. The Danish, German, French, Italian, and Australian navies are constrained by smaller defense budgets and produce significantly smaller surface combatant fleets in comparison to the United States. By building modular and flexible vessels, these countries have been able to sustain operations in blue waters around the world with sophisticated and technologically advanced platforms that are capable of evolving with the threat with a smaller number of vessels. Cross-platform commonality with respect to weapons modules and the ability to rapidly change mission are essential design elements for these navies. Additionally, these navies recognize the advantage to leaving growth margin to rapidly integrate new technology as it becomes available.

Chapter III highlights the current problems within the U.S. Navy's approach to ship design of surface combatants. With current platforms losing 1015 years of their service-life expectancy and incurring rising maintenance costs, the U.S. Navy needs to look at other ship design models. One alternative design model incorporates the use of modularity and flexibility to ensure surface combatants can maintain combat relevancy throughout their life cycle.