Huntington Ingalls – Transforming the Shipyard

The largest military shipbuilding company in the United States is beginning its digital upgrade

 “Today, we are starting to reinvent ourselves so that we are here for the next 130 years,” Matt Mulherin, President, Newport News Shipbuilding

Background

Founded over 131 years ago, Huntington Ingalls is the largest military shipbuilding company in the United States. The company is solely responsible for the construction of the Navy’s aircraft carriers, amphibious ships, and the Coast Guard’s National Security Cutters, and is one of two defense firms that constructs submarines and destroyers. Operating one division as Newport News Shipbuilding in Virginia and another division as Ingalls Shipbuilding in Mississippi, Huntington Ingalls is the largest industrial employer in these two states.[1] The firm became a public company following a spin-off from Northrop Grumman in 2011. Now, with its own shareholder base, independent balance sheet, and highly concentrated revenue stream – 87% of its revenue comes from the U.S. Navy – Huntington Ingalls faces new challenges. How can the company continue to construct the most complicated ships ever built – on time and under budget – and maintain the enormous level of employment across many states, and still provide adequate returns to its shareholders? Many within the Newport News Shipbuilding Division believe that digital innovation is the answer. I provide below an example of a digital effort by the Newport News Shipbuilding Division and offer my opinion as to how financial, cultural, and Navy/government-induced pressure may impact Huntington Ingalls’ attempt to complete an effective, company-wide digital transformation in the future.

As an aside, I have never worked for Huntington Ingalls, but I did serve on a U.S. Navy submarine and therefore decided to research the digital transformation efforts of one of these shipbuilding companies, as their fine product kept us safe underwater.

 

An Example of a Current Challenge at the Shipyard

A presentation by the Newport News Shipbuilding Division of Huntington Ingalls describes the complex shipbuilding process as littered with inefficiencies stemming from de-centralized sources of paper drawings and instructions for production. Planning/Construction Supervisors are challenged with work sequencing coordination, while Production Foremen and Craftsman struggle with paper instructions, lacking a single point-of-access to all necessary information.[2] An engineer described the inefficient process, “The information that ‘the deck plate’ needs to do their job was scattered all over thousands of drawings… The information was all disjointed and time consuming to find.”[3] A non-destructive test inspector described the current inefficiency, “Right now, we all have to carry individual weld records, verify all this data, and input the same things over and over and over again.” Efficiency suffered, and frustration rose, but processes had been established and a paper-based culture was prevalent.

          

 

 

 

 

 

 

 

Path to 2020

In 2015, CEO Mike Petters expressed his vision for the next five years, entitled “Path to 2020.” Here, he laid out a commitment to, “strengthen and protect our core shipbuilding business with nearly $1.5 billion in generational capital investments…and to return substantially all free cash to shareholders with annual dividend increases of at least 10% and share repurchases.”[4] This commitment to increased capital investment provided a foundation for digital transformation, however, I included the financial commitment as I think it may prove contentious for the digital transformation below.

 

In 2016, Mr. Petters elaborated on his vision for the Path to 2020, as it related to the upcoming CVN-80 USS Enterprise design, “Most of the investment that we make in terms of research and development is really towards process. We’re not trying to invent a new kind of steel…So our thinking is, how do you digitize? How do you take advantage of the data that’s out there…so our workers can be more efficient and more effective? …Our ambition is that for CVN-80 there would be no paper drawings, there would be no two-dimensional drawings. It would all be tablets and three-dimensional representations.”[5]

 

In 2017, he further reported, “We…continue to make great progress on our “Path to 2020” business strategy: We invested more than $350 million in major capital projects in 2017, including … in integrated digital shipbuilding technology and training at both divisions. We increased our quarterly cash dividend from $0.60 per share to $0.72 per share in the fourth quarter of 2017… (and the Board approved) an increase in our share repurchase rogram from $1.2 billion to $2.2 billion…”[6] Huntington Ingalls further increased their CAPEX on upgrading ship facilities and digital innovation efforts following changes to the tax bill in 2017, including $100 million going towards digital shipbuilding technology at the Newport News Shipbuilding[7].

 

Integrated Digital Shipbuilding at Newport News Shipbuilding

The Newport News Shipbuilding Division began the digital transformation with a program entitled Integrated Digital Shipbuilding in 2016. An engineer explains, “Now, with Integrated Digital Shipbuilding, all our information (about the ship or ship’s system) is combined into one place and we have a single point of access, delivered digitally.”3  ­Newport News executives claim that the early implementation has proved very successful, though results on cost savings or quality improvements were not available. Mechanics are pleased with streamlined processes and testers receive their morning assignment with less time spent waiting for direction – work populates digitally on their tablets.[8]  Based on the available data, this appears to be a strong start to the transformation.

 

 

 

 

 

 

 

Challenges Going Forward

 

Financial Impact and the Path the 2020: As mentioned, management is seeking to return substantially all free cash flow to investors, through increased dividend and opportune share buy backs. This is not the best use capital. Huntington Ingalls reduce share repurchases and instead increase CAPEX towards digital capabilities. This will inevitably lower costs through higher quality work in the future. I fear that digital initiatives for industrial companies will cost multiples more than these firms initially estimate – as digital is not yet a core competency – and therefore in preparation, Huntington Ingalls should redistribute a significant fraction of the $1.0bn increase it has committed to share buybacks and spend it instead on digital initiatives, including training.

 

Leadership Buy-In: Jennifer Boykin, VP of Engineering and Design at Newport News Shipbuilding states, “Across the senior leadership team, there’s a really strong shared vision to transition to new integrated digital shipbuilding environment.” This needs to be the case across the firm, not in just one division. This tension, though, arises from the financial bullet above. It is difficult to determine how aligned Huntington Ingalls C-Suite and Ingalls Shipbuilding Division are in pursing this digital shift. My interpretation was Newport News Shipbuilding would lead the digital push and then lessons learned and best practices from the digital shift would be applied to Ingalls Shipbuilding. Huntington Ingalls corporate has also focused on expanding its services portfolio, in accordance with its Path to 2020, and spent ~$380 million to acquire Camber in November 2016[9]. To be safe, I would recommend that the Newport News Shipbuilding digital transformation be a focus and passion within the greater Huntington Ingalls C- Suite, ensuring that the push for digital is coming form both above and below. We’ve seen too many examples of digital transformations not receiving full leadership buy-in with less than favorable outcomes.

 

Employment and Training: The towns and region surrounding the shipyard depend on the shipyard for economic activity and employment, and the shipyards come to a standstill without the employees. Therefore, part of the funds that would’ve been used for share buybacks should go instead to training programs, perhaps in connection with local community colleges, for welders and testers, mechanics, nuclear workers, etc. to upgrade the skills of the workers for the increasingly digital job. This ensures that the schools educate for the correct set of skills for the available jobs.

 

Navy and Government Culture: Above all else, the shipyard, its employees, its leaders, the Navy, and the government all must be comfortable and with a cultural shift towards digital for this to work. The Navy is a notoriously bureaucratic entity especially when nuclear assets are involved. Because of the highly concentration revenue from the Navy, the speed with which digital transformation can occur within Huntington Ingalls may be limited by the comfort of its largest consumer. Educating both its largest customer (Navy/DoD) and its investors on this digital shift through aggressive Investor Relations and evidence of success is a great way to ensure that everyone understands the need for this transformation.

 

 

 

 

 

[1] Huntington Ingalls Industries. (2017). Bernstein Thirty Third Annual Strategic Decisions Conference Presentation. Retrieved from http://ir.huntingtoningalls.com/phoenix.zhtml?c=243052&p=irol-calendarpast

[2] Newport News Shipbuilding – A Division of Huntington Ingalls. (2017). Newport News Shipbuilding Digital Journey: Drawings to 4GD based Visual Instructions. NIST Conference, April 2017. Retrieved from https://www.nist.gov/sites/default/files/documents/2017/04/18/02_dorwart_nist-nns-2017.pdf

[3] Huntington Ingalls Industries (2016). Integrated Shipbuilding Video. Retrieved from http://nns.huntingtoningalls.com/employees/pub/watch/ids2015.html

[4] Huntington Ingalls Industries. (2016). 2015 Annual Report. Retrieved from http://ir.huntingtoningalls.com/phoenix.zhtml?c=243052&p=irol-reportsannual

[5] Eckstein, Megan. “Petters: Huntington Ingalls Pursuing Digital-Only Blueprints Amid Navy Innovation Push.” USNI News, 23 Feb. 2016, Retrieved from  http://news.usni.org/2016/02/23/petters-huntington-ingalls-pursuing-digital-only-blueprints-amid-navy-innovation-push

[6] Huntington Ingalls Industries. (2018). 2017 Annual Report. Retrieved from http://ir.huntingtoningalls.com/phoenix.zhtml?c=243052&p=irol-reportsannual

[7] Huntington Ingalls Industries (2017). Q4 2017 Huntington Ingalls Conference Call. Retrieved from https://edge.media-server.com/m6/p/5szmn6vh

[8] Huntington Ingalls Industries (2016). NNS Executives Talk About Integrated Digital Shipbuilding. Retrieved from http://nns.huntingtoningalls.com/employees/pub/watch/ids_execs.html

[9] Huntington Ingalls Industry (2016). Huntington Ingalls Industry to Acquire Camber Corporation and Establish a New Technical Solutions Segment. Retrieved from http://newsroom.huntingtoningalls.com/releases/huntington-ingalls-industries-to-acquire-camber-corporation-and-establish-new-technical-solutions-segment

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1 thought on “Huntington Ingalls – Transforming the Shipyard

  1. Thanks for sharing this blog on digital transformation in the defense industrial base. Many of the challenges you discussed mirror those faced by the Department of Defense. In addition to digitizing construction blueprints and work stream management, I wonder if there are other opportunities to for Huntington-Ingalls to digitally transform itself. I wonder if HI could shift to a subscription or outcome based model, similar to General Electric’s shift from equipment and service contracts to selling up time or performance. I’m also curious if HI has considered disrupting its underlying processes instead of just digitizing the current ones. Either way, I’m glad their submarines kept you safe and hope they can successfully make the transition to the digital age.

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