Charting a new course: The untapped potential of American shipyards

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American shipbuilding has reached a critical inflection point—can supply keep up with demand? The US Navy, the industry’s principal customer, increased its shipbuilding budget by 12.5 percent per year from fiscal year 2020 to fiscal year 2024, and its most recent 30-year plan calls for the construction of 290 to 340 new ships by 2053.1 Beyond this domestic demand, there is additional demand to meet the anticipated needs of the AUKUS nuclear submarine partnership among the Australian, US, and UK defense agencies.2 Meanwhile, overall shipbuilding production has fallen to historic lows largely because of the decline in commercial production: US shipbuilding output has decreased by more than 85 percent since the 1950s, while the number of American shipyards capable of building large vessels has fallen by more than 80 percent.3

Shipyards, once the backbone of flourishing communities, now face myriad challenges—from talent gaps to outdated operating models—that threaten their ability to grow and thrive. The US has gone from building 5.0 percent of the world’s ocean-going commercial ships in the 1970s to building about 0.2 percent today, as measured by gross tonnage. Conversely, China, Japan, and South Korea now combine for more than 90 percent of global commercial shipbuilding.4

Increasing output quickly and efficiently is the greatest challenge currently facing American shipyards. But despite the obstacles, there is reason for optimism: the industry does not have to start from scratch. The United States has substantial latent shipbuilding, sustainment, and repair capacity, including aging but not obsolete capital assets, a strong base of potential skilled-trade labor, and a middle-management and engineering talent base that has become geographically separated from shipyards. Rapidly increasing output requires tapping into this latent capacity quickly and confidently.

To do so, shipbuilders and suppliers can prioritize five focused interventions:

  • rebuild the workforce from the frontline through middle management to the next generation of leaders
  • reenergize the existing shipyard footprint to bolster near-term capacity
  • modernize digital systems and tools, focusing first on low-hanging, high-ROI opportunities
  • align the organization and culture around performance to create transparency and promote accountability
  • engage in strategic economic development to support long-term sustainability of the industry, the workforce, and the business

Rebuild the workforce

Despite strong demand for ships, talent supply has struggled to keep pace—especially as industry labor needs and jobs have evolved. Manufacturing is a prime example, as the industry is projected to shrink5 in response to factors such as high rates of retirement,6Navigating the gray-to-green transition in aerospace and defense,” McKinsey, March 16, 2023. pipeline slowdowns across key trades, and the strains of “pinchpoint” roles (those with a significant supply-and-demand imbalance, slow career progression, and risk of migration).7Tradespeople wanted: The need for critical trade skills in the US,” McKinsey, April 9, 2024. Some of the manufacturing areas most affected, such as primary metals and transportation equipment, will have a direct impact on maritime operations (Exhibit 1). At the same time, jobs in adjacent areas of manufacturing relevant to modern shipbuilding—including electrical equipment, appliances, and components—are projected to grow rapidly.

Key maritime manufacturing trades will be displaced by higher demand from battery and semiconductor production.

In addition to skilled-trade labor, gaps in other shipbuilding professions cannot be overlooked. Shipbuilding is as much about scheduling, production control, and critical chain management as it is about steel fabrication. In highly complex production and construction environments, talent gaps in the many production-support and -management functions that surround fabrication and construction can have an equally deleterious effect on output.

Shipbuilders that are winning this battle for talent are doubling down on creating a talent advantage, which requires immediately addressing two of the biggest levers of value:

  • Talent acquisition. Most shipbuilders have long relied on volume-based hiring, or hiring any available talent and training them up to proficiency. As competition has increased, so too has the importance of “quality of hire”—that is, attracting employees who cost less to acquire, are more likely to learn quickly, and are less likely to leave. To compete effectively in this new environment, shipbuilders should treat hiring as a science, not as an art. Shipbuilders’ ability to attract quality workers will be further tested as the US industrial base expands to meet the demands of the AUKUS partnership, which is expected to require an additional 100,000 workers across submarine yards nationwide.8 Those proactive in quality talent acquisition start by identifying the business outcomes they seek to achieve, use analytics to identify the markers of the employees who are most likely to propel those outcomes, and focus their hiring on candidates with those characteristics.
  • Talent retention. While past generations of shipbuilders typically stayed with one company for their entire careers, today’s employees—particularly those with valuable trade skills—face much lower barriers to switching employers.9Navigating the gray-to-green transition in aerospace and defense,” McKinsey, March 16, 2023. To augment traditional talent-retention techniques, employers are increasingly using analytics to understand not just where attrition has occurred but also what causes it, and using this insight to predict where attrition might come from in the future and take action. One US shipbuilder, for example, used analytics to reduce attrition by as much as two times in certain employee populations, resulting in significant annual cost avoidance and bottom-line impact.

Regardless of a company’s specific starting point and strategic goals, leaders will need to take clear, deliberate, and proactive actions to shape the company’s workforce and, in so doing, create a competitive talent advantage.

Reenergize the existing shipyard footprint

Many US shipyards have been in service for decades, with some infrastructure dating back to the World War II era or even earlier. Despite their age, domestic shipyards still have a great deal of life: the existence of robust ecosystems for sustainment and repair have allowed them to remain functional and relevant, though often in need of targeted operational and productivity improvements.

To better address the challenges faced by aging shipyards and unlock their full potential, maritime leaders must understand the dynamic and intersecting production value streams in the yard and systematically address both structural and transient bottlenecks. More acutely than many other industries, shipyards face large, shifting bottlenecks that are difficult to eliminate, resulting in bottom-quartile overall equipment effectiveness (OEE) and labor productivity relative to other sectors. Indeed, a small bottleneck in one shop can have a yardwide ripple effect, leaving assets idle and labor waiting.

The silver lining to these challenges is that the ceiling of performance is much higher than most yards currently experience. By focusing on the right bottlenecks in the value stream, shipyards can unlock outsize throughput quickly and cost-effectively.

Two levers can help shipbuilders get the most out of their existing footprints:

  • Lean improvements. Lean initiatives are the fastest, most cost-effective way to drive a step change in throughput, rebuild a performance culture, and reveal structural bottlenecks in a matter of months by driving out deeply rooted waste. But effectively deploying lean principles in highly complex systems such as shipyards can be challenging.

    Shipyards that do this well focus on reducing complexity, improving operational discipline, and building operating systems focused on cross-functional execution and transparency. They develop a detailed understanding of the intersecting value streams throughout the shipyard, eliminate barriers to the flow of material through the value stream, and improve the cross-functional coordination needed to support flow through service-level agreements and enhanced daily execution routines. And the impact is well worth the effort: one US shipbuilder used this high-complexity lean approach to double throughput and compress cycle times by more than 40 percent in a bottleneck facility in less than six months.10Why flow matters most in highly complex manufacturing,” McKinsey, May 3, 2024.

  • Targeted capital investments essential to core business operations. Where structural bottlenecks emerge and a lean approach is not enough on its own, targeted capital investments that prioritize the most restrictive issues may be needed to improve throughput. However, because of their complexity, shipbuilders are at an elevated risk of sinking millions of dollars into ineffective capacity expansions. Two common pitfalls include expanding capacity where it’s not needed and replicating unproductive operating systems in new facilities.

    To avoid these expensive mistakes, shipyards should ask two questions when deciding whether and where to invest in new capacity: are new capital investments targeting current or future bottlenecks on the critical path of production? And are we currently reaching the full potential of our existing capacity? When asset and labor utilization are at capacity, and output is still failing to meet demand, yard leaders can be confident they will fill new capacity with a high-performing operation and experience its benefits.

Modernize digital systems and tools

Transparency motivates performance, but creating transparency into daily shipyard execution is notoriously difficult. A primary reason for the obscurity is often a lack of digital integration among various systems, metrics, and departments within the yard. Operating-system fragmentation can lead to delays, miscommunication, and inefficiencies that ultimately affect the shipyard's overall performance.

For example, at one shipyard, a disconnect between the data sets used by the industrial engineering team and the planning team resulted in two different production schedules. Unclear on which to follow, the production team created a third. Resolving these disconnects through targeted digital interventions can be “quick wins”: another US shipyard proactively addressed a disconnect in schedules and metrics by digitally linking its downstream demand signal to production targets, updated its delivery metrics to match, and built dashboards to track performance.

To achieve substantial near-term improvements in transparency and performance, shipbuilders don't necessarily need the latest and most expensive automation or digital twins—yet. While these advanced technologies can take a production system from good to great, they may be inaccessible without the foundation of an already mature and digitally connected operating system. To accelerate digital maturity and maximize near-term benefit, shipyards can take four immediate and accessible steps that close information gaps, create digital transparency, and enable the benefits of cutting-edge technology:

  • Digital engineering. Design-to-manufacturing tools and digital engineering solutions offer powerful ways to improve quality, shorten development cycles, reduce rework, and streamline production. Moreover, they accelerate the learning curve, enabling more-transparent feedback between production and engineering, robust issue documentation, and improvements from hull to hull.
  • Digital supplier management. Shipbuilding requires highly synchronized parallel work, and any disruptions can quickly evolve into delays and cost overruns by throwing the sequence of work out of balance. Supply chain management is crucial because delays to the start of the sequence can be particularly disruptive. Creating digital early-warning systems to transparently map supplier risk can signal issues before they become delays, enabling proactive intervention.
  • Digital performance management. Digital tools can also bring transparency to shipyard performance. By cascading dynamic cost and schedule targets into weekly, daily, and shift-by-shift requirements, performance management dashboards can simplify daily planning, allow shop leaders to identify issues quickly, and promote informed problem solving across functions and teams.
  • Digital value stream management. A pervasive challenge in shipyards is knowing what work to prioritize when, to provide the most global benefit to the interconnected shipyard—all while managing constant supply chain and operational disruptions. An integrated digital thread of the value stream can create transparency into the trade-offs and constraints faced by each shop, facilitating productive decision making across the yard.

Targeted improvements can often be implemented in a matter of weeks or months, rather than the years-long timelines associated with more complex digital transformations. The key is parallel processing: in addition to long-term investments, shipyards can focus on areas where a lack of transparency and integration is causing the most pain and inefficiency, and then implement targeted solutions to address those specific problems. Effective digital adoption requires harnessing the existing workforce’s extensive experience while also adapting to new technologies and processes. By taking a high-velocity, high-ROI approach to process improvement, shipbuilders can achieve significant gains in performance and productivity while laying the foundations for the next generation of digital innovation.

Align the organization and culture around performance

Shipyards have a clear purpose: to build, sustain, and repair high-quality ships quickly and efficiently. However, this clarity of mission has been challenged by decades of boom-to-bust cycles, frequent shipyard acquisitions and sales, and the increasingly technical demands of the latest advanced ships. Together, these forces have inadvertently created a complicated organizational system of functional silos that hinder efficiency and collaboration.

McKinsey research shows that shipbuilders are plagued by legacy norms around slow and siloed decision making, with a 30 percent gap in perceived speed of decision making compared with other sectors.11 Further complicating organizational ways of working and effectiveness is a culture that lags behind: 70 percent of advanced industrial companies, including shipbuilders, have lower organizational health scores than the global median (Exhibit 2). McKinsey research has found that the healthiest companies deliver three times the TSR of unhealthy organizations, regardless of industry.12Organizational health is (still) the key to long-term performance,” McKinsey, February 12, 2024. Moreover, employees of healthy organizations are about 50 percent more likely to continue working there and 36 percent more likely to endorse their organization to friends and relatives.13

Seventy percent of advanced industrial companies, including shipbuilders, have lower organizational health scores than the global median.

A key issue is that organizational metrics often fail to align with the overarching goals of delivering flawless ships on time and on budget. This disconnect can lead to conflicting priorities and a lack of clarity about what truly matters for the success of the shipyard as a whole.

But shipbuilders can break free of these counterproductive ways of working and inject speed into their operations by ensuring that the organizational structure is clearly set up around sources of value and by resetting the culture to focus on value, accountability, safety, and speed. For instance, some shipbuilders are revisiting how they are organized, questioning legacy norms, and embracing new ways of working. They have dedicated functional resources to product lines or facilities while maintaining functional excellence through dotted-line authority to ensure that each program receives the support it needs to meet its delivery goals. In addition, they have publicly committed to targets and then cascaded their goals out to the front line to ensure the entire shipyard is pulling in the same direction.

Crucially, resetting culture requires setting behavioral aspirations for how the place should be run, understanding current behaviors, and designing targeted interventions to shift behaviors toward the aspiration, often by addressing the underlying mindsets. This helps to create a clear vision for what “good” looks like and allows every employee to participate.

Engage in strategic economic development

Revitalizing the shipbuilding industrial base in the United States requires a collaborative effort between shipyards, suppliers, communities, government, and others. Strategic investments in centers of excellence, which themselves are strategically located near shipyard communities, can foster the development of skilled trades, engineering, and management talent.

Key coastal locations across New England, Hampton Roads, and the Gulf and West Coasts will benefit from bold and innovative private and public investments to kick-start shipbuilding and sustainment ecosystems. These investments should focus on attracting and growing the various components necessary for effective shipbuilding, including a local supply base, a talented workforce, and educational institutions that produce skilled workers. This collaboration is particularly important in maritime communities, where shipyards are often the largest employers and have been the backbone of the community for generations.

Some regions are leading the charge in addressing vast hiring needs. For example, one workforce development council in the eastern United States is on track to increase job placements in skilled trades by more than 30 percent without any additional funding by using historical ROI analytics to rebalance its portfolio of workforce initiatives.14Tradespeople wanted: The need for critical trade skills in the US,” McKinsey, April 9, 2024. Shipyards can also take inspiration from other industries by increasing their focus on nonfinancial factors that affect employee health and outcomes, including flexibility, purpose, learning, and belonging.15Working nine to thrive,” McKinsey Health Institute, March 13, 2024. For example, when a Land O’Lakes manufacturing plant offered flexible shift schedules for some part-time workers, it tapped into a key employee priority and saw both an influx of applicants and an uptick in productivity.16 While the right solutions for a given shipbuilder may look different, the core takeaway remains: widening the aperture on what drives employee well-being can result in stronger, more productive, and more sustainable economic outcomes.

What’s more, key stakeholders are modeling a proactive approach to supplier constraints by developing upstream partnerships to increase transparency, reduce fragmentation, and mitigate cybersecurity risks. For example, supplier health is a key priority for the AUKUS nuclear submarine partnership. Roughly 200 suppliers have received grants to increase capacity, automate processes, and ensure efficiency to meet increased demand for new ships, with additional funding expected in anticipation of repair spikes.17 Investing in the capabilities, security, and transparency of the shipbuilding, sustainment, and repair industrial base is critical both to meet current delivery requirements and to position the industry for efficient future growth.

The American shipbuilding industry is in need of repair. Fortunately, the industrial base already has many of the ingredients for success. Industry leaders can accelerate growth by leveraging latent capacity, but the window to do so is closing fast. The trades gap is widening as fast-growing industries that compete for similar entry-level talent (such as Amazon and Uber) beckon with higher wages and easier lifestyles, college-educated talent gravitates toward tech and the allure of AI, and existing shipyards continue to age. With a few bold strategic moves, shipbuilders can dramatically increase the performance of existing yards while strategically positioning new capacity to prepare for the demands of the next age of shipbuilding.

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