This testimony before congress by Franklin C Spinney is quite illuminating. Obama is right - the biggest opportunity for cost reduction is in the big ticket weapons systems. As mentioned, there a political costs do doing this given DoD's propensity for what Spinney calls "front loading" of costs:
Front loading is the art of planting seed money today while downplaying the future consequences of a decision to spend that money. While it takes many forms, the most well known form is the so-called “Milestone II Buy-In,” a deliberately “low-balled” estimate of future costs made to obtain a Milestone II approval in a weapons acquisition program. A Milestone II approval is crucially important, because it allows an acquisition program to move into concurrent engineering and manufacturing development (EMD). Once EMD is approved, the defense contractor can begin to “invest” contract dollars (i.e., tax dollars) in building a geographically distributed production base as well as a nationwide network of suppliers. The EMD decision, in effect, gives the contractor permission to use public money to build his political protection network by systematically spreading subcontracts and production facilities to as many congressional districts as possible. This spreading operation is the second step in the gaming strategy and is known as political engineering.
The goal is to raise the political stakes before the true costs of the front-loaded program become apparent. By the time these costs emerge, as they clearly did in the case of the F-18, the series of sequential adjustments in the succession FYDPs have bought enough time and desensitized decision makers to the effects of additional production cutbacks, while the political cost of a fundamental redirection (i.e., termination) has become prohibitive. So, decision-makers on both sides of the Potomac take the easy way out: they cut back production rates to reduce total costs in order to protect the jobs and profits of their constituents. Viewed in the context of the defense power games, production stretch-outs, like those in Side 3, were a predictable, indeed inevitable, consequence of a decision to front load the F-18 into the budget in the late 1970s and early 1980s.
While these power games may work to get programs started in the short term, they create a brain lock that produces a vicious cycle of decay over the long term.
Anyway, the whole thing is worth a read when you have the time. I do fear gdnp is right though - its sad that its almost politically impossible to talk as Spinney does here for fear of being tarred as "soft on defense" - well, isn't advocating for the status quo "soft on defense" if it leads to a "vicious cycle of decay" and bloat that mis-aligns America's spending with the strategic environment?
One more part worth quoting:
How might we begin to better rationalize this situation in terms of real needs?
Perhaps a couple of examples will help place this question into perspective. The first relates to the Royal Navy and the second relates to Israel. In the late Nineteenth Century, the Royal Navy also bestrode the world’s oceans like a colossus when compared to other Navies, but, it should be noted, to a lesser extent than the U.S. military relates to the rest of world’s conventional forces today. Strategic planners in the Royal Navy adopted what came to be known as the Two Power Standard to maintain their superiority. They used this standard to plan for the Royal Navy’s budgets, particularly its battleship modernization program. The Two Power Standard simply meant that the Royal Navy should maintain a battleship fleet that was at least as powerful as the next two biggest fleets combined, which were those of United States and Germany. Note that this standard was applied to friend as well as foe. If we applied the logic of this standard to the current U.S. defense budget, the next two biggest spenders would be Russia and China (about $102B total). So, a Two Power Standard applied to the United States defense budget would reduce the current budget by over 70 percent.
A second example illustrating the judgment of how much spending is enough is the case of Israel. Israel faces direct strategic threats from Iraq and Syria but also has to consider the potential threats posed by organized military capabilities of Jordan, Egypt, Iran, Libya, and Saudi Arabia in its strategic planning (for the purpose of illustrating this point, we can neglect the additional capabilities of any other Arab Counties, like Kuwait or the UAE, etc.). If Israel applied the Royal Navy’s standard to the defense budgets of the above listed adversaries, we could say that Israel maintains a One-Quarter Power Standard. Nevertheless, few doubt Israel’s capability to defend itself with its conventional forces in a Second/Third Generation war (like that of 1967 or 1973) against these nations. On the other hand, Intifada I, the debacle in Lebanon, and the ongoing Intifada II, all raise serious questions about the capability of Israel’s military to defeat the threats posed by a Fourth Generation adversary. But these Fourth Generation threats, serious as they may be, are hardly related to relative size of the defense budgets of Israel, let alone the United States.
Some might be tempted to argue that a One Quarter Power Standard by Israel is misleading, because Israeli spending is far more efficient than its adversaries. This is true, no doubt. But this argument is a double edged sword, because it would also apply to the Twenty Power Standard of the United States, in effect making the overwhelming nature of that comparison even larger, particularly when applied against the likes of Iraq, Iran, or North Korea.
Our military exists to cope with the real threats to our nation’s security. But the bulk of U.S. spending is directed toward maintaining and modernizing its second and third generation military capabilities left over from the Cold War with a modern equivalent of a twenty-power standard.
Another good resource (and where I found this testimony) is
Rose Colored Glasses, a blog started by a vet and devoted to military procurement issues. There is an excellent (and lengthy) pdf called "Odyssey of Armaments" which describes the procurement process from an insider with decades of experience at different companies involved in the MIC. Well worth an email request as mentioned in the sidebar of the blog...
No, not asking for the Million, prudent planning is always worst case. 
