oversight

Defense Depot Maintenance: Challenges Facing DOD in Managing Working Capital Funds

Published by the Government Accountability Office on 1997-05-07.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Defense,
                          Committee on Appropriations,
                          U.S. Senate


For Release on Delivery
Expected at
10:00 a.m., EDT
                          DEFENSE DEPOT
Wednesday,
May 7, 1997               MAINTENANCE

                          Challenges Facing DOD in
                          Managing Working Capital
                          Funds
                          Statement of Henry L. Hinton, Jr., Assistant Comptroller
                          General, National Security and International Affairs
                          Division




GAO/T-NSIAD/AIMD-97-152
                        Mr. Chairman and Members of the Subcommittee:

                        We are pleased to be here today to discuss financial management and
                        logistics management issues relating to the effectiveness and efficiency of
                        the Department of Defense’s (DOD) operations. Specifically, we will focus
                        on the operations of DOD’s working capital funds, which collect and
                        disburse over $65 billion annually, and on DOD’s management of the
                        $13 billion depot maintenance program. It is important to note that these
                        areas fall within defense financial management and infrastructure
                        activities, 2 of the 24 areas we identified as high-risk areas within the
                        federal government.1

                        These issues have significant impact on the efficiency and effectiveness of
                        how DOD spends its operations and maintenance funds. DOD has
                        consistently experienced losses in the operations of various working
                        capital funds, including the depot maintenance activity group, and has had
                        to request additional funding to support their operations. This issue has
                        been an area of concern to this subcommittee and other congressional
                        committees. Before we get into specifics, let’s briefly summarize our key
                        points.


                        Our work on working capital funds cash management and operations
Working Capital         shows the following:
Funds’ Cash
Management and      •   To date, the working capital funds have not yet accomplished the goal of
                        operating on a break-even basis, and DOD estimates the funds will have an
Operations Issues       accumulated operating loss of about $1.7 billion at the end of fiscal year
                        1997. However, we believe that the funds have achieved a measure of
                        success because the services are doing a better job of identifying the costs
                        of doing business and including those costs in the prices charged
                        customers. Setting prices to recover more of the costs of providing goods
                        and services to customers gives managers a window into the costs of DOD
                        support operations—including costs for direct labor, material, overhead,
                        and contracts. With a more complete cost picture, managers can account
                        for past activities, manage current operations, and assess progress toward
                        planned objectives. Further, more accurate identification of costs enables
                        those responsible for providing oversight to make more informed policy
                        decisions by highlighting the cost associated with those decisions.


                        1
                         Defense Financial Management (GAO/HR-97-3, Feb. 1997) and Defense Infrastructure Management
                        (GAO/HR-97-7, Feb. 1997). In 1990, GAO began a special effort to report on the federal program areas
                        its work identified as high risk because of vulnerabilities to waste, fraud, abuse, and mismanagement.



                        Page 1                                  GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
                        •   When the Defense Business Operations Fund was established in 1991, DOD
                            consolidated the cash balances of the nine industrial and stock funds into
                            a single account that was managed centrally by the Office of the Secretary
                            of Defense (Comptroller). In February 1995, DOD devolved the
                            responsibility for cash management to the military services and DOD
                            components. We agree with DOD’s decision to place the responsibility for
                            managing the working capital funds’ cash at the military service and DOD
                            component level because it makes each individual DOD component directly
                            accountable for its respective cash balance as well as their decisions that
                            impact cash. Each DOD component now has an incentive to more
                            accurately price the goods and services that its working capital fund
                            charges customers since inaccurate prices could lead to not having
                            enough cash to cover day-to-day operating expenses.
                        •   Since 1993, the working capital funds have had a cash shortage. To ensure
                            that the cash balances remained positive, the funds have advance billed
                            their customers. While the three services have liquidated $3.6 billion of
                            outstanding advance billings from February 1995 to January 1997, the
                            outstanding advance billing balance is still $1.6 billion. Further, the Navy
                            and Air Force advance billed their customers about $2.9 billion during
                            calendar year 1996 to ensure that their cash balances remained positive.
                        •   Our analysis of the fiscal year 1998 prices for five business areas indicates
                            that they are probably too low to recover expected fiscal year 1998
                            operating costs and/or recover prior year losses by over $300 million.


                            Various factors contribute to inefficiencies in DOD’s management of depot
Challenges Facing           maintenance activities.
DOD in Improving the
Cost-Effectiveness of   •   Excess capacity—which is currently about 40 percent in DOD’s depot
                            maintenance system—is a significant contributor toward the inefficiency
Depot Maintenance           and high cost of DOD’s depot maintenance program and is generating
Operations                  significant losses in the depot maintenance activity group of the services’
                            working capital funds. The Navy has made the greatest progress in dealing
                            with excess capacity through its implementation of base realignment and
                            closure (BRAC) recommendations. Through consolidations, interservicing
                            actions, and outsourcing some noncore workloads, the Navy expects to
                            reduce its operating rate by about $10 per hour. Based on a forecast of
                            13 million direct labor hours for fiscal year 1999, the Navy expects to
                            produce a savings of about $130 million. However, the Army and the Air
                            Force’s plans for implementing BRAC recommendations will do little to
                            reduce excess capacity and will likely result in increased depot
                            maintenance prices.



                            Page 2                        GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
•   DOD has made overly optimistic assumptions about cost savings that can
    be achieved from outsourcing depot maintenance activities. When
    outsourcing results in increasing, rather than decreasing costs, expected
    depot maintenance savings will not be realized. To the extent projected
    savings were budgeted, losses will occur. For example,
    privatization-in-place of the Aerospace Guidance and Metrology Center
    was justified based on achieving savings. However, the Air Force projects
    that for 1997, costs in the privatized facility will be $9 million to
    $32 million more than the cost of the same work before privatization.
    Similarly, the Air Force is also projecting savings from planned
    competitions of workloads at two closing Air Logistics Centers. If the
    savings from these competitions are not achieved, a similar situation will
    occur.
•   Material cost increases are generating losses for the depot maintenance
    capital fund. Material costs represent about 40 percent of the Air Force
    depot maintenance costs and during the first half of fiscal year 1997,
    material costs for Air Force depots have been about $32.7 million, or
    5.4 percent higher than planned. Our work also shows that weaknesses in
    DOD’s inventory management system, such as inadequate visibility over
    items and purchasing of unneeded stocks, have contributed to rising
    material costs. In addition, inadequate control of government-furnished
    material to contractors has also led to losses in contract depot
    maintenance. For example, in April 1996, the Air Force Audit Agency
    found problems at Warner Robins Air Logistics Center with
    government-furnished property financial statement balances misstated by
    up to $2.3 billion.

    In conclusion, the inefficient operation of depot maintenance activities
    results in a reduction of the military services’ purchasing power through
    their operations and maintenance funds. Stated another way, more
    operations and maintenance funds will be required to perform the same
    level of maintenance. Depot maintenance privatization should be
    approached carefully, allowing for evaluation of economic, readiness, and
    statutory requirements that surround individual workloads. If not
    effectively managed, privatizing depot maintenance activities, including
    the downsizing of the remaining DOD depot infrastructure, could
    exacerbate existing capacity problems and the inefficiencies inherent in
    underutilization of depot maintenance capacity.

    In addition, other factors also impact the cost-effectiveness of depot
    maintenance operations. These include such things as inventory
    management practices, repair processes, and readiness requirements. We



    Page 3                       GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
have encouraged DOD to aggressively seek new management practices to
meet these challenges. To their credit, each of the military services have
programs underway to improve depot maintenance and other logistics
activities. While it is too early to assess the results of these programs, we
believe they are addressing several key problems, such as the reduction of
repair cycle time.

In closing, it is important to note that reducing depot maintenance cost
and improving depot maintenance efficiency are complex and challenging
tasks that are compounded by force structure downsizing. We have
presented some of the key factors that must be addressed and continue to
believe DOD should develop an overall plan for improving depot
maintenance efficiency and effectiveness that clearly defines how it will
deal with this set of complex issues.


Mr. Chairman, this completes the summary of issues contained in our
statement. Mr. Brock and Ms. Denman, as requested, will now provide
more details on these issues.




Page 4                        GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
Page 5   GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
Appendix I

Working Capital Cash and Operations
Management Issues

              The Department of Defense (DOD) established the Defense Business
              Operating Fund (DBOF) in 1991 in an attempt to fundamentally alter the
              way DOD managed its resources by fostering a more business-like culture
              within selected Defense operations, which include depot maintenance,
              transportation, supply management, and finance and accounting. DBOF
              consolidated the nine existing industrial and stock funds operated by the
              military services and DOD, as well as the Defense Finance and Accounting
              Service, the Defense Industrial Plant Equipment Service, the Defense
              Commissary Agency, the Defense Reutilization and Marketing Service, and
              the Defense Technical Information Service into a single financial structure.
              The military services and DOD components continue to be responsible for
              managing and operating business activities within the financial structure.

              On December 11, 1996, the Under Secretary of Defense (Comptroller)
              reorganized DBOF and created four working capital funds: Army, Navy, Air
              Force, and Defense-wide. This was done in order to clearly establish the
              military services and DOD components responsibilities for managing the
              functional and financial aspects of their respective business areas. The
              recently established working capital funds continue to operate the same
              way they did under DBOF.

              The primary goal of DBOF and the recently established working capital
              funds is to focus the attention of all levels of management on the total
              costs of carrying out certain critical DOD business operations and the
              management of those costs in order to encourage support organizations,
              such as depot maintenance facilities, to provide quality goods and services
              at the lowest costs. Focusing attention on costs is important, given the size
              of the working capital funds. For fiscal year 1998, the four funds are
              expected to generate about $69 billion in revenue and employ about
              220,000 civilians and 24,000 military personnel.

              The working capital funds are supposed to generate sufficient revenues to
              recover expenses incurred in their operations and are expected to operate
              on a break-even basis over time. However, setting prices to ensure that the
              funds do break even is a complex and difficult task. DOD policy requires
              working capital fund business areas to establish prices prior to the start of
              each fiscal year and to apply these predetermined (stabilized or standard)
              prices to most orders and requisitions received during the year. The
              process that the business areas use to develop their stabilized prices
              begins as early as 2 years before the prices go into effect, with each
              business area developing workload projections for the budget year. After a
              business area estimates its workload based on customer input, it (1) uses



              Page 6                        GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
Appendix I
Working Capital Cash and Operations
Management Issues




productivity projections to estimate how many people it will need to
accomplish its work; (2) prepares a budget that identifies the labor,
material, and other expected costs; and (3) develops prices, that when
applied to the projected workload, should allow it to recover operating
costs from its customers. Because sales prices are based on expected
rather than actual costs and workloads, higher-than-expected costs or
lower-than-expected customer demand for goods and services can cause
the business areas to incur losses. Conversely, lower-than-expected costs
or higher-than expected workloads can result in profits.

To date, the working capital funds have not yet accomplished their goal of
operating on a break-even basis and DOD estimates that they will have an
accumulated operating loss of $1.7 billion at the end of fiscal year 1997.
However, we believe that the funds have achieved a measure of success
because they are doing a better job of identifying the costs of doing
business and including those costs in the prices charged customers. This
provides managers and decisionmakers two important benefits. First,
setting prices to recover more of the costs of providing goods and services
to customers gives DOD managers a window into the costs of Defense
support operations—including costs for direct labor, material, overhead,
and contracts. With a more complete cost picture, managers can account
for past activities, manage current operations, and assess progress toward
planned objectives. Second, more accurate identification of costs enables
those responsible for providing oversight to make more informed policy
decisions by highlighting the cost associated with those decisions.

Over the last several years, various congressional Defense oversight and
appropriations committees have expressed concern with the management
and operations of the funds. To address these concerns, DOD was required
to conduct a study of its working capital funds as directed in the National
Defense Authorization Act for Fiscal Year 1997. Not later than
September 30, 1997, the Secretary of Defense is required to submit to the
Congress a plan to improve the management and performance of the
industrial, commercial, and support type activities that are currently
managed in the working capital funds. We are hopeful that DOD will use
this plan as a mechanism to continue to strengthen its commitment to
improving the management and operations of the working capital funds as
well as identifying the total costs of providing goods and services to
customers and including those costs in the prices charged customers.




Page 7                           GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
                            Appendix I
                            Working Capital Cash and Operations
                            Management Issues




                            Since 1993, the working capital funds have had a cash shortage. To
Working Capital Fund        address this problem, DOD has taken two actions. First, in February 1995,
Cash Management             DOD devolved the responsibility for cash management to the military
                            services and the DOD components to better align accountability and
                            responsibility for management. Second, to ensure that the cash balance
                            remains positive, the working capital funds have advance billed their
                            customers since 1993.


The Importance of Cash      Cash plays an extremely important role for DOD’s working capital funds
for Working Capital Funds   since they collect and disburse over $65 billion annually. Cash generated
                            from the sale of goods and services is the primary means by which the
                            working capital funds maintain an adequate level of cash to pay bills.
                            Where the cash balances start each year depends on the outcome of many
                            decisions made during the budget process with regard to (1) projecting
                            workload, (2) estimating costs, and (3) setting prices to recover the
                            estimated full cost of the goods and services. During the execution of the
                            budget, they operate much like a checking account: collections increase
                            the funds’ account balances and disbursements (such as salaries and
                            purchases of inventory) reduce the account balances. To the extent that
                            the decisions made during the budget process are reasonably accurate, the
                            funds’ cash balances should fall between the minimum and maximum
                            amount required by DOD. However, if the decisions are not accurate, the
                            funds could have too much or not enough cash.

                            DOD’s policy requires the funds to maintain cash levels to cover 7 to
                            10 days of operational costs and 4 to 6 months of capital asset
                            disbursements, which is about $2.3 billion to $3.4 billion for the four funds.
                            If the level of cash becomes low and there is a possibility of incurring an
                            Antideficiency Act1 violation, immediate actions will be taken to resolve
                            the cash shortages by advance billing customers.

                            Before DBOF was established, each industrial and stock fund had a separate
                            cash balance and managers were responsible for ensuring sufficient cash
                            was available to cover fluctuations in collections and disbursements that
                            occurred from one month to another. When DBOF was implemented, DOD
                            consolidated the cash balances of the nine industrial and stock funds into
                            a single account that was managed centrally by the Office of the Secretary
                            of Defense (OSD) (Comptroller). OSD centrally managed DBOF’s cash for
                            about 3 years. In February 1995, DOD devolved responsibility for cash

                            1
                             The Antideficiency Act, 31 U.S.C. 1341(a)(1), 1517, provides that no officer or employee of the
                            government shall make or authorize an expenditure or obligation exceeding the amount of an
                            appropriation of funds available for the expenditure or obligation.



                            Page 8                                  GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
                              Appendix I
                              Working Capital Cash and Operations
                              Management Issues




                              management as well as Antideficiency Act responsibilities to the military
                              services and the DOD components.


Our Views on DOD’s            We agree with DOD’s decision to place the responsibility for managing the
Decision to Devolve the       working capital funds’ cash at the military service and defense agency
Cash Management               level and to likewise devolve the Antideficiency Act responsibility. In our
                              view, decentralized cash management should result in better cash
Responsibility                management and more responsible business decisions.

                              According to DOD officials, the cash management responsibility was
                              devolved to the Army, the Navy, the Air Force, and the defense agencies to
                              better align accountability and responsibility for managing cash. DOD
                              pointed out that the operational control of actions taken by each fund
                              activity, which results in cash disbursements and collections, always has
                              resided and continues to reside with the individual DOD components.

                              We believe that there are a number of benefits associated with the
                              decentralization of cash management responsibilities. The decentralization
                              makes each individual DOD component directly accountable for its
                              respective cash balance as well as their decisions that impact cash,
                              including any violation of the Antideficiency Act. One DOD component
                              cannot spend money generated by another DOD component. When cash
                              management was centralized, DOD did not have reports that showed the
                              cash balances for the individual DOD components—the reports only
                              provided information on (1) DBOF’s overall cash balance and (2) collection
                              and disbursement data for each of the DOD components. With the
                              decentralization of cash management, the Department of the Treasury
                              provides DOD with a cash balance for each of the five DOD components.

                              There are still other advantages associated with the decentralization of
                              cash management:

                          •   Each DOD component now has an incentive to more accurately price the
                              goods and services that its working capital fund charges customers since
                              inaccurate prices could lead to not having enough cash to cover day-to-day
                              operating expenses.
                          •   The management of cash is closer to where cash decisions are made—the
                              business area and the activity level.
                          •   OSD and the DOD components have started working more as a team to
                              resolve cash problems. Under the centralization of cash, there was less
                              incentive for the DOD components to respond to cash problems since OSD



                              Page 9                           GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
                         Appendix I
                         Working Capital Cash and Operations
                         Management Issues




                         was responsible for cash and there was only one cash balance. When the
                         DOD components became responsible for their individual cash balances,
                         they raised more questions on the accuracy and timeliness of the
                         information on collections and disbursements. Such increased attention
                         should help improve the accuracy of collection and disbursement data
                         reported in the working capital funds’ financial statements, which are
                         prepared under the Chief Financial Officers Act of 1990.


DOD Has Advance Billed   Since 1993—with the transfer of $5.5 billion from DBOF as required by the
Customers to Alleviate   National Defense Authorization Act for Fiscal Year 1993—the funds have
Cash Shortage            been advance billing customers because they have not been able to
                         generate enough cash to pay their bills. In July 1994, the Comptroller of
                         Defense stopped the advance billing at all activities except for the Naval
                         shipyards and research and development activities. Although these
                         activities had been tentatively scheduled to stop advance billing in
                         January 1995, this did not occur.

                         DOD officials informed us that when the responsibility for cash
                         management was returned to the DOD components in February 1995, the
                         amount of cash returned to the services was not sufficient to cover
                         outstanding DBOF liabilities. DBOF’s financial reports indicate that this was
                         the case, with each service facing cash shortages. Therefore, according to
                         DOD, it was necessary for the military services to continue to advance bill
                         customers so that their cash portion of DBOF would not go negative.

                         Since 1995, the military services have made some progress in liquidating
                         (working off) their outstanding advance billing balances. However, the
                         Navy and the Air Force had to advance bill customers again during
                         calendar year 1996 to ensure that their cash balances remained positive.
                         Specifically, the Navy advance billed customers about $1.7 billion and the
                         Air Force advance billed customers $1.2 billion during calendar 1996.
                         Further, the Navy had advance billed their customers $100 million in
                         February 1997. The following figures show the reported (1) cash balances
                         for the Army, the Navy, the Air Force, OSD, and the defense agencies
                         portion of the funds and the (2) cash balances for these components if
                         they did not advance bill their customers from February 1995—when DOD
                         returned the responsibility for cash to these five DOD
                         components—through January 1997.




                         Page 10                          GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
                                                                                 Appendix I
                                                                                 Working Capital Cash and Operations
                                                                                 Management Issues




Figure I.1: Working Capital Fund Cash Balances (Dollars in millions)

      Overall Working Capital Fund                                                                                     Army Working Capital Fund
 6,000                                                                                    Cash balance         800                                                                               Cash balance
                                                                                           W/O adv. bill.                                                                                        W/O adv. bill.
 5,000
                                                                                                               600

 4,000
                                                                                                               400

 3,000
                                                                                                               200
 2,000

                                                                                                                   0
 1,000

                                                                                                               -200
      0


-1,000                                                                                                         -400
          2/95            6/95                       1/96          6/96          12/96                                 2/95         6/95                     1/96          6/96          12/96
Cash policy requires about $2.3 billion to $3.4 billion.                                                       Cash policy requires about $360 million to $515 million.



          Navy Working Capital Fund
                                                                                                                   Air Force Working Capital Fund
         3,000                                                                             Cash balance
                                                                                                               1,200                                                                                  Cash balance
                                                                                           W/O adv. bill.
         2,000                                                                                                 1,000                                                                                  W/O adv. bill.


                                                                                                                  800
         1,000
                                                                                                                  600

               0                                                                                                  400

                                                                                                                  200
       -1,000
                                                                                                                       0

       -2,000                                                                                                    -200

                                                                                                                 -400
       -3,000                                                                                                              2/95        6/95                       1/96        6/96           12/96
                   2/95          6/95                      1/96     6/96         12/96                         Cash policy requires about $465 million to $670 million.
       Cash policy requires about $625 million to $900 million.


                                                                                                                       Defense Agencies
                     Office of the Secretary of Defense
                                                                                                                       (which do not advance bill)
                     (which does not advance bill)
                                                                                                               2,000
      160


      140
                                                                                                               1,500
      120


      100
                                                                                                               1,000
        80


        60
                                                                                                                  500

        40


        20
                                                                                                                       0
                                                                                                                           2/95        6/95                         1/96          6/96           12/96
                                                                                                               Cash policy requires about $885 million to $1.3 billion.
          0
              2/95           6/95                           1/96          6/96           12/96



                                                                                 Page 11                                GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
                              Appendix I
                              Working Capital Cash and Operations
                              Management Issues




                              Note to above figures: We did not independently verify the financial information shown in the
                              figures, which was taken from DOD and Treasury reports.




                              As shown in figure I.1, the Army, the Navy, and the Air Force would have
                              had negative cash balances when they received the responsibility for cash
                              in February 1995 had they not advance billed customers. The figures also
                              show that

                          •   the three services have liquidated $3.6 billion of outstanding advance
                              billings from February 1995 through January 1997;
                          •   as of January 1997, the outstanding advance billing balance was
                              $1.6 billion;
                          •   the Army has liquidated almost all of its outstanding advance billing
                              balance;
                          •   the Navy’s cash balance would have been negative for most of the time
                              period from February 1995 through January 1997 if it had not advance
                              billed customers; and
                          •   the Air Force liquidated most of its outstanding advance billing balance
                              until it needed to advance bill customers over a billion dollars in
                              December 1996 to ensure that its cash balance would remain positive.

                              According to Army and Air Force officials, they plan to liquidate all their
                              outstanding advance billing balances by the end of fiscal year 1998. Navy
                              officials informed us that they now plan to liquidate the Navy’s
                              outstanding advance billing balance by the end of fiscal year 1999.


Cash Outlook for Fiscal       DOD’s cash plans, dated January/February 1997, show that the working
Years 1997 and 1998           capital funds will disburse about $2.3 billion more than they collect during
                              fiscal year 1997. To offset most of the cash drain that DOD expects to occur
                              during fiscal year 1997, DOD plans to increase fiscal year 1998 prices to
                              recoup losses and generate cash. DOD plans also show that it expects to
                              collect about $2.2 billion more than it disburses during fiscal year 1998.
                              This information is summarized as follows.




                              Page 12                                GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
                                        Appendix I
                                        Working Capital Cash and Operations
                                        Management Issues




Table I.2: DOD’s Working Capital Fund
Annual Cash Plans Dated                 Dollars in millions
January/February 1997                                                   Estimated fiscal year 1997           Estimated fiscal year 1998
                                                                                  collections less                     collections less
                                        Component                                  disbursements                        disbursements
                                        Army                                                   ($173.4)                                $27.2
                                        Navy                                                  (1,427.7)                                984.5
                                        Air Force                                               (154.5)                                493.4a
                                        Defense Agencies                                        (511.0)                                669.4
                                        Total                                                $(2,266.6)                            $2,174.5
                                        a
                                         Air Force fiscal year 1998 figure includes U.S. Transportation Command’s net collections of
                                        $102.6 million.



                                        Based on our analysis of DOD’s cash plan and past trends, we believe that
                                        the Navy may have to advance bill customers during the remainder of
                                        fiscal year 1997 in order to ensure that its cash balance remains positive.
                                        Based on our review of the cash and outstanding advance billing balances
                                        for the period October 1996 through March 1997, it is too close to tell if the
                                        Army and the Air Force will have to advance bill their customers during
                                        the remainder of fiscal year 1997.


                                        The four DOD working capital funds have added surcharges to their fiscal
Working Capital Fund                    year 1998 sales prices in order to recoup the $1.7 billion accumulated
Operations                              operating loss that they expect to have at the end of fiscal year 1997. As a
                                        result of this accumulated operating loss, the customers will need
                                        $1.7 billion in appropriated fiscal year 1998 funds so that they can
                                        reimburse the working capital funds for prior year losses rather than buy
                                        goods and services.

                                        Our limited review of five business areas and the assumptions used to
                                        develop their fiscal year 1998 prices (which could change as fiscal
                                        year 1998 approaches) indicates that the price increases may not be
                                        enough to eliminate the $1.7 billion accumulated operating loss. Based on
                                        the requirements in the National Defense Authorization Act for Fiscal
                                        Year 1997, we reviewed the fiscal year 1998 prices for Army depot
                                        maintenance, Air Force depot maintenance, Navy shipyards, Navy
                                        ordnance, and Navy research and development. In performing our work,
                                        we reviewed DOD’s assumptions—which were finalized about 9 months
                                        before the beginning of fiscal year 1998—on the fiscal year 1998 estimated
                                        revenue, costs, operating results, and workload (direct labor hours) to




                                        Page 13                                GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
                                            Appendix I
                                            Working Capital Cash and Operations
                                            Management Issues




                                            determine if the prices are likely to (1) recover fiscal year 1998 operating
                                            costs and (2) achieve a zero accumulated operating result at the end of
                                            fiscal year 1998.

                                            Our analysis indicates that the fiscal year 1998 prices for four of the five
                                            business areas reviewed are probably too low to recover expected fiscal
                                            year 1998 operating costs and/or recoup prior year losses by over
                                            $300 million. The results of our work is summarized below.

Table I.2: Estimated Impact of Fiscal
Year 1998 Pricing Assumptions on            Business area                        Estimated end-of-year accumulated operating result
End-of-Year Accumulated Operating           Army depot maintenance               Greater than $100 million loss
Results
                                            Air Force depot maintenance Greater than $100 million loss
                                            Navy shipyards                       Between $25 million and $100 million loss
                                            Navy ordnance                        Between $25 million and $100 million loss
                                            Navy research and                    On target for zero accumulated operating result
                                            developmenta
                                            a
                                                Naval surface warfare center and Naval undersea warfare center divisions only.



                                            Our previous reports2 have identified some of the primary causes of
                                            business area losses. For example, several reports have identified such
                                            long-standing and well-documented causes as (1) overly optimistic
                                            productivity assumptions, (2) unrealistic cost-reduction goals, and
                                            (3) lower-than-expected workloads. As illustrated below, we believe that
                                            the funds will incur losses in fiscal year 1998 for the same reasons.

                                        •   The Army depot maintenance business area is likely to end fiscal year 1998
                                            with an accumulated operating loss of more than $100 million. The
                                            expected loss is due, in large part, to significant changes made to the
                                            depot-level budget, resulting in cost-reduction goals that we believe will
                                            not be fully realized. Specifically, the Army’s Industrial Operations
                                            Command proposed a composite fiscal year 1998 sales price of $107.03 per
                                            direct labor hour, which would have been a 19-percent increase over the
                                            fiscal year 1997 price. However, this price was reduced by $10.18 per hour
                                            by the Army Materiel Command in an effort to hold down prices and
                                            reduce the cost of depot operations. The fiscal year 1998 price reduction

                                            2
                                             Air Force Depot Maintenance: Improved Pricing and Financial Management Practices Needed
                                            (GAO/AFMD-93-5, Nov. 17, 1992); Financial Management: Navy Industrial Fund Has Not Recovered
                                            Costs (GAO/AFMD-93-18, Mar. 23, 1993); Defense Business Operations Fund: Improved Pricing
                                            Practices and Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132, June 22, 1994);
                                            Financial Management: Army Industrial Funds Did Not Recover Costs (GAO/AIMD-94-16, Nov. 26,
                                            1993); and Navy Ordnance: Analysis of Business Area Price Increases and Financial Losses
                                            (GAO/AIMD/NSIAD-97-74, Mar. 14, 1997).



                                            Page 14                                  GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
    Appendix I
    Working Capital Cash and Operations
    Management Issues




    has created a situation where expected revenues for fiscal year 1998 will
    be significantly less than originally expected by the depots. In order to
    offset this revenue reduction, the depots need to reduce operational costs
    by about $68 million in fiscal year 1998. The Army was aware of the
    potential for significant losses and is attempting to identify areas where it
    can reduce its costs.
•   The Air Force depot maintenance business area is likely to have an
    accumulated operating loss of more than $100 million at the end of fiscal
    year 1998 primarily because disruptions related to on-going actions to
    close two Air Logistics Centers will probably prevent its workforce from
    achieving productivity goals that were incorporated into budget estimates
    for fiscal years 1997 and 1998. In fact, our review of other closure actions
    and the business area’s actual productivity for the first 5 months of fiscal
    year 1997 indicates that the workforce’s actual productivity is much more
    likely to decline significantly than to improve. For example, when the Air
    Force Aerospace Guidance and Metrology Center was closed in
    September 1996, its workforce’s productivity had declined about
    26 percent during the preceding 2 years. Similarly, the productivity of the
    Air Force depot maintenance business area’s workforce for the first
    5 months of fiscal year 1997 is about 6.5 percent below budgeted levels for
    fiscal year 1996 and 8.5 percent below the budgeted levels for fiscal year
    1997.
•   It is likely that the Naval shipyard business area will have an accumulated
    operating loss between $25 million and $100 million at the end of fiscal
    year 1998. This is due, in part, to workload delays and cancellations—two
    problems that have adversely affected the shipyards’ operations in the
    past3 and are likely to affect their operations in fiscal years 1997 and 1998.
    For example, the Navy’s February 1997 budget submission was based
    partly on the assumption that repairs and alterations for one ship would
    require about 491,000 direct labor hours. However, in April 1997, about 4
    months before work was scheduled to start, a major portion of this work
    was deferred. As a result, the workload estimate for the ship has been
    reduced by about 71 percent to about 144,000 direct labor hours. A Naval
    Sea Systems (NAVSEA) Command official stated that the shipyard cannot
    reduce its direct personnel and overhead costs in sufficient time to offset
    the lost revenue, which we estimate at about $20 million for direct labor,
    overhead, and surcharges.

    In another instance, our analysis of budget documents identified a change
    in workload estimates for a ship scheduled to begin repairs in May 1998.

    3
     Defense Business Operations Fund: Improved Pricing Practices and Financial Reports Are Needed to
    Set Accurate Prices (GAO/AIMD-94-132, June 22, 1994).



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    Working Capital Cash and Operations
    Management Issues




    Budget documents indicated that Navy customers planned to spend about
    $16 million for ship repairs, while the shipyard planned to receive about
    $36 million in revenue for working on the ship. A NAVSEA official stated that
    workload was reduced about 68 percent from 400,000 DLHs to 128,000 DLHs,
    but the change was not reflected in the workload estimates used to set
    fiscal year 1998 prices. In this case, the shipyard has 1 year to reduce its
    costs, renegotiate the workload reduction, or find additional revenue
    sources. Otherwise, a significant reduction in workload can result in
    significant losses.

•   It is likely that the Navy ordnance business area will have an accumulated
    operating loss between $25 million and $100 million at the end of fiscal
    year 1998. As part of an initiative to restructure its ordnance business area
    and reduce costs, the Navy plans to drastically reduce the scope of
    operations at selected ordnance weapons stations. Accordingly, when it
    developed the prices that the business area will charge customers in fiscal
    year 1998, the Navy reduced weapons stations’ cost estimates for overhead
    contract costs (for such things as utility bills and real property
    maintenance) from $126 million to $87 million, a reduction of $39 million,
    or 31 percent. However, the Navy has historically underbudgeted overhead
    contract costs for the weapons stations. For example, the reported actual
    overhead contract costs exceeded budgeted costs for fiscal years 1994,
    1995, and 1996 by $33 million, $81 million, and $43 million, respectively.
    Furthermore, the Navy has not yet developed a detailed plan to achieve
    the budgeted cost reductions. Consequently, we believe it is very likely
    that the Navy ordnance weapons stations’ actual overhead contract costs
    will exceed budgeted costs.

    Because the budget process used to develop business areas’ stabilized
    prices begins as long as 2 years before the prices go into effect, some
    variance between budgeted and actual operating results is inevitable.
    However, in some business areas, sales prices have yielded revenues that
    have been lower than actual costs for several years in a row. This indicates
    that there may be systemic problems with either the operation of the
    business areas or the methodology and assumptions used to estimate
    future costs and workloads. Until these problems are corrected, some
    business areas will continue to incur losses from their day-to-day
    operations and will need to increase future prices to recover these losses.




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Appendix II

Key Factors Impacting the
Cost-Effectiveness of the Defense Depot
Maintenance Program
               DOD’s depot maintenance program costs more than $13 billion annually
               and involves an extensive public and private sector industrial base. Depot
               maintenance is one of the areas where DOD plans to achieve savings that
               can be used to fund shortfalls in modernization accounts. However, DOD is
               not achieving expected cost reductions in its depot maintenance program.
               In some instances, depot maintenance costs, in general, and unit repair
               costs, in particular, have actually increased and are expected to go higher.
               The waste and inefficiency in DOD’s logistics system, including its depot
               maintenance program, is one of the key reasons we identified DOD’s
               infrastructure activities as 1 of 24 high-risk areas within the federal
               government.1

               A number of factors are preventing DOD from achieving expected savings
               in its depot maintenance costs. First, excess capacity in the industrial
               repair and overhaul capability of the public and private sectors contributes
               significantly to inefficiencies and higher costs in both sectors. Second, DOD
               is not achieving expected savings from outsourcing. Third, inefficiencies in
               DOD’s supply system, along with other factors, increase the cost of
               material, yet, because needed parts are often not available, cause
               disruptions in depot maintenance operations. Also, other factors, such as
               inadequate information systems and readiness requirements, can influence
               depot inefficiencies and increase costs. To the military services’ credit,
               each has programs underway to improve the effectiveness and efficiency
               of its depot maintenance activities.


               Depot maintenance is a key part of the total DOD logistics system that
Background     supports millions of equipment items, over 52,000 combat vehicles,
               351 ships, and over 17,000 aircraft. Depot maintenance is a vast
               undertaking that requires extensive shop facilities, specialized equipment,
               and highly skilled technical and engineering personnel (1) to perform
               major overhauls of weapon systems and equipment; (2) to completely
               rebuild parts and end items; (3) to modify systems and equipment by
               applying new or improved components; (4) to manufacture parts
               unavailable from the private sector; and (5) to program the software that is
               an integral part of today’s complex weapon systems. This work is done in
               both military depots and the private sector. DOD facilities and equipment
               are valued at over $50 billion. A large but unknown amount of
               government-owned depot plant equipment is used by private
               contractors—many of which are original equipment manufacturers of

               1
                 Defense Infrastructure (GAO/HR-97-7, Feb. 1997). In 1990, GAO began a special effort to review and
               report on the federal program areas its work identified as high risk because of vulnerabilities to waste,
               fraud, abuse, and mismanagement.



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                          Appendix II
                          Key Factors Impacting the
                          Cost-Effectiveness of the Defense Depot
                          Maintenance Program




                          weapons or major systems and components. DOD spends about
                          $13 billion—5 percent of its $250 billion fiscal year 1997 budget—on depot
                          maintenance activities. Over $1 billion of this amount is procurement
                          funding rather than operation and maintenance funding for contractor
                          logistics support, interim contractor support, and some software
                          maintenance.


Workload and Personnel    DOD’s depot maintenance workload has declined significantly in recent
Have Been Reduced Since   years, in large part because of the downsizing of the military force
the Cold War Ended        structure and reductions in spending for new weapon systems and
                          equipment that followed the end of the Cold War. Other factors that have
                          contributed to this decline, and which must be shared among all potential
                          sources of repair—both public and private—include efforts by some
                          services to do more repairs in field-level maintenance activities and the
                          increased reliability, maintainability, and durability of some systems and
                          equipment.

                          The defense depot system employs about 76,000 DOD civilian personnel,
                          including laborers, highly trained technicians, engineers, and top-level
                          managers. As shown in figure II.1, the number of depot maintenance
                          personnel has been reduced by about 71,000 personnel—a 48-percent
                          reduction since 1990. Over the same period, the organic depot
                          maintenance workload had a similar decline of about 43 percent, while the
                          total depot maintenance budget declined by a margin of only 12 percent.




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                                           Appendix II
                                           Key Factors Impacting the
                                           Cost-Effectiveness of the Defense Depot
                                           Maintenance Program




Figure II.1: Reductions in DOD’s Depot Maintenance Budget, Depot Maintenance Personnel, and Direct Labor Hours

Personnel (in thousands) /Hours (in millions)                                               Budget (in billions of dollars)
160                                                                                                                     14



                                                                                                                        12
140

                                                                                                                        10


120
                                                                                                                        8



                                                                                                                        6
100


                                                                                                                        4

 80
                                                                                                                        2



 60                                                                                                                     0
      FY90          FY91            FY92             FY93          FY94              FY95       FY96            FY97

                        Depot maintenance budget Depot maintenance personnel Direct labor hours




Excess Capacity Exists in                  DOD has extensive excess capacity in the form of large numbers of
the Public and Private                     underutilized buildings and equipment. While DOD has substantially
Sectors                                    reduced depot maintenance requirements and the number of depot
                                           maintenance personnel has been similarly reduced, DOD has not completed
                                           complementary reductions in its depot maintenance
                                           infrastructure—despite four rounds of base closures. Also, private sector
                                           production workload for new systems and equipment has generated




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Appendix II
Key Factors Impacting the
Cost-Effectiveness of the Defense Depot
Maintenance Program




significant excess production capacity—which the private sector
estimates to be about 57 percent for military work and 56 percent for
commercial work.

We identified excess capacity by determining maintenance facilities’
potential for doing more work than they are programmed to accomplish.
This approach, which assumes that additional trained personnel would be
available to accomplish the added workloads, is the same approach that
was used during the Base Realignment and Closure (BRAC) process to
identify opportunities to consolidate similar workloads and to thereby,
improve capacity utilization and reduce redundancies. However, DOD
normally uses an approach that constrains facilities’ capacity based on
(1) the availability of trained personnel and the organization of work
stations and (2) operation on one 8-hour shift each day, for a 5-day
workweek. The private sector usually considers a maximum potential
capacity utilization between 75 and 85 percent to be an efficient operating
level. Using maximum potential capacity estimates, DOD is predicted to
have excess capacity in fiscal year 1999 of about 50 percent. Figure II.2
shows excess capacity using both the maximum potential capacity and
DOD’s available capacity approach.




Page 20                           GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
                                         Appendix II
                                         Key Factors Impacting the
                                         Cost-Effectiveness of the Defense Depot
                                         Maintenance Program




Figure II.2: Comparison of Depot Capacity and Workload

Direct Labor Hours (000s)
60,000



50,000



40,000



30,000



20,000



10,000



     0
                 Army              NAVAIR                NAVSEA            Navy other         Air Force

                              Maximum Capacity        Available Capacity       Workload




                                         Table II.1 provides projections of each military depot’s workload and
                                         excess capacity for fiscal year 1999 using maximum potential capacity and
                                         available capacity for 1999.




                                         Page 21                           GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
                                           Appendix II
                                           Key Factors Impacting the
                                           Cost-Effectiveness of the Defense Depot
                                           Maintenance Program




Table II.1: Capacity and Workload Forecasts for Defense Depots for Fiscal Year 1999
(Direct labor hours in thousands)
                                                                                                   Percentage      Percentage
                              Maximum                                  Maximum        Available     excess of       excess of
                               potential     Available                  capacity       capacity     maximum          available
Maintenance depot              capacity       capacity Workload          excess         excess       capacity        capacity
Naval aviation
Cherry Point                      5,735          3,797       3,620          2,115          177             37               5
Jacksonville                      7,158          5,572       5,355          1,803          217             25               4
North Island                      7,772          4,318       4,027          3,745          291             48               7
Subtotal                         20,665         13,687     13,002           7,663          685             37               5
Naval shipyard
Norfolk                          15,851         12,000       8,723          7,128        3,277             45              27
Pearl Harbor                      8,032          5,320       3,739          4,293        1,581             53              30
Portsmouth                        7,996          7,028       3,209          4,787        3,819             60              54
Puget Sound                      14,919         14,000     11,717           3,202        2,283             21              16
Subtotal                         46,798         38,348     27,388         19,410        10,960             41              29
Other Navy
Albany                            1,883          1,215       1,089           794           126             42              10
Barstow                           1,563          1,037         928           635           109             41              11
Crane                             2,451              974       583          1,868          391             76              40
Keyport NUWC                      1,141              672       555           586           117             51              17
Subtotal                          7,038          3,898       3,155          3,883          743             55              19
Air Force
Oklahoma City                    12,863          7,881       7,624          5,239          257             41               3
Ogden                             9,005          8,371       4,596          4,409        3,775             49              45
San Antonio                      15,220          1,575       1,606        13,614            (31)           89              –2
Sacramento                       10,291          1,724         989          9,302          735             90              43
Warner Robins                     9,913          7,605       5,508          4,405        2,097             44              28
Subtotal                         57,291         27,156     20,323         36,968         6,833             65              25
Army
Anniston                          4,512          3,192       2,614          1,898          578             42              18
Corpus Christi                    4,714          4,009       3,338          1,376          671             29              17
Letterkenny                       3,707              213       164          3,543           49             96              23
Red River                         4,684          1,534         898          3,786          636             81              41
Tobyhanna                         7,606          5,091       2,736          4,870        2,355             64              46
Subtotal                         25,223         14,040       9,750        15,473         4,290             61              31
Total                           157,016         97,129     73,618         83,398        23,511             53              24




                                           Page 22                           GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
                            Appendix II
                            Key Factors Impacting the
                            Cost-Effectiveness of the Defense Depot
                            Maintenance Program




                            There are essentially two options for reducing a maintenance depot’s
Workload                    excess capacity: downsizing-in-place or increasing the volume of
Consolidation               workload. Downsizing-in-place by mothballing or tearing down buildings
Provides Significant        and disposing of equipment may reduce the cost of maintaining some
                            facilities and equipment, but it does not eliminate the costly infrastructure
Opportunities to            that supports the operations of a military installation. Also, it does not
Reduce Costly Excess        promote the efficiencies that can be achieved through consolidation.
                            During the BRAC process, it was generally the case that the most
Capacity                    cost-effective way to reduce maintenance costs was to close some depots
                            and to consolidate their workloads at the remaining depots or in existing
                            private sector capacity. This approach allowed the remaining facilities to
                            achieve production efficiencies and to spread their fixed overhead over an
                            increased volume of work.

                            The defense depot system currently has about 40-percent excess capacity.
                            With the exception of the Navy’s privatization-in-place efforts, our work
                            shows that the Navy has been the most successful at addressing the issue
                            of closing excess industrial capacity and consolidating it to achieve
                            economies of operation. On the other hand, the Army and the Air Force
                            have not succeeded in making significant reductions in their excess
                            capacity. Both services are incurring rising prices because they have too
                            much depot infrastructure for the available workload. Further, DOD’s
                            privatization of selected depots has contributed to the excess capacity
                            problem and ultimately will continue to drive up maintenance costs.
                            Additionally, the Air Force plans to compete workloads at two closing
                            depots may be more costly than redistributing the workload to other
                            depots. Such cost increases mean that military service customers can buy
                            less depot maintenance with available operation and maintenance dollars.


Navy Is Saving by           The Navy has closed three of its six aviation depots and has consolidated
Expeditiously Closing       most of their workloads at the three remaining depots to improve capacity
Aviation Depots and         utilization and reduce excess capacity. These actions, while costly and
                            difficult, will significantly increase utilization and reduce excess capacity
Shipyards, but Is Missing   in the remaining three naval aviation depots. Specifically, following the
Savings Opportunities by    1993 BRAC Commission’s approval of a recommendation to close aviation
Privatizing Workload        depots at Pensacola, Florida, Alameda, California, and Norfolk, Virginia,
                            the Navy completed the closures in about 3 years versus the 6-year period
                            allowed under the BRAC legislation. The Navy estimates that these closures
                            and workload redistribution actions, along with interservicing actions and
                            outsourcing some noncore workloads, will reduce its projected operating
                            rate by about $10 per hour. Based on a forecast of 13 million direct labor



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                                Appendix II
                                Key Factors Impacting the
                                Cost-Effectiveness of the Defense Depot
                                Maintenance Program




                                hours for fiscal year 1999, this forecast is expected to produce a savings of
                                about $130 million.

                                Our work shows that based on a maximum potential capacity and fiscal
                                year 1999 workload forecasts, the three remaining naval aviation depots
                                will have an average excess capacity of 37 percent, substantially lower
                                than the other services. Further, because the Navy reallocated most of the
                                closing depots’ workloads and specialties to its remaining aviation depots,
                                and reengineered work spaces in the process, Navy officials state that
                                given the availability of depot maintenance personnel, capacity utilization
                                will be about 95 percent. This represents an increase of 36 percent after
                                the workload transition is completed.

                                The Navy has closed four of its eight naval shipyards, significantly
                                reducing excess capacity in the public sector. However, excess capacity
                                remains, particularly in nuclear capability. The amount of that excess
                                capacity depends on how much depot level ship repair work the Navy
                                assigns public shipyards.

The Navy’s                      The Navy’s privatization of its Louisville depot was not the most
Privatization-in-Place of the   cost-effective choice—it could have saved more through consolidation of
Louisville Depot Was Less       workloads and improved use of capacity in remaining industrial activities.2
Cost-Effective Than              The Louisville, Kentucky, Detachment of the Naval Surface Warfare
Redistributing the Workload     Center, Crane Division, a depot recommended for closure by the 1995 BRAC
                                Commission, supported the overhaul and remanufacture for naval surface
                                ship gun and missile systems. In analyzing the cost of privatizing the
                                Louisville workload in-place versus transferring it to another depot, the
                                Navy estimated that the contract alternative would cost more on an annual
                                recurring basis and the one-time cost of transferring the workload to
                                another depot would be prohibitive. However, we found the Navy’s
                                analyses understated the annual savings of transferring the workloads to
                                other underused facilities and overstated the one-time transfer costs.

                                Our analysis shows a one-time cost of $243 million and an annual savings
                                of $59 million by transferring the workload. The annual savings would
                                offset the one-time cost in about 4 years. The Navy’s annual savings
                                estimate recognized that transferring the workloads to underused facilities
                                would reduce the overhead cost for those production units being
                                considered for transfer. However, the per-unit savings were applied only
                                to the workloads transferred and not to existing workloads at receiving

                                2
                                Navy Depot Maintenance: Cost and Savings Issues Related to Privatizing-in-Place at the Louisville,
                                Kentucky, Depot (GAO/NSIAD-96-202, Sept. 18, 1996).



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                               Appendix II
                               Key Factors Impacting the
                               Cost-Effectiveness of the Defense Depot
                               Maintenance Program




                               locations. So, while privatizing the workload in place avoided short-term
                               cost for transitioning the workload, it is likely to be more costly for the
                               Navy over the long run.

Operating With Costly Excess   Based on the actions taken thus far, the Army has not effectively
Capacity Is Resulting in       downsized its depot maintenance infrastructure to significantly reduce
Increased Prices for Army      costly excess capacity.3 We reported in September 19964 that tentative
Depots                         plans for implementing the 1995 BRAC decisions by allocating some
                               workloads from realigned depots to remaining depots will likely achieve
                               some reduction in excess capacity and savings at two remaining depots.
                               However, the Army’s failure to follow through with the closure of the
                               Letterkenny Depot—by consolidating of repair workloads at other Army
                               depots, and retaining the Red River Depot as directed by the BRAC
                               Commission—is expected to increase costly excess capacity in the Army
                               depots, from 42 to 46 percent over the next 3 years.

                               This increase is caused by several factors including: (1) a forecasted
                               decrease in future year depot-level workload; (2) the Army’s preliminary
                               plan to retain most depot operations for missiles at Letterkenny, while
                               privatizing or transferring to Tobyhanna Army Depot only about
                               14 percent of the workload; and (3) the delay in the transfer of the ground
                               communications-electronics workload from the Sacramento depot to the
                               Tobyhanna depot. In our September 1996 report, we recommended that
                               DOD reassess this delay, which is costing the Army about $24 million
                               annually. Subsequently, on March 13, 1997, the Defense Depot
                               Maintenance Council approved the Air Force’s proposal for a 3-year
                               workload transfer beginning in 1998 with the transfer of 20 percent of the
                               workload in the first year, and 40 percent each in the second and third
                               years with full-operational capability at the Tobyhanna Depot in 2001.


Delay in Implementing          The Air Force has the most serious excess capacity problem. Delays in
Depot Closure Is               closing two depots identified for closure during the 1995 BRAC extends the
Increasing Air Force Depot     period that the Air Force will operate five depots. During this period, each
                               depot will operate with declining workloads, excess facilities, and
Maintenance Costs              personnel. This situation will increase the cost of Air Force depot
                               maintenance operations and result in projected losses of about $90 million
                               in its depot operations during fiscal year 1997. Three of the six Air Force

                               3
                                Although the Army closed the Lexington-Blue Grass, Sacramento, and Tooele Army depots, excess
                               capacity was still 42 percent in 1995.
                               4
                               Army Depot Maintenance: Privatization Without Further Downsizing Increases Costly Excess
                               Capacity (GAO/NSIAD-96-201, Sept. 18, 1996).



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                     Appendix II
                     Key Factors Impacting the
                     Cost-Effectiveness of the Defense Depot
                     Maintenance Program




                     depots that existed in 1992 were recommended for closure during the 1993
                     and 1995 BRAC processes. The Air Force has opted to privatize-in-place one
                     of these depots and is in the process of using public-private competitions
                     to decide where the workloads from the other two closing depots will be
                     performed.


                     Despite major force structure reductions and significant excess capacity in
BRAC Decisions and   the Air Force depot maintenance system, none of the Air Force’s five large,
How DOD Is           multicommodity logistics centers or their maintenance depots were
Approaching          recommended by DOD for closure during the first four BRAC rounds. These
                     five depots have about 57 million direct labor hours of capacity to
Implementation       accomplish about 32 million direct labor hours of work, leaving about
                     26 million hours of excess capacity—or about 45 percent. Also, the Air
                     Force maintenance depots’ workloads are projected to decline to about
                     20 million direct labor hours of work in 1999. At this workload level, the
                     Air Force depots would have about 65 percent unused capacity. Although
                     the commission identified depots at the Sacramento and San Antonio
                     centers for closure during the 1995 BRAC process, the executive branch,
                     citing readiness, up-front costs, and potential effects on the local
                     community, indicated that these workloads should be privatized-in-place
                     or in the local communities. Subsequently, DOD announced that it will use
                     public-private competitions as a means for determining who will perform
                     the workload from the closing depots.

                     In December 1996, we reported that if the remaining depots do not receive
                     additional workloads, they are likely to continue to operate with
                     significant excess capacity and to become more inefficient and expensive
                     as workloads continue to dwindle due to downsizing and outsourcing
                     initiatives.5 Our analysis indicates that redistributing 8.2 million direct
                     labor hours of work from the two closing Air Force depots to the three
                     remaining depots would (1) reduce the projected excess capacity in 1999
                     from about 65 percent to about 27 percent, (2) lower the hourly rates by an
                     average of $6 at receiving locations by spreading fixed-cost over a larger
                     workload, and (3) save as much as $182 million annually as a result of
                     economies of scale and other efficiencies. This estimate was based on a
                     workload redistribution plan that would relocate only 78 percent of the
                     available hours to Air Force depots. About one-half of the remaining
                     22 percent was captured in savings the Army projected would be achieved
                     through consolidating ground communications and electronics workload

                     5
                      Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly While Excess Capacity Exists
                     (GAO/NSIAD-97-13, Dec. 31, 1996).



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                                         Appendix II
                                         Key Factors Impacting the
                                         Cost-Effectiveness of the Defense Depot
                                         Maintenance Program




                                         at Tobyhanna Army depot. Table II.2 shows an overview of the projected
                                         savings achievable through consolidation and increased use of capacity in
                                         the remaining three Air Force depots.

Table II.2: Potential Savings From Air
Force Depot Consolidation                                                            Direct labor       Labor/
                                         Depot location                                    hours overhead rates                     Cost
                                         Before consolidation
                                         Oklahoma City                                  7,122,421              $59.11     $421,006,305
                                         Ogden                                          4,939,623              $65.47       323,397,118
                                         Warner Robins                                  6,763,218              $59.55       402,749,632
                                         Sacramento                                     3,222,409              $63.81       205,621,918
                                         San Antonio                                    5,000,190              $58.24       291,211,066
                                         Total cost                                                                     $1,643,986,039
                                         After consolidation
                                         Oklahoma City                                12,214,902               $50.22     $613,432,378
                                         Ogden                                          6,626,348              $59.68       395,460,449
                                         Warner Robins                                  8,206,611              $55.17       452,758,729
                                         Total cost                                                                     $1,461,651,556
                                         Total potential savings                                                          $182,334,483

                                         According to management officials at the three remaining centers, it would
                                         cost about $475 million to absorb all of the Sacramento and San Antonio
                                         workloads. Using our estimate of $182 million in projected annual
                                         consolidation savings, net savings could occur within 2.6 years of the
                                         consolidation.6 The Air Force believes that the competition process will
                                         demonstrate if outsourcing or workload redistribution is the best value.


                                         While material costs vary for different commodities and depot
Material Cost                            maintenance actions, the cost of reparable and consumable parts is a
Increases Are                            significant portion of the cost of depot maintenance activities and of the
Generating Losses for                    composite rates charged depot maintenance customers. For this reason,
                                         inefficiencies in the DOD supply system and inaccurate information about
the Depot                                the quantity and price of spare and repair parts required in the repair
Maintenance Activity                     processes may lead to increased costs and losses in the depot
                                         maintenance capital fund. For example, about 40 percent of Air Force
Group                                    depot maintenance costs are material costs. During fiscal year 1997, Air
                                         Force depots are experiencing a 9-percent loss due to increased cost of

                                         6
                                          In addition, the Army estimates that the BRAC Commission mandated transfer of about 1.2 million
                                         hours of ground communications workload from the Sacramento depot to the Tobyhanna Army Depot
                                         will save an additional $24 million annually.



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                         Appendix II
                         Key Factors Impacting the
                         Cost-Effectiveness of the Defense Depot
                         Maintenance Program




                         material. The total effect of awaiting parts on the depot repair cycle
                         process is not known because its measurement is said to be incomplete
                         and inconsistent. However, one study reported that partial data indicates
                         that it is a pervasive and serious problem—in one case, as much as
                         12 percent of an annual negotiated program was not completed because
                         parts were not available.7


Inventory Management     Since 1992, we have reported that DOD had wasted billions of dollars on
Inefficiencies to        excess supplies, including spare and repair parts used in the depot
Contribute to            maintenance repair process. We reported that the problem resulted
                         because inherent in DOD’s culture was the belief that it was better to
High-Maintenance Costs   overbuy items than to manage with just the amount of stock needed. Had
                         DOD used effective inventory management and control techniques and
                         modern commercial inventory management practices, DOD would have had
                         lower inventory levels and would have avoided the burden and expense of
                         storing excess inventory. In a 1995 report, we stated that managing DOD’s
                         inventory presented challenges that partially stemmed from the
                         downsizing of the military forces.8 We reported that DOD needed to move
                         aggressively to identify and implement viable commercial practices and
                         provide managers with modern, automated accounting and management
                         systems to better control and monitor its inventories.

                         More recently, we reported that while DOD has clearly had some success in
                         addressing its inventory management problems, much remains to be done.9
                         DOD has made little progress in developing the management tools needed
                         to help solve its long-term inventory management problems. It has not
                         achieved the economies and efficiencies hoped for from the Defense
                         Business Operations Fund and the Corporate Information Management
                         initiatives. As a result of the lack of progress with some of the key
                         initiatives, it has become increasingly difficult for inventory managers to
                         manage DOD’s $69 billion spare and repair parts inventory efficiently and
                         effectively, including determination of budget requirements. Large
                         amounts of unneeded inventory, inadequate inventory oversight,
                         overstated requirements, and slowness to implement modern commercial
                         practices are evidence of the lack of progress. For example:



                         7
                         The Depot Repair Cycle Process: Opportunities for Business Practice Improvement, LG406MR1,
                         May 1996, The Logistics Management Institute.
                         8
                          High-Risk Series: Defense Inventory Management (GAO/HR-95-5, Feb. 1995).
                         9
                          High-Risk Series: Defense Inventory Management (GAO/HR-97-5, Feb. 1997).



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                               Appendix II
                               Key Factors Impacting the
                               Cost-Effectiveness of the Defense Depot
                               Maintenance Program




                           •   In our 1995 report, we stated that DOD’s 1994 strategic plans for logistics
                               called for improving asset visibility in such areas as in-transit assets,
                               retail-level stocks, and automated systems. Although the asset visibility
                               plans were to be completely implemented by 1996, DOD currently does not
                               project to complete the total asset visibility initiative until 2001. Further,
                               the lack of adequate visibility over operating materials and supplies
                               substantially increases the risk that millions of dollars will be spent
                               unnecessarily.
                           •   In 1992 and 1995, we reported that DOD had problems in accurately
                               determining how much inventory it needs to buy. Our recent work shows
                               that this continues to be the case. For example, we reported that DOD had
                               made limited progress in reducing acquisition lead times and that DOD
                               could reduce its lead time by 25 percent over a 4-year period and save
                               about $1 billion.10
                           •   We have found that despite DOD’s huge investment in spare and repair
                               parts, depots often do not have the spare and repair parts to perform
                               required maintenance. For example, we recently reported that inadequate
                               consumable parts that are used in large quantities to repair aircraft
                               components were the primary cause for repair delays at the Corpus Christi
                               Army depot.11 Also, we found that not having required parts has delayed
                               the installation of the night vision modification for the F-16 aircraft
                               because required parts had not been procured—resulting in a production
                               loss of 31,000 hours. According to Air Force officials, if this work had been
                               contracted out, the contractor would file a claim to be reimbursed for lost
                               production time where nonavailability of parts impacted contractor
                               performance. As a result of this and other production changes, Ogden
                               officials stated the depot is currently 126,000 hours below planned 1997
                               production levels, causing a net loss of about $5 million.


Inadequate Control of          Long-standing problems in managing government-furnished property,
Government-Furnished           government-furnished equipment, and government-furnished material are
Stocks Can Contribute to       adding millions of dollars to DOD’s depot level maintenance contracting
                               costs and resulting in losses in the Air Force’s contract maintenance
Losses in Contract Depot       portion of the working capital fund.
Maintenance
                               DOD buying commands can choose to provide contractors property,
                               equipment, and materials for use in repairing items. Contractors are to

                               10
                                Defense Supply: Acquisition Leadtime Requirements Can Be Significantly Reduced
                               (GAO/NSIAD-95-2, Dec. 1994).
                               11
                                Inventory Management: The Army Could Reduce Logistics Costs for Aviation Parts by Adopting Best
                               Practices (GAO/NSIAD-97-82, Apr. 15, 1997).



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                                    Appendix II
                                    Key Factors Impacting the
                                    Cost-Effectiveness of the Defense Depot
                                    Maintenance Program




                                    report annually to the services the amount of property and equipment they
                                    have on hand that was furnished by the commands, and the commands are
                                    to reconcile these reports with their records. Material for use in the repair
                                    of items is to be furnished timely and monitored for proper use. Failure to
                                    provide government-furnished material in a timely manner can result in a
                                    claim for compensation from the contractor. Further, since the Air Force,
                                    unlike the other military services, includes contract depot maintenance in
                                    its working capital fund, increased costs over what is budgeted will lead to
                                    losses in the working capital fund.

Management and                      DOD’s  problems in managing and accounting for government-furnished
Accountability Has Not Always       stocks have been long-standing. For example, in 1993, the Secretary of the
Been Effective                      Army requested the Army Audit Agency to examine controls over
                                    government-furnished property because we identified this as a weakness
                                    during our audit of the Army’s fiscal year 1991 financial statements. The
                                    Army Audit Agency found many problems Army-wide, including the
                                    inability to determine the accuracy of contractors’ reports. For instance, at
                                    the Missile Command, contractors reported having about $1.3 billion in
                                    government-furnished property for which the command’s annual summary
                                    report of property in the custody of contractors did not identify. In
                                    April 1996, the Air Force Audit Agency found similar problems at Warner
                                    Robins Air Logistics Center with government-furnished property financial
                                    statement balances that could have been misstated by up to $2.3 billion.
                                    The following are three cases we found where inadequate control over
                                    government-furnished material resulted in increased depot maintenance
                                    costs:

                                •   The Warner Robins Air Logistics Center experienced a $113-million cost
                                    overrun on F-15 maintenance work. Since the early 1980s, the Center has
                                    contracted with Korean Airlines and Israel Air Industries for maintenance
                                    of F-15’s overseas. In 1989, the Center began experiencing cost overruns,
                                    which it determined were directly related to government-furnished
                                    material. Our review shows that the F-15 program managers had sufficient
                                    information about the government-furnished material issue from reports
                                    that were periodically generated from the Center’s automated systems.
                                    However, no actions were taken to resolve the government-furnished
                                    material problem until the contract was being administratively closed out
                                    in 1996. The Center maintains that some of the problems have been
                                    corrected but that others have not. We observed the government-furnished
                                    material status on the current F-15 contract and found that a similar
                                    pattern of cost overrun is occurring.




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                             Appendix II
                             Key Factors Impacting the
                             Cost-Effectiveness of the Defense Depot
                             Maintenance Program




                         •   In another case, the Air Force paid $24.9 million to settle claims related, in
                             part, to its failure to provide the contractor, PEMCO, timely
                             government-furnished material. PEMCO had filed claims for compensation
                             between November 1994 and June 1996 for alleged problems related to
                             programmed depot maintenance for the KC-135 aircraft and had planned
                             to file additional claims. In September 1996, the Air Force and PEMCO
                             reached a “global settlement” of $24.9 million where the Air Force
                             conceded fault in several areas, including the failure to provide material
                             on time.
                         •   According to program office officials, increased costs resulting from the
                             contractor’s use of government-furnished material is one of several factors
                             leading to losses resulting from the privatization of the Aerospace
                             Guidance and Metrology Center (AGMC) in Newark, Ohio.


                             Unanticipated losses in outsourced workloads are another factor
Overly Optimistic            influencing cost growth in the depot maintenance program and losses in
Assumptions of Cost          the working capital fund. Reported projections of 20- to 40-percent savings
Savings From                 from outsourcing depot maintenance and other logistics operations have
                             influenced DOD assumptions that outsourcing will lead to significant
Outsourcing Could            savings. Because assumptions about outsourcing savings were overly
Lead to Further Price        optimistic, expected savings are not being achieved.
Increases
AGMC Outsourcing             The Air Force reported to the Congress that the privatization of the AGMC
Illustrates How Overly       would result in savings, and it did not budget for increased costs for
Optimistic Saving            post-privatization operations. Customers of the privatized facility—the
                             Boeing Guidance Repair Center—are not paying enough to recoup the
Assumptions Lead to          costs of ongoing repair work and the Air Force Working Capital Fund is
Losses                       therefore expected to incur losses during fiscal year 1997. The Air Force
                             has recognized that costs will be higher during fiscal year 1998 and is
                             increasing its prices by $19 million. Nonetheless, a just released Air Force
                             Materiel Command study, which was undertaken at our request, states that
                             privatized repair operations for missile and aircraft inertial navigation
                             systems could range between about $9 million and $32 million—a 12- to
                             47-percent increase—with a most likely increase of $17.1 million.




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                            Appendix II
                            Key Factors Impacting the
                            Cost-Effectiveness of the Defense Depot
                            Maintenance Program




Assumptions Regarding       Facing large shortfalls in its modernization accounts, DOD plans to reduce
Outsourcing Savings Are     costs and generate savings for modernization through the outsourcing of
Based on Competition, but   support activities, including depot maintenance. DOD’s projected savings
                            level is based largely on estimates made through studies by the
Many Current Depot          Commission on Roles and Missions (CORM) and Defense Science Board
Maintenance Contracts Are   that outsourcing depot maintenance and other activities will save 20 to
Sole Source                 40 percent. Our review shows that savings of this magnitude are
                            questionable for several reasons. For example (1) projections were based
                            on the Office of Management and Budget Circular A-76 competitions
                            between the public and private sector, with the public sector winning
                            about half of the competitions; (2) the activities being competed were
                            simple, commercial activities like mowing grass, maintaining buildings,
                            and operating motor pools where requirements could readily be identified
                            and for which there were many private sector offerors who could compete
                            for the work; and (3) savings estimates were estimated, not actual, and
                            where audited, savings estimates were not achieved. While we believe
                            savings may be achieved from outsourcing some depot maintenance
                            workloads, our analysis indicates that little or no savings would result
                            from outsourcing depot maintenance in the absence of competition.

                            However, our April 1996 testimony and July 1996 CORM report noted that
                            much of the depot work contracted to the private sector was awarded sole
                            source and that obtaining competition for remaining noncore workloads
                            may be difficult and costly.12 For example, to test for the extent of
                            competition, we sampled 240 contracts, totaling $4.3 billion, that 12 DOD
                            buying commands had open during 1995. Of these 240 contracts, 182,
                            about 76 percent, were awarded on a sole-source basis—about 45 percent
                            of the total dollar value.

                            Recently, we asked the DOD buying commands to classify as competitive or
                            sole source all the new contracts awarded from the beginning of fiscal
                            year 1996 to date. As shown in table II.3, of the 15,346 contracts totaling
                            $2.2 billion, 13,930—about 91 percent—were awarded sole source. The
                            sole-source contracts totaled about $1.5 billion, or about 68 percent of the
                            total dollars awarded.




                            12
                             Defense Depot Maintenance: Privatization and the Debate Over the Public-Private Mix
                            (GAO/T-NSIAD-96-148, Apr. 17, 1996) and Defense Depot Maintenance: Commission on Roles and
                            Mission’s Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July 15, 1996).



                            Page 32                              GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
                                       Appendix II
                                       Key Factors Impacting the
                                       Cost-Effectiveness of the Defense Depot
                                       Maintenance Program




Table II.3: DOD Depot Maintenance
Contracts Awarded From Year 1996 to    Dollars in millions
Date                                                           Competitive              Sole source                   Total
                                       Command               Number       Value       Number          Value   Number            Value
                                       Army                        2             $1        40          $540           42         $541
                                       Air Force               1,263         443        1,268           336      2,531            779
                                       Navy                      151         253       12,622           638     12,773            891
                                       Total                   1,416       $697        13,930        $1,514     15,346         $2,211

                                       Table II.4 compares the services’ use of competition for contracts we
                                       sampled in 1995 with that used in contracts awarded since the beginning
                                       of fiscal year 1996. The Air Force had the greatest percent of competitive
                                       contracts in 1995 and 1996. The Army’s use of competition decreased, and
                                       the Navy’s use was low for both periods.

Table II.4: DOD’s Use of Competition
for Depot Maintenance Work             Numbers in percent
                                                                 Competitive contracts open             Competitive contracts
                                                                          In 1995                    awarded from FY 1996 to date
                                       Service                    Total number        Total value      Total number        Total value
                                       Army                                      23             53                5                 .2
                                       Air Force                                 39             62               50                57
                                       Navy                                      8              39                1                28



Competition Cited as                   Our review also showed that, for existing weapon systems, obtaining a
Reason for Sole-Source                 competitive market may be costly for DOD because it has not acquired the
Awards                                 technical data rights for many of its weapon systems. In examining the
                                       reasons for sole-source contracting, we observed that the justification
                                       most often cited was that competition was not possible because DOD did
                                       not own the technical data rights for the items to be repaired. Officials
                                       from the DOD buying commands told us that DOD would have to make
                                       costly investments to promote full and open competition for many of its
                                       weapon systems. Also, we found that savings through competition may be
                                       adversely affected by private businesses that choose not to compete for
                                       maintenance workloads that have (1) small volumes, (2) obsolete
                                       technology, (3) irregular requirements, and (4) unstable funding. DOD may
                                       be able to encourage more competition through bundling common work
                                       and offering contracts with terms and conditions such as multiple options
                                       and multiyear performance periods.




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                        Appendix II
                        Key Factors Impacting the
                        Cost-Effectiveness of the Defense Depot
                        Maintenance Program




                        In addition to the factors we have already discussed, there are a number of
Other Factors           others that impact the efficiency and cost of depot maintenance
Effecting Depot         operations. In particular, our work shows that: (1) lengthy depot repair
Inefficiencies and      cycles are costly, (2) DOD has been unsuccessful in implementing effective
                        information systems to adequately support its depot maintenance, and
Costs                   (3) defense depots must support inefficient workloads and changing
                        budgets and requirements of their customers. It is important to note that
                        each of the services has initiated programs to improve their depot
                        maintenance operations. However, while these programs are
                        concentrating on key problems, it is too soon to assess effectiveness of
                        these initiatives.


Reducing Repair Cycle   Reducing the length of the depot repair cycle process is of vital
Days Can Reduce Costs   importance in reducing costs. Reducing repair cycle time reduces the
                        number of items that must be purchased to support weapon systems and
                        equipment. One study estimated that for depot level reparables, the
                        dollar-weighted organic/contractor depot repair cycle time is 86.8 days,
                        with a resultant repair cycle level investment requirement of $4.4 billion.
                        That requirement would be decreased an average of $51 million for each
                        day the repair cycle time is reduced.13

                        In our April 1997 report, we stated that the Army’s efforts to improve its
                        logistics pipeline for aviation parts and reduce logistics costs could be
                        enhanced by incorporating best practices we have identified in the private
                        sector. The Army’s current repair pipeline, characterized by a $2.6-billion
                        investment in aviation parts, is slow and inefficient. For example, in one
                        case we examined, it took the Army four times longer than a commercial
                        airline to ship a broken part to the depot and complete repairs. Also, for
                        24 different types of items examined, we calculated it took the Army an
                        average of 525 days to repair and ship the parts to field units. The Army
                        estimates only 18 days (3 percent) should have been needed to repair the
                        items. The remaining 507 days (97 percent) were used to transport or store
                        the parts or were the result of unplanned repair delays. Because of this
                        lengthy pipeline time, the Army buys, stores, and repairs more parts than
                        would be necessary with a more efficient system. We reported that
                        implementing industry best practices can be used to achieve significant
                        improvements and cost reduction. These practices are the prompt repair
                        of items, the reorganization of the repair process, the establishments of
                        partnerships with key suppliers, and the use of third-party logistics

                        13
                         The Depot Repair Cycle Process: Opportunities for Business Practice Improvement, LG406MR1,
                        May 1996, Logistics Management Institute.



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                             Appendix II
                             Key Factors Impacting the
                             Cost-Effectiveness of the Defense Depot
                             Maintenance Program




                             services. Our work in the Navy and the Air Force depot activities found
                             similar opportunities for improvement exist.14


Timely and Accurate          Current information systems used to manage the depot repair process do
Information Systems Are      not provide timely and accurate information essential for improving depot
Essential to Improve Depot   operations and reducing costs. In 1989, DOD established the Corporate
                             Information Management Initiative to dramatically improve the way DOD
Operations and Costs         conducts business, primarily by adopting best business practices used in
                             the public and private sectors and building the automated information
                             systems to support those improved practices. In November 1992, DOD
                             adopted a plan for identifying the best operational logistics information
                             systems and deploying them among all the services and defense agencies.
                             This strategy failed to produce the dramatic gains in efficiency and
                             effectiveness that DOD anticipated.

                             Our review of depot maintenance systems envisioned under this plan
                             found that even if the migration effort was successfully implemented as
                             envisioned, the planned depot maintenance standard system would not
                             dramatically improve depot maintenance operations in DOD.15 DOD planned
                             to invest more than $1 billion to develop a depot maintenance standard
                             system that would achieve less than 2.3 percent in reduced operational
                             costs over a 10-year period. Such incremental improvement is significantly
                             less than the order-of-magnitude improvements DOD has said could be
                             achieved through reengineering business processes—efforts that were
                             being postponed until after the development of the standard systems.

                             DOD subsequently terminated the Depot Maintenance Information System
                             and the depots had to write off their investment in this effort. Air Force
                             depots wrote off about $34 million of their investment in this program in
                             1996, adding to their depot activity group losses that year.




                             14
                              Inventory Management: Adopting Best Practices Could Enhance Navy Efforts to Achieve Efficiencies
                             and Savings (GAO/NSIAD-96-156, July 12, 1996) and Best Management Practices: Reengineering the Air
                             Force’s Logistics System Can Yield Substantial Savings (GAO/NSIAD-96-5, Feb. 21, 1996).
                             15
                              Defense IRM: Strategy Needed for Logistics Information Technology Improvement Efforts
                             (GAO/AIMD-97-6, Nov. 14, 1996).



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                                 Appendix II
                                 Key Factors Impacting the
                                 Cost-Effectiveness of the Defense Depot
                                 Maintenance Program




Organic Depots’ Mission Is       While the organic depots can and must implement improvements to
to Support Military              reduce the cost of their depot maintenance operations, they have some
Customers’ Programs,             mission requirements that are inherently inefficient. However, performing
                                 these missions is necessary to meet the readiness and support needs of
Which Contain Some               their customers. For example:
Inherent Inefficiencies
                             •   Many of the depot level reparable components that organic depots must be
                                 prepared to repair have uncertain and infrequent repair requirements. For
                                 example, a contingency response or special training exercises may require
                                 expedited and/or increased repair needs to support key weapon systems
                                 and equipment. Likewise, depots are required to maintain repair
                                 capabilities to support end items and components that may be obsolete,
                                 are maintained in low quantities and/or have infrequent, sporadic
                                 requirements. Neither of these situations are conducive to supporting
                                 low-cost operations, but are necessary to meet the readiness needs of the
                                 customer.
                             •   Changing operational requirements and changing budget requirements
                                 frequently result in changes to the production schedules. Production
                                 changes would result in losses when the volume of work declines or the
                                 mix of resulting work generates less revenue than planned. As previously
                                 discussed, budgets are developed 2 years in advance. Depot officials stated
                                 that changes in the production schedule that impact projected versus
                                 actual revenues are significant.


All Services Have                Each of the military services have individual programs designed to address
Initiatives to Improve           some depot maintenance inefficiencies. We have recommended such
Depot Operations                 actions and are encouraged by these efforts. While it is too early to assess
                                 the specific results, our initial impression is that the programs are focusing
                                 on key problem areas, such as reducing repair cycle time. Some examples
                                 of the services improvement initiatives over the past few years include:

                             •   The concept of regional maintenance in the Navy focuses on properly
                                 sizing the shore maintenance infrastructure to support a smaller naval
                                 force while maintaining the Fleet in a high state of readiness.
                             •   The Air Force’s Lean Logistics Program is designed to maximize
                                 operational capability by using high velocity transportation and
                                 just-in-time stockage principles to shorten cycle times, reduce inventories
                                 and cost, and shrink the mobility footprint, and providing flexibility to
                                 manage mission and logistics uncertainties.




                                 Page 36                           GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
                     Appendix II
                     Key Factors Impacting the
                     Cost-Effectiveness of the Defense Depot
                     Maintenance Program




                 •   The Integrated Sustainment Maintenance Program in the Army
                     regionalizes the repair of components to achieve efficiencies and cost
                     savings.
                 •   The Marine Corps’ Precision Logistics Program is a change in culture and
                     a pursuit of smart business practices regarding the speed and accuracy of
                     information, speed and fluidity of distribution, and reduction in support
                     cycle times.


                     Mr. Chairman, this concludes our statement. We would be pleased to
                     answer any questions you or the Subcommittee may have at this time.




709262, 511616       Page 37                           GAO/T-NSIAD/AIMD-97-152 Defense Depot Maintenance
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