Defense Transportation: Process Reengineering Could Be Enhanced by Performance Measures

Published by the Government Accountability Office on 1999-12-20.

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

                 United States General Accounting Office

GAO              Report to the Chairman, Subcommittee
                 on Military Readiness, Committee on
                 Armed Services, House of

December 1999

                 Process Reengineering
                 Could Be Enhanced by

United States General Accounting Office                                                       National Security and
Washington, D.C. 20548                                                                 International Affairs Division

                                    B-283486                                                                             Leter

                                    December 20, 1999

                                    The Honorable Herbert H. Bateman
                                    Chairman, Subcommittee on Military Readiness
                                    Committee on Armed Services
                                    House of Representatives

                                    Dear Mr. Chairman:

                                    A number of studies since the late 1940s have cited the defense traffic
                                    management organizational structure as costly and inefficient. This
                                    structure consists of multiple transportation agencies each with separate
                                    service and modal responsibilities. In 1996, we reported that the
                                    fragmentation and duplication inherent to this structure led to higher
                                    transportation costs for defense customers, and recommended that the
                                    Department of Defense address the organizational structure as it
                                    reengineers the transportation processes to achieve the full benefits of the
                                    Department’s reengineering efforts.1 In response, the Department stated it
                                    would implement several initiatives, including reengineering transportation
                                    financial management processes, and then it would assess the
                                    infrastructure required to support the reengineered processes.

                                    This report responds to your request concerning improving the efficiency
                                    and effectiveness of the defense transportation financial management
                                    processes. Specifically, our objectives were to determine (1) progress in
                                    reengineering defense transportation financial management processes,
                                    (2) challenges associated with implementing these reengineered processes
                                    agencywide, and (3) the extent to which the Department is assessing the
                                    infrastructure required to support the reengineered processes.

Results in Brief                    Progress has been made in reengineering defense transportation financial
                                    management processes through a reform initiative. The goal of this
                                    initiative is to reduce costs, eliminate government-unique documentation,
                                    reduce data requirements, improve accuracy, and adapt best commercial

                                     Defense Transportation: Streamlining of the U.S. Transportation Command Is Needed
                                    (GAO/NSIAD-96-60, Feb. 22, 1996).

                                    Page 1                                         GAO/NSIAD-00-7 Defense Transportation

practices. The Department has proposed two separate efforts to
accomplish the initiative: (1) use an electronic payment system, referred to
as PowerTrack, that would also eliminate the use of government-unique
documentation and/or (2) use contractors (through contracting out to
third-party logistics providers) to perform traffic management functions,
including transportation payment, to achieve cost savings and other
benefits. The electronic payment system facilitates the replacement of
cumbersome government-unique documentation with simplified
commercial documentation, and the Department has already begun using
the electronic payment system at 69 military installations as of September
1, 1999. The benefits of electronically paying and reconciling transportation
bills include quicker carrier payment, reduced billing documentation,
easier and more reliable reconciliation of billing disputes, reduced
workload, and some savings from a reduction in the number of
transactions processed by the Defense Finance and Accounting Service.
Regarding the second effort, the Department plans to test whether the
payment function, plus other transportation functions, can be contracted to
a third-party logistics provider to reduce infrastructure and achieve cost
efficiencies. Although the electronic payment system is being implemented
now, the commercial contract initiative has not yet begun the prototype
testing phase.

The Department faces challenges in implementing the electronic payment
system agencywide. The most significant challenge will be the need to
modify the system to accommodate the existing unique interagency billing
process, which is plagued with data accuracy and reliability problems. In
addition, transportation costs may increase because the electronic system
imposes a fee on carriers that may be passed on to defense customers
through higher transportation rates. The challenges associated with
contracting out transportation functions have not yet been identified, but
agency officials have acknowledged the need to determine if a commercial
contract with a third-party logistics provider can meet Department
contingency and surge requirements.

Page 2                                    GAO/NSIAD-00-7 Defense Transportation

             While the Department has addressed the infrastructure required to support
             the reengineered financial management processes for the PowerTrack
             effort, it could not estimate the infrastructure reductions for the
             contracting out effort because, according to Department officials, such
             reductions cannot be estimated until completion of the prototype testing.
             We are concerned, however, that the Department has no plans to
             comparatively assess the cost and benefits of the two approaches to
             determine whether PowerTrack or the third-party logistics provider could
             more effectively achieve its goals, such as reducing costs and improving
             quality, in reengineering the transportation financial management
             processes. Finally, although DOD’s Government Performance and Results
             Act of 1993 (Results Act)2 Performance Plan for fiscal year 2000 identifies
             general goals for its financial management initiative, there are no specific
             savings targets or overall performance-oriented measures that relate to
             such things as cost reductions and other improvements. We are
             recommending that the Department comparatively assess the cost and
             benefits of the two approaches and include in future Results Act
             Performance Plans performance-oriented measures and specific savings
             targets so that it can measure the success of the reform efforts.

Background   The major defense transportation reengineering initiative is being
             implemented under Management Reform Memorandum 15. This
             memorandum, issued by the Deputy Secretary of Defense on July 7, 1997,
             directs the complete reengineering of defense transportation
             documentation and financial processes. The reengineering initiative has
             been incorporated in the Department of Defense’s (DOD) Defense Reform
             Initiatives, which are a series of initiatives designed to achieve a revolution
             in DOD’s business and support operations by identifying and adopting the
             best business practices from the private sector. This effort is being
             managed by the Office of the Assistant Deputy Under Secretary of Defense
             for Transportation Policy. The defense transportation reengineering
             initiatives’ key objectives are to reduce infrastructure costs, eliminate
             government-unique documentation and processes, reduce data
             requirements and improve accuracy, increase use of electronic commerce,

               The Results Act requires federal agencies (including DOD) to set strategic goals, measure
             performance, and report on the degree to which goals were met. Its intent is to focus
             agencies more on results, service delivery, and program outcomes. This is expected to
             provide the Congress and other decisionmakers with objective information on the relative
             effectiveness and efficiency of federal programs.

             Page 3                                            GAO/NSIAD-00-7 Defense Transportation

and employ best commercial practices. To meet its objectives, DOD
officials proposed using commercial documentation and credit cards as the
cornerstones of the financial management reengineering initiative and
conducted short-term pilot tests of these features. In February 1998, DOD
concluded that the pilot tests produced favorable results. They
recommended that, because of the tests’ limited scope and use of manual
procedures, the concepts be prototyped in the airlift, sealift, and express
delivery business areas. The information from the prototypes would be
used to address concerns before agencywide implementation.

The Department established four prototype tests to continue evaluating the
use of commercial documentation and credit cards. The airlift prototype
test, begun in July 1998, used credit cards for interagency billings,
expanding on the earlier pilot tests. The sealift prototype, begun in
September 1998, was designed to broaden the scope of the pilot test and
automate the processes that had been administered manually. Key
processes tested included use of credit cards for both commercial carrier
and interagency payments and use of simplified commercial
documentation. The surface and express prototypes began in April 1998.
This testing was broader in scope than the pilot test, involving the Army,
the Air Force, the Navy, and the Marine Corps as well as a number of
depots. The initial service prototypes primarily tested the use of credit
cards, while the Defense Logistics Agency and a few service sites tested the
use of the “PowerTrack” electronic payment and reconciliation system.
PowerTrack is a commercially owned online database accessible via the
Internet, Electronic Data Interchange, and telephone. All shipment
information is submitted electronically to PowerTrack and stored in its
central database. Both DOD and carriers have access to the database for
instant approval and payment of invoices and for online payment dispute
resolution. The goal is to pay carriers within 3 days using PowerTrack
versus 30 to 90 days under the existing systems.

In February 1999, the Deputy Secretary of Defense directed the DOD-wide
implementation of the defense transportation financial management
reform initiative. Specifically, he directed the elimination of government-
unique documentation, such as government bills of lading; the use of
PowerTrack for commercial transportation payment, certification, and
reconciliation; and the development of PowerTrack for interagency billing.
DOD also decided to conduct a 1-year regional prototype test of the use of a
contractor (third-party logistics provider), to provide domestic freight
transportation services, including financial management and payment

Page 4                                   GAO/NSIAD-00-7 Defense Transportation

                       functions, in a selected geographic area. The test is planned to begin in mid
                       calendar year 2000.

                       DOD estimated total investment costs for both of its defense transportation
                       reengineering initiatives of about $41.4 million for fiscal years 1997 through
                       2000. This amount included $8.4 million for the pilot and prototype efforts,
                       $25 million for Defense Logistics Agency and service system hardware and
                       software changes, $5.9 million for contractor support, and $2.1 million for
                       an administrative office to implement PowerTrack.

Progress Made in       DOD has made progress in reforming its transportation system through
                       initiatives planned or under way to reengineer its financial management
Implementing Reforms   processes. Specifically, DOD is implementing the PowerTrack electronic
                       payment and reconciliation system agencywide. In conjunction with
                       PowerTrack, DOD is also using commercial documentation, thereby
                       reducing or eliminating cumbersome government-unique documents. In
                       addition, DOD is planning to test the use of a third-party logistics
                       contractor to perform in-house transportation functions to determine
                       whether cost savings and other benefits can be achieved.

                       DOD was using the PowerTrack system at 69 installations as of September
                       1, 1999. The system has shown that it has the capability of providing
                       quicker payments to carriers and can help to resolve billing disputes more
                       quickly. On delivery of a shipment, PowerTrack can pay a carrier
                       automatically within 3 days if the carrier’s electronic bill matches the
                       expected service cost. Under the old system, carrier payment could take as
                       long as 60 to 90 days. If the bill and cost of service amounts do not match
                       (for example, when the shipment weight varies or delivery requirements
                       are changed), PowerTrack allows for on-line reconciliation, essentially
                       through the use of e-mail within the PowerTrack system. Some carriers
                       believe that PowerTrack will ultimately enable them to reduce staff,
                       particularly staff currently involved in handling government bills of lading.
                       Most importantly, PowerTrack enables transportation officers to verify
                       receipt of the shipment prior to authorizing payment to the carrier. This
                       feature is a significant improvement over the current system.

                       As part of the reform efforts and implementation of PowerTrack, DOD has
                       eliminated some government-unique documentation and is using
                       commercial transportation documentation. For example, the Department is
                       eliminating requirements for the government bill of lading for U.S. cargo
                       and replacing them with simplified commercial documents. DOD estimates

                       Page 5                                    GAO/NSIAD-00-7 Defense Transportation

                           it will eliminate about 1 million government bills of lading, which carrier
                           and defense and industry officials have told us are extremely time
                           consuming to create, process, and store.

                           The planned initiative to contract out some transportation functions may
                           also demonstrate potential cost benefits. Beginning in mid 2000, DOD plans
                           to conduct a 1-year prototype test of the use of an outside contractor to
                           perform transportation functions, including documentation and payment
                           functions. A March 1998 report prepared by Coopers & Lybrand for DOD
                           discusses the use of a contractor to support reengineering of the
                           transportation financial management processes. Specifically, the report
                           entitled, Report of the Department of Defense Reengineering Task Force:
                           Reengineering Transportation Documentation and Financial Processes,
                           Best Commercial Practices, cites the benefits of using commercial
                           companies to perform some in-house transportation services because it
                           would be cost-effective as well as responsive to DOD’s transportation
                           requirements. The report notes that any evaluation of using a third-party
                           logistics provider to perform in-house transportation functions, however,
                           would require a thorough analysis of a contractor’s capability to satisfy
                           contingency requirements.

Challenges in              In moving forward with agencywide PowerTrack implementation, DOD is
                           working to resolve many issues. PowerTrack can provide substantial
Implementing the           benefits. However, DOD faces challenges in modifying PowerTrack to
PowerTrack Electronic      operate with DOD systems. In particular, they need to develop a way to
                           accommodate the existing unique interagency billing and payment process
Payment and                for the airlift and sealift business areas. Further, the interagency billing and
Reconciliation System      payment process is plagued with data accuracy and reliability problems. In
                           addition, PowerTrack is not widely used in the commercial transportation
                           industry, and some carriers are concerned about the impact of the carrier
                           fee in the low-profit margin freight business. These carriers believe the use
                           of PowerTrack could ultimately result in increased freight rates to DOD.

Further Tests to Resolve   The Department faces challenges in implementing PowerTrack in its
Issues Related to          interagency billing and payment process. DOD did not test PowerTrack in
                           accomplishing this process, and the PowerTrack system must be modified
Interagency Billing Are
                           to accommodate it. Implementing PowerTrack with the existing
Planned                    interagency billing system will be a difficult process because, as we
                           reported previously, the DOD shipper is often billed by many defense
                           agencies for reimbursement of a single shipment. Further, customers are

                           Page 6                                      GAO/NSIAD-00-7 Defense Transportation

                             often billed without adequate supporting data so they have difficulty
                             determining if they have been billed accurately. Additional testing of using
                             PowerTrack to make interagency payments is planned before proceeding
                             with full implementation of this process. Prototyping PowerTrack for
                             sealift interagency payments began in September, and the airlift
                             interagency prototype began in November 1999.

                             In addition, current plans to use PowerTrack for interagency billing and
                             payment will encounter an interagency reimbursement system that is
                             plagued with data accuracy and reliability problems. PowerTrack cannot
                             correct the systemic data accuracy and reliability problems in existing
                             systems and requires accurate input data for automatic reconciliation.
                             However, agency officials believe that PowerTrack, with its feedback and
                             correction capabilities, may provide a means to help address some of the
                             systemic data problems. According to agency officials, PowerTrack will
                             need modifications in order to work with the interagency reimbursement

PowerTrack Is Not Widely     PowerTrack is not widely used by commercial companies and has only
Used in the Transportation   been available since April 1998. Electronic Data Interchange, which does
                             not require that carriers pay a fee as PowerTrack does, is widely used in
                             industry, and it is also used by the Defense Finance and Accounting Service
                             with many of DOD’s largest carriers. Electronic Data Interchange is the
                             business-to-business electronic exchange of documents using standard
                             formats that are widely recognized both nationally and internationally. The
                             use of standard data formats allows organizations to exchange common
                             business documents without having to customize their hardware or
                             software for each organization they do business with. Some large carriers,
                             who have made substantial investments in systems and equipment in order
                             to use Electronic Data Interchange, have expressed satisfaction with it and
                             are less inclined to favor PowerTrack. For example, one large carrier
                             representative told us that his company is already getting paid in 7 days
                             with Electronic Data Interchange and electronic payment under the current
                             system, and he does not see enough advantage to using PowerTrack to get
                             payment in as few as 3 days. However, many small carriers have not made
                             investments in Electronic Data Interchange technology; a Defense Finance
                             and Accounting Service official stated that he believes PowerTrack will be
                             a less costly alternative for them. Although PowerTrack offers carriers the
                             ability to use Electronic Data Interchange, carriers do not need substantial
                             investments in associated technology to use the PowerTrack system.
                             Further, DOD has had only limited experience with PowerTrack, having

                             Page 7                                    GAO/NSIAD-00-7 Defense Transportation

                              first started prototype testing with the system in April 1998. DOD does not
                              expect to complete agencywide implementation of PowerTrack until
                              September 2000.

Transportation Costs May      PowerTrack fees could result in higher transportation costs for DOD
Increase Because of Carrier   shippers at military installations that use defense transportation services.
                              PowerTrack charges carriers a transaction fee, similar to credit card fees in
Fees                          the commercial world. Carrier fees generally range from about 1 to 2
                              percent of the transaction amount, gradually decreasing to the minimum
                              1 percent as the transaction amount increases. Other than start-up and
                              modification costs, the government will not incur transaction fees or other
                              PowerTrack costs. However, transportation costs could increase if carriers
                              pass the PowerTrack fee to defense shippers in the form of higher-priced
                              negotiated freight contracts.

                              Some carriers oppose the PowerTrack transaction fees and DOD’s plan to
                              make participation in PowerTrack mandatory in order to bid for future
                              freight business. While some carriers believe quicker payments justify the
                              carrier fee, others believe the time value of money does not offset the fee.
                              Moreover, some carriers are concerned about the negative impact of the
                              fee in their low margin businesses: the American Trucking Association, for
                              example, has expressed concerns about the PowerTrack fee and its cost
                              impact on member trucking firms.

                              Page 8                                    GAO/NSIAD-00-7 Defense Transportation

Overall Results of the   The Department has not addressed how it would comparatively assess the
                         cost and benefits of the two efforts−using PowerTrack and/or a third-party
Reform Efforts Need to   logistics provider−to achieve its goals, particularly in terms of reducing
Be Measured              costs and infrastructure. While the Department has addressed the
                         infrastructure required to support the reengineered financial management
                         processes for the PowerTrack effort, such reductions, according to
                         Department officials, cannot be determined for using a contractor to
                         provide transportation functions until prototype testing is completed.
                         However, as noted previously in this report, a recent study cites potential
                         cost and efficiency benefits from doing so. In addition, as we reported in
                         1996, process fragmentation, duplication, and organizational overlap are
                         major factors driving up defense transportation costs. For example, as
                         many as five separate units’ actions within two component commands may
                         be required to handle a single overseas shipment. These separate
                         organizations require separate staffs and separate supporting
                         infrastructures, the costs of which are ultimately included in customer
                         charges. We noted that waiting to address long-standing organizational
                         issues until process improvements are made would likely represent a
                         significant barrier to achieving the full benefits of reengineering efforts.3

                         Three-quarters of the estimated $11.2 million annual savings resulting from
                         PowerTrack implementation is expected to be derived from a significant
                         reduction in the number of transactions processed by the Defense Finance
                         and Accounting Service and a concomitant reduction in revenue since it
                         charges a fee for each transaction. Although the Defense Finance and
                         Accounting Service has identified 250 positions that could be eliminated
                         under PowerTrack implementation, it cannot eliminate the transportation
                         payment function at the Finance and Accounting Service because it also
                         handles household goods payments that are not covered under the
                         PowerTrack electronic system.

                         DOD has not identified the potential organizational implications of the
                         contracting out effort or projected any infrastructure reductions that could
                         result from this effort. DOD officials told us they must wait for the
                         prototype test of the contract concept that is scheduled to begin in mid
                         2000 and be completed 1 year later. DOD officials told us they cannot wait
                         to complete the prototype for contracting transportation functions before

                          Defense Transportation: Streamlining of the U.S. Transportation Command Is Needed
                         (GAO/NSIAD-96-60, Feb. 22, 1996).

                         Page 9                                         GAO/NSIAD-00-7 Defense Transportation

                              proceeding with the electronic system. They point out that the two efforts
                              are not mutually exclusive, and they would like to use PowerTrack in
                              conjunction with contracting out.

Reform Effort Lacks           Although DOD has established general goals for its financial management
Quantitative Performance      initiative, it has not identified specific savings targets or expected
                              outcomes for the initiative for its fiscal year 2000 Government Performance
Measures in the Results Act   and Results Act Performance Plan. The Results Act requires agencies to
Performance Plan              establish annual performance plans and include performance goals
                              defining the level of performance to be achieved by a program activity. The
                              Results Act further requires agencies to establish performance indicators
                              to measure or assess the outcomes of each program activity and provide a
                              basis for comparing actual program results with the established
                              performance goals. DOD’s fiscal year 2000 performance plan provides a
                              qualitative performance indicator for its defense transportation financial
                              management initiative and cites the goals of increasing transportation
                              efficiency and reducing infrastructure costs. The plan outlines broad
                              strategies for accomplishing these goals, but does not provide quantitative
                              measures by which to judge the relative success of the initiative in reducing
                              infrastructure costs and improving operating efficiencies. For example,
                              although DOD cites “reducing data requirements” as a strategy for
                              achieving its broad goals, it does not provide a quantitative indicator or
                              target by which to measure the success of this effort in reducing costs and
                              improving efficiencies.

Conclusions                   The Department of Defense has made progress in reforming the defense
                              transportation system. We support these ongoing efforts to reengineer
                              costly processes. However, we are concerned that the Department has no
                              plans to comparatively assess the costs and benefits of reengineering
                              transportation financial management processes through PowerTrack or
                              through contracting to a third-party logistics provider. Finally, the
                              Department has not included its savings targets or expected performance
                              outcomes in its fiscal year 2000 Results Act Performance Plan.

Recommendations               We recommend that the Secretary of Defense comparatively assess the cost
                              and benefits of using PowerTrack or contracting out the function to a third-
                              party logistics provider to reengineer the transportation financial
                              management process. In addition, we recommend that the Secretary of

                              Page 10                                   GAO/NSIAD-00-7 Defense Transportation

                      Defense include the specific savings targets and overall performance-
                      oriented measures in future Results Act Performance Plans to enable a
                      clear assessment and comparison of the extent to which these or other
                      efforts could achieve the goals of the transportation reform initiative.

Agency Comments and   The Department of Defense provided comments on a draft of this report
                      (see app. I). The Department disagreed with the draft report
Our Evaluation        recommendations because it believes it (1) has already addressed
                      infrastructure reductions to the extent possible and (2) is using metrics to
                      measure the success of the reform efforts.

                      As we discussed in our draft report, we agree that the Department has cited
                      cost reductions resulting from reengineering its transportation financial
                      management processes for the PowerTrack effort. Also, as noted in the
                      draft report, DOD believes it is premature to estimate savings from the use
                      of a third−party logistics provider until prototype testing is completed. The
                      intent of our recommendation was for DOD to comparatively assess the
                      cost and benefits of the two approaches—using PowerTrack and/or a third-
                      party logistics provider—to determine the best approach for improving the
                      process and achieving cost reductions. Accordingly, we clarified our final
                      recommendation to reflect that position.

                      With respect to our recommendation to develop performance measures
                      with quantifiable goals, the Department stated that it has developed several
                      key metrics to measure success of its electronic payment initiative. In
                      response, DOD provided information on metrics it is using for PowerTrack
                      and other metrics it is planning to develop for the third-party logistics
                      effort. While we agree that the Department has identified metrics, or is in
                      the process of developing them, our concern is that the measures are not
                      linked to the overall reform initiative and are not included in the Results
                      Act Performance Plans. For example, to a make a comparison between
                      PowerTrack and the contractor initiative, performance-oriented measures
                      related to the overall initiative, such as cost reductions and service
                      improvements to DOD customers, are needed. As we stated in the report,
                      the current (fiscal year 2000) performance plan contains no specific goals
                      and does not refer to any metrics. Including performance indicators in
                      future years performance plans would help to provide a means to measure
                      the success of reforming the transportation financial management process.
                      We clarified our recommendation in this regard.

                      Page 11                                   GAO/NSIAD-00-7 Defense Transportation

              DOD also provided some technical comments that we have incorporated as

Scope and     To determine DOD’s progress and challenges in implementing the defense
              transportation reengineering initiatives and to determine if DOD is
Methodology   assessing the infrastructure necessary to support the reengineered
              processes, we obtained and reviewed relevant DOD documents and
              contractor reports. In addition, we interviewed cognizant officials at the
              Office of the Assistant Deputy Under Secretary of Defense for
              Transportation Policy, Washington, D.C. We also obtained relevant
              information and interviewed officials at the Defense Logistics Agency
              Headquarters, Fort Belvoir, Virginia; Defense Distribution Center
              Headquarters, New Cumberland, Pennsylvania; U.S. Transportation
              Command, Scott Air Force Base, Illinois—and from two component
              commands—the Air Mobility Command and the Military Traffic
              Management Command. To obtain additional information on potential
              savings, we interviewed officials at the Defense Finance and Accounting
              Service located in Arlington, Virginia.

              To obtain industry perspective on the defense transportation reengineering
              initiatives, we interviewed various defense transportation system
              commercial cargo carriers, including representatives of six motor carrier
              and two ocean carrier companies. We also interviewed officials of three
              third-party logistics companies.

              We conducted our review from August 1998 through November 1999 in
              accordance with generally accepted government auditing standards.

              We are sending copies of this report to the Honorable William S. Cohen,
              Secretary of Defense; General Charles T. Robertson, Jr., Commander in
              Chief of the U.S. Transportation Command; the Honorable Louis Caldera,
              Secretary of the Army; the Honorable Richard J. Danzig, Secretary of the
              Navy; the Honorable F. Whitten Peters, Secretary of the Air Force; the
              Honorable Jacob J. Lew, Director, Office of Management and Budget; and
              other interested congressional committees.

              Page 12                                  GAO/NSIAD-00-7 Defense Transportation

If you have any questions regarding this letter, please contact me at
(202) 512-8412. Major contributors to this report are Nomi Taslitt, Greg
Symons, Nora Landgraf, and John Wiethop.

Sincerely yours,

David R. Warren, Director
Defense Management Issues

Page 13                                  GAO/NSIAD-00-7 Defense Transportation
Appendix I

Comments From the Department of Defense                                    Appendx

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.

                             Page 14   GAO/NSIAD-00-7 Defense Transportation
                 Appendix I
                 Comments From the Department of Defense

Now on p. 10.

See comment 1.

See comment 2.

                 Page 15                                   GAO/NSIAD-00-7 Defense Transportation
                    Appendix I
                    Comments From the Department of Defense

See comment 3.

See comment 4.

See comment 5.

Now on pp. 10-11.

                    Page 16                                   GAO/NSIAD-00-7 Defense Transportation
Appendix I
Comments From the Department of Defense

Page 17                                   GAO/NSIAD-00-7 Defense Transportation
               Appendix I
               Comments From the Department of Defense

               The following are GAO’s comments on the Department of Defense’s (DOD)
               letter dated October 25, 1999.

GAO Comments   1. We acknowledge in the report that DOD believes it is premature to
               determine the extent that the use of contracting out can reduce DOD
               infrastructure until it is determined whether contracting out can meet its
               requirements. However, the goal setting process can still continue. DOD
               does not have a sound basis for assessing how well third-party logistics
               providers will or will not meet its needs unless it can set infrastructure
               reduction goals prior to implementing the prototype testing effort. As
               stated in the report, a prior DOD study indicates substantial infrastructure
               savings associated with contracting out some transportation functions.

               2. The Department stated that it had identified $11.2 million in
               infrastructure savings using the electronic payment system, referred to as
               PowerTrack in our report. About $8.2 million of the $11.2 million that DOD
               cites in estimated savings is based on Finance Service transaction billings,
               not on actual reductions of infrastructure or personnel. Although DOD
               notes that the Finance Service is adjusting its infrastructure to meet
               changes in workload as PowerTrack is being implemented, no substantial
               personnel reductions have yet occurred. As our report notes, Finance
               Service personnel cannot be totally eliminated until the household goods
               portion of transportation payment is reengineered or included under the
               PowerTrack electronic system. Further, unless the Finance Service actually
               eliminates personnel, the infrastructure savings will not accrue, and
               billings for the remaining services could potentially increase.

               3. DOD notes in its response that the remaining $3 million of the
               $11.2 million in estimated savings is contingent on the successful
               completion of the interagency prototypes, further stating that
               infrastructure adjustments will be made when PowerTrack is implemented
               in these business areas. However, implementation of PowerTrack in the
               interagency process has not yet been determined; therefore, the associated
               infrastructure reductions may or may not occur. The interagency portion of
               PowerTrack, as noted in the report, is a major challenge to successful
               implementation of the reengineered system.

               4. Regarding DOD’s comment that the transportation payment process is
               not a primary focus of the test to evaluate the use of contracting out some
               transportation functions, our point is that many third-party logistics
               providers already offer payment and reconciliation services. While DOD

               Page 18                                   GAO/NSIAD-00-7 Defense Transportation
                   Appendix I
                   Comments From the Department of Defense

                   identified possible savings through the electronic system, the opportunity
                   for potentially greater savings and elimination of unnecessary
                   infrastructure may be possible through the contracting effort. However,
                   absent this type of comparative analysis, DOD will not have the
                   opportunity to compare the two types of approaches to reengineer the
                   transportation payment function.

                   5. DOD added that, even if the prototype is successful, the use of third-
                   party logistics providers to perform the transportation payment and other
                   functions will be applicable to only a segment of the domestic surface
                   freight movement business because outside contractors do not normally
                   handle some types of cargo routinely moved by DOD, which include
                   munitions, bulk fuels, and oversize shipments. While we recognize that
                   contracting out may not be appropriate for some shipments, it need not be
                   overly restrictive during the prototype effort and should allow for testing
                   the full range of capabilities of third-party logistics providers. Moreover,
                   DOD states that it plans to use PowerTrack in the third-party logistics
                   process and does not consider the payment function a primary focus of that
                   effort. By doing so, we believe DOD is missing an opportunity to
                   comparatively assess the potential benefits and cost reductions that may be
                   achieved by contracting out the transportation payment and reconciliation
                   process. In addition, it should be noted that DOD has included both
                   initiatives under its reform effort to reengineer the transportation financial
                   management processes.

(709362)   Leter   Page 19                                    GAO/NSIAD-00-7 Defense Transportation
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