oversight

Army Depots: Plans Abandoned for the New Distribution Center at the Red River Depot

Published by the Government Accountability Office on 1990-08-20.

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

 _-_I             ..--.-,-   ---_-
                                              -_--




                                                     ARMY DEPOTS
    Alrl,[llst~                      I!)!)0




                                                     Plans Abandoned for
                                                     the New Distribution
                                                     Center at the Red
                                                     River Depot




                                                                      142037




(;AO/NSIAJ)-!)()-I84
                  United States
GAO               General Accounting Office
                  Washington, D.C. 20548

                  National Security and
                  International Affairs Division

                  B-221107
                  August 20,199O

                  The Honorable Earl Hutto
                  Chairman, Subcommitteeon Readiness
                  Committee on Armed Services
                  House of Representatives
                  Dear Mr. Chairman:

                  In September 1989, you asked us to review the Army’s efforts to build
                  new, highly mechanizeddistribution centers at three of its depots: the
                  Sharpe Army Depot, in Lathrop, California; the New Cumberland Depot,
                  in New Cumberland, Pennsylvania; and the Red River Depot, in Texar-
                  kana, Texas, You were concernedthat the recently completed center at
                  Sharpe might be underutilized and that the center at Red River, now in
                  the early stagesof construction, might therefore be unnecessary.Among
                  other things, you asked that we (1) compare the present work load at
                  Sharpe to the Army’s early projections; (2) determine the actual cost of
                  the Sharpe project; (3) report the status of work at the three depots; and
                  (4) evaluate the rationale for completing the Red River project, given the
                  potential excesscapacity at Sharpe and New Cumberland.

                  In March 1990, we briefed your office on the preliminary results of our
                  work. We also informed your office that, according to officials at the
                  Army’s Depot System Command,the Army no longer planned to con-
                  struct the distribution center at Red River. This report summarizes and
                  updates that briefing.

                  The work load at the three depots has not increased at the rate pre-
Resultsin Brief   dicted by the Army. In 1986, the Army projected that the total of mate-
                  riel issuesand receipts handled annually by the three depots would
                  increaseby 26 to 53 percent over a 4-year period. The Army used this
                  projection as the primary basis for the construction of new distribution
                  centers at the three depots. However, the total work load at the three
                  depots has increased little since 1986. Depot System Command officials
                  have not analyzed why the expected work load did not materialize.
                  The estimated cost of the three distribution centers has increased36
                  percent since 1984, from $488 million to $668 million. Construction of
                  two of the centers (New Cumberland and Sharpe) has been completed,
                  and the center at Sharpe is partially operational. However, according to
                  Army Depot System Commandofficials, neither center will be able to


                  Page 1                               GAO/NSIAD90-184   Army Depot Modernization
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                     E-221107




                     operate as planned until the completion of delivery, integration, and
                     testing of key software, now expected by March 1991. Theseofficials
                     also informed us that the third center (Red River) is no longer needed.
                     Canceling this project reducesthe $668 million estimate by at least
                     $146.9 million.

                     In 1976, the Army designatedthree depots to receive, store, and ship
Background           secondary items (primarily repair parts and other support items) to spe-
                     cific geographic areas in the United States and overseas.The Sharpe
                     Army Depot servesthe western United States, Alaska, and the Pacific;
                     the New Cumberland Depot servesthe eastern United States, Europe,
                     Central America, the Middle East, the Caribbean, and Puerto Rico; and
                     the Red River Depot servesthe central United States. In ‘1980,the Army
                     stated that new distribution centers were neededat the three depots to
                     meet increasesin the work load expected to result from force moderni-
                     zation efforts.

                     The objective of the depot modernization program is to streamline
                     supply operations by constructing state-of-the-art automated distribu-
                     tion centers. Automated centers are to integrate computers, materiel-
                     handling systems, and bar coding to enable the centers to more effi-
                     ciently receive, store, and ship supplies.
                     In a report to the Secretary of Defense,Army Depots: Planned Distribu-
                     tion Centers Are Not Adequately Justified (GAO/NSIAD-S6-84, June 6, 1986)
                     we concluded that the Army’s work load projections at that time had
                     been basedon questionable-assumptionsand-computation procedures
                     and appeared to be overstated.
                     We also concluded that there could be viable and less costly options to
                     the construction program to satisfy any work load increases.We recom-
                     mended that the Army (1) analyze options for improving the efficiency
                     and effectiveness of existing facilities and (2) identify potential savings
                     to be gained by further consolidation or realignment of the depot
                     system.

                     The projected work load increasesused by the Army as the primary jus-
ProjectedWork Load   tification for construction of the new distribution centers have not mate-
Did Not M&erialize   rialized. Although the total work load was estimated to increaseby 26 to
                     63 percent over a 4-year period, it has remained at about its 1986 level.



                     Page 2                               GAO/NSuDgO-lI34   Army Depot Modembtion
 .
                                      B221107




                                      Work load for the three depots is measuredby the total number of
                                      issuesand receipts, that is, the number of shipments entering or leaving
                                      the depot each year. We analyzed Army projections that were prepared
                                      in responseto our 1986 report. For each depot, two projections were
                                      made through 1990, a high and a low projection. The Army expected
                                      that the actual work loads would fall somewherebetween the high and
                                      low projections.
                                      We compared the projected and actual work loads for each depot for
                                      fiscal years 1986 through 1989, the latest year for which actual data
                                      were available. Actual work load was below the Army’s projections for
                                      each depot; for example, the actual work load at Sharpe was 69 percent
                                      of the low and 47 percent of the high work loads projected for 1989.
                                      Figure 1 comparesthe total actual work loads at the three depots to the
                                      Army’s projections, and appendix 1 contains a detailed comparison for
                                      each center.

Flgure 1: Projected and Actual Work
Loada at the Three Depot8
                                      12.0   lnwsandfiooolptslnYilllons
                                      11.0
                                      11.0
                                      10.5
                                      10.0
                                       9.5
                                       9.0
                                       6.5
                                       9.0
                                       7.5
                                       7.0
                                       6.5
                                       6.0
                                       5.5
                                       5.0

                                        1995                        1996            1997                 1999                  1999
                                        FIscalYear

                                             -         High Projection
                                             -1-1      Low Projection
                                             m         Actual

                                      Source: GAO analysis of Department of Defense and Depot System Command data.




                                      Page 3                                         GAO/NSIAD-!WlfJ4    Army Depot Modernization
                                B221107




                                Depot System Commandofficials informed us that they had not for-
                                mally analyzed the reasonsfor the discrepancy between projected and
                                actual work loads. However, they offered the following observations:

                            . Budget cuts might have reduced the number of orders from customer
                              units.
                            . Budget cuts might also have slowed the Army’s force modernization
                              effort, delaying the introduction of new systems. Such a slowdown
                              would reduce both depot receipts and issues.
                            l New systems that have been introduced are better constructed and more
                              trouble-free than expected. Fewer repairs would result in fewer orders
                              of repair parts from the depots.
                                Further, Army officials said work load for New Cumberland was below
                                projections because(1) someof the work load was shifted from New
                                Cumberland to Europe, after the establishment of three European redis-
                                tribution facilities beginning in 1986, and (2) in anticipation of construc-
                                tion, somework load was shifted to other depots.


Most Stored Items Are Not       Although the work load has not grown as projected, the number of items
Eking Ordered                   in storage has. The number of line items stocked at the three depots
                                steadily increased from 1985 to 1989, as shown in figure 2.




                                Page 4                                GAO/NE&W-90-184   Army Depot Modernization
-
                                         lb221107




Flgure 2: Number of Line Item8 Stocked
at the Three Depots
                                         590      Llno item8 In Thousands

                                         460

                                         400

                                         350

                                         a00

                                         250

                                         200

                                         159

                                         100

                                           1985                       1996                    1997                     1998                         1969
                                           Flsosl Yrr

                                                  -         Sharpa
                                                  - - - -   New Cumbedand
                                                  m         Red River

                                         Note: Depot officials said that, for single line items stored at more than one location in a depot, each
                                         location is counted as a separate line item when the location contains different condition coded
                                         materiel.
                                         Source: GAO analysis of Depot System Command data.


                                         Most of the items stocked at the three depots are largely inactive. Data
                                         on line-item activity as of December23, 1989, show that more than half
                                         of the items stocked at the three depots had not been issued during the
                                         previous 12 months, as shown in table 1. For example, 61.7 percent of
                                         the items stocked at Sharpe experiencedno activity during the 12-month
                                         period ending December23, 1989. In fact, only 9.1 percent of the items
                                         stocked at Sharpe had an issue rate of 10 or more during this period.




                                         Page 5                                                GAO/NSIADBO-l&4        Army Depot Modernization
                                                                                                                           >
                                           5221107




Table 1: Line-Item Actlvlty at the Three
Depot8 (For the 12.Month Period Ending                                                   New
December 23,1989)                          Number of Isauea                      Cumberland          Sharpe      Red River
                                           High (20 or more)                          25,848           7,674        21,734
                                           Medium (10 to 19)                           21,579          8,607          17,819
                                           Low (1 to 9)                                91,559         52,315         100,737
                                           No issues                                  154,077        110,664    152,891
                                           Total                                     293,063        179,260         293,161
                                           Percentage with no activity                  52.6           61.7            52.1




Depot Productivity Is                      The depots have continued to accomplish their supply mission despite a
Increasing Without                         decline in work hours. In effect, productivity is increasing without the
                                           benefit of the new automated capabilities. From 1986 to 1989, work
Modernization                              hours at Sharpe and New Cumberland declined, while work loads
                                           remained constant or increased slightly. Depot System Commandoffi-
                                           cials said that productivity improved in responseto budget constraints
                                           and at the expenseof other necessarydepot managementfunctions,
                                           such as managing inventory and packaging.

                                           The estimated cost of the three distribution centers has increased36
Cost of New                                percent since 1984, from about $488 million to about $658 million.
Distribution Centers                       According to the DefenseDepartment (DOD), the costs exceededthe orig-
Has Increased                              inal projections primarily due to the underestimation of the complexity
                                           of the software and its developmental costs.

                                           As of October 1984, the Army indicated that about $488 million would
                                           be required to modernize the three depots. This figure included about
                                           $404 million in construction and procurement costs and about $84 mil-
                                           lion in facility design and systems software development coststhat
                                           would be transferred from other Army accounts.
                                           Table 2 breaks down the $404 million capital costs neededto build the
                                           centers and to procure equipment, according to the Army’s 1984 esti-
                                           mate. These costs, of which about $386 million has been appropriated,
                                           are now estimated to total about $469 million.




                                           Page 6                              GAO/NSIAD-90-164   Army Depot Modernhtlon
                                         B-221107




Table 2: Estimated Fundlng
Requlrementr to Modernlte the Three      Dollars in millions
Depots (As of October 1984)                                                      Military              Army
                                                                            construction        procurement           Total
                                         Sharpe                                     $49.0              $41.4          $90.4
                                         New’Cumberland                              93.8               79.1          172.9
                                         Red River                                  87.7                52.7          140.4
                                         Total                                    $230.5              $173.2         $403.7


                                         The $84 million estimate for design and software costs has grown to
                                         $199 million. These costs have thus far been funded primarily with
                                         operation and maintenance and Army industrial funds transferred from
                                         other requirements. Budget submissionsto the Congresshave not associ-
                                         ated these costs with depot modernization.
                                         Table 3 shows funds expended or obligated and funds neededfor com-
                                         pleting each distribution center. This table includes the military con-
                                         struction and procurement funds appropriated by the Congressand the
                                         funds transferred by the Army from other accounts.Appendix II
                                         presents detailed cost information for each center.
Table 3: Total Fundlng Requlremenk (As
of October 31, 1989)                     Dollars in millions
                                                                            Expended or Estimated coat
                                         Distribution center                   obligated   to complete                 Total
                                         Sharpe                                    $158.2         $25.5               $163.7
                                         New Cumberland                             219.4          43.2                262.6
                                         Red River                                   39.7              172.0           211.7
                                         Total                                    $417.3              $240.7          9666.0



                                         The construction contract for the distribution center at Red River was
OneProject Canceled;                     canceledin April 1990. Depot System Command officials informed us
Two Continue                             that they do not plan to complete the proposed center. They determined
                                         that Sharpe and New Cumberland have the capacity to handle the Red
                                         River supply work load basedon proposed reductions in troop strengths
                                         as announcedby the Secretary of Defensein January 1990.
                                         Construction has been completed at the other two distribution centers,
                                         and one is partially operational. However, the software neededto
                                         achieve full automation at the two centers is in the testing stage.




                                         Page 7                              GAO/NSIAD-90-184     Army Depot Modernization
                                  B-221107




Red River Distribution            The site of the Red River center had been prepared, and utilities and
Center Canceled                   roads had been relocated in anticipation of the construction. Two build-
                                  ings had also been relocated from the site. The construction contract
                                  was initially awarded in August 1989. However, a Depot System Com-
                                  mand official informed us in November 1989 that, becauseseveral bid
                                  protests were received, the order to start construction was delayed.
                                  In January 1990, the Depot System Commandofficial informed us the
                                  Army no longer plans to build the new center, and in April 1990, the
                                  Army terminated the contract. In addition, officials said that they were
                                  considering transferring Red River’s area-oriented depot supply mission
                                  to New Cumberland and Sharpe. An official said that, basedon a work
                                  load assessmentconducted during January 1990, Sharpe and New Cum-
                                  berland had sufficient capacity to handle the work load. Red River
                                  would continue to fulfill other missions.
                                  According to Army records, DOD allocated about $90 million in appropri-
                                  ated funds for the Red River center-$66.5 million in military construc-
                                  tion funds and $34.6 million in procurement funds. Of the $39.7 million
                                  expended or obligated for the center as of October 31, 1989, only about
                                  $8.7 million was from the military construction funds allocated for the
                                  center. The remaining $31 million was primarily operation and mainte-
                                  nance funds that were not specifically allocated for the Red River
                                  center. No procurement funds have yet been obligated for the center.
                                  In addition, the Depot System Commandofficial estimated that up to
                                  $18.6 million ($13.8 million in procurement funds and $4.8 million in
                                  military construction funds) would be neededto terminate existing com-
                                  mitments for the Red River center. Finally, $6.6 million, the prorated
                                  cost to the Red River center for completion of the managementand con-
                                  trol system, will have to be reallocated to the Sharpe and New Cumber-
                                  land centers. By canceling the Red River project, the $668 million total
                                  funding requirement shown in table 3 could be reduced by as much as
                                  $146.9 million.


Sharpe Distribution Center The Sharpe distribution center, currently stocked with about 47,000 of a
Built and Partially        planned 169,000 line items, is in partial operation using a modified stan-
                           dard depot system. The distribution center construction contract was
Operational                awarded in December1986. This contract included constructing the
              Y                   building and procuring the materiel-handling equipment, automatic data
                                  processingequipment, and the processcontrol system. The contract
                                  completion date was April 1988. While the Army acceptedthe building


                                  Page 8                              GAO/NSIADBO-184   Army Depot Modernization
                             B-221107




                             in January 1989, a Depot System Commandofficial said that it was not
                             expected that the center would be in full operation until January 1993,
                             when the necessarysoftware has been integrated and tested and the
                             center has been fully stocked.


New Cumberland               Currently, the New Cumberland distribution center is not in operation.
Distribution Center Bui.1t   The construction contract was awarded in September 1986. Like Sharpe,
                             this contract includes constructing the building and procuring the equip-
but Not Operational          ment and processcontrol system. The contract completion date was
                             October 1989. While the Army acceptedthe building in January 1990, a
                             Depot System Command official said it was not expected that the center
                             would be in full operation until September 1991, when the.necessary
                             software has been integrated and tested and the center has been fully
                             stocked.


Software Development Has     Development of the managementand control system and the process
Been Delayed                 control system software has been delayed. The managementand control
                             system, originally scheduled for completion in June 1988, is now
                             expected to be fully integrated and tested by March 1991.

                             The processcontrol system for New Cumberland, originally scheduled
                             for completion in October 1989, is now scheduled for completion by
                             August 1990. The processcontrol system for Sharpe, originally part of
                             the Sharpe construction contract, was scheduledfor completion in April
                             1988. The Army terminated the contract in May 1988, and the Sharpe
                             processcontrol system is now to be adapted from the New Cumberland
                             system.

                             We visited the three Army depots, the Depot System Command, and the
Scopeand                     Corps of Engineers.At each location, we interviewed appropriate offi-
Methodology                  cials and examined pertinent contracts, cost records, and other
                             documents.
                             We discussedour findings with officials from the Army’s Depot System
                             Command and the Corps of Engineers and incorporated their comments
                             as appropriate. We performed our work from November 1989 through
                             April 1990 in accordancewith generally acceptedgovernment auditing
                             standards.




                             Page9                               GAO/NSIAD-90=184   Army Depot Modernization
                                                                                                        ,
                     B-221107




Matter for           Becauseonly about $8.7 million of the $90 million in military construc-
                     tion and procurement funds allocated for the now canceledRed River
Congressional        center have been expended and up to $18.6 million may be neededto
Consideration        terminate existing commitments, the Congressmay wish to rescind the
                     remaining $62.7 million ($42 million in military construction funds and
                     $20.7 million in procurement funds).

                     DOD concurred with our findings but disagreedwith our suggestionthat
Agency Commentsand   the Congressshould consider rescinding $62.7 million of military con-
Our Evaluation       struction and procurement funds that were allocated for the Red River
                     distribution center. DOD said that it had identified $39 million that can
                     be rescinded and would agreewith a GAO recommendation to rescind
                     that amount. DOD did not explain how it arrived at the $39 million
                     figure.

                     Our calculation of the amount we suggestedfor rescission($62.7 mil-
                     lion) gave full consideration to the funds already expended, and to the
                     maximum amount the Army estimates will be neededto terminate
                     existing commitments for the Red River center. In the absenceof any
                     explanation as to how DOD determined the amount that it believed
                     should be rescinded, we continue to believe that the appropriate amount
                     for rescissionis $62.7 million.

                     Appendix I provides a comparison of projected and actual workloads at
                     the three depots. The construction costs for these depots are presented
                     in appendix II. A copy of DOD'S commentsis included as appendix III.
                     We are sending copiesof this report to concernedcongressionalcommit-
                     tees, the Secretariesof Defenseand Army, and the Director of the Office
                     of Management and Budget. Copieswill also be made available to other
                     interested parties.




                     Page 10                              GAO/NSIAD-90-184   Am~y Depot Modernization
I



    B-221107




    This report was prepared under the direction of Richard Davis, Director,
    Army Issues,who may be reached on (202) 276-4141if you or your
    staff have any questions. Other major contributors are listed in
    appendix IV.
    Sincerely yours,




    Frank C. Conahan
    Assistant Comptroller General




    Page 11                             GAO/NSIAD-90484 Army Depot Modehtion
Contents


Letter
Appendix I
Projectedand Actual
Work Loads at the
Three Depots
Appendix II
Costsof the Three
Depots
Appendix III                                                                                                16
CommentsFrom the
Department of
Defense
Appendix IV                                                                                                 22
Major Contributors to
This Report
Tables                  Table 1: Line-Item Activity at the Three Depots
                        Table 2: Estimated Funding Requirementsto Modernize
                            the Three Depots
                        Table 3: Total Funding Requirements

Figures                 Figure 1: Projected and Actual Work Loads at the Three                              3
                            Depots
                        Figure 2: Number of Line Items Stocked at the Three                                 6
                            Depots



                        Abbreviations

                        DOD       Department of Defense
                        GAO       General Accounting Office


                        Page 12                               GAO/NSIAD-SO-184   Army Depot Modernization
Page 13   GAO/NSIADfJO-184   Army Depot Modernization
Appendix   I




Projectedand Actual Work Loads at the
Three Depots

               Issues and receipts in millions
                                                                          Year
               Depot                                1985     1986          1987     1988      1989
               Red River
               Projected
                 Low                                  1.9         2.1        2.3       2.5         2.7
                 High                                 1.9         2.3        2.8       3.2         3.6
               Actual                                 1.9         2.2        2.3       2.2         2.2
               Sharpe
               Proiected
                 Low                                  0.9         1.0        1.1      1.2          1.3
                 High                                 0.9         1.1        1.4      1.6          1.9
               Actual                                 0.9         1.o        1.0      0.9          0.9
               New Cumberland
               Projected
                 Low                                  2.7         3.0        3.2      3.5          3.7
                 Hiah                                 2.7         3.3        3.0      4.4          4.9
               Actual                                 2.7         2.6        3.0      2.6          2.7




               Page 14                           GAO/NSIAWO-184         Army Depot Modernization
       .

Appendix II

Costsof the Three Depots


              Dollars in millions
                                                         Expended or         Estimated
                                                      obligated as of            cost to    Total
              Depot                                  October 31.1989          comMte        cost
              Sharpe
              Cost category
                Architect and enaineerina costs                     $11.6          $0.0   $11.6
                Construction                                         50.0            0.4   50.4
                Materiel-handling equipment                          39.1            1 .o  40.1
                Computer hardware                                    10.4            5.2   15.6
                Software desian                                      23.6           12.4   36.0
                Management and control system                        20.6            6.5   27.1
                Other                                                 2.9            0.0    2.9
              Total                                             $158.2            $25.5 $183.7
              New Cumberland
              Cost category
                Architect and enaineerina costs                     $12.4          $0.0    $2.4
                Construction                                         93.0            9.0  102.0
                Materiel-handling equipment                          61.6           13.7   75.5
                Cornouter hardware                                   16.8            1 .Q  18.7
                Software design                                       8.4            8.7   17.1
                Management and control system                        20.6            6.5   27.1
                Other                                                 6.4            3.4    9.8
              Total                                             $219.4            $43.2 $262.6
              Red River
              Cost cateaorv
                Architect and enaineerina costs                      $9.9           $0.0        $9.9
                Construction                                          8.7           85.8        94.5
                Materiel-handling equipment                           0.0           53.0        53.0
                Cornouter hardware                                    0.0            9.3         9.3
                Software desian                                       0.0           15.6        15.6
                Management and control system                        20.6            6.5        27.1
                Other                                                 0.5            1.8         2.3
              Total                                                 $39.7        $172.0 $211.7




              Page    15                          GAO/NSIAD-90484      Army Depot Modernhtion
Appendix   III




CommentsF’romthe Department of Defense ’



                                        ASSISTANT SECRETARY OF DEFENSE
                                              WA*HINGTON. D.C. 20301-8000




                 Mr. Frank C. Conahan
                 Assistant Comptroller General
                 National Security and International
                   Affairs Division
                 U.S. General Accounting Office
                 Washington, DC 20548
                 Dear    Mr. Conahan:
                      This Is the Department of Defense (DOD) response to the General
                 Accounting Office @AC) draft report, %RMy DEPOTS: Plans Abandoned
                 for the New Distribution Center at the Red Rivei: Depot," dated
                 May 14, 1990 (GAOCode 393367), OSDCase 8305.
                       The Department conours with the draft report findings and is
                 pleased that the CR0 supports the DODdecision to cancel the Central
                 Distribution  Center contract at the Red River Army Depot and its
                 plan to transfer the area-oriented depot distribution    functions end
                 workload to the New Cumberland and Sharpe Area-Oriented Depots.      The
                 Department, however, does not agree with the GACsuggestion that
                 the Congress should rescind $62.7 million of the $90 million
                 appropriated for the Red River Central Distribution   Center.    The
                 Department has identified   that $39 million can be rescinded and would
                 agree with a GACsuggestion to Congress for rescission of that
                 amount.
                      The detailed DODcomments on the report findings and the GAC
                 suggestion to the Congress are provided in the enclosure.  The
                 Department appreciates the opportunity to comment on the draft
                 report.

                                                       Sinflrely,


                                                        David J. “Berteau
                 Enclosure                              Principal  Deputy




                        Page16                                  GAO/NSLAD-90-184ArmyDePotModemisstion
                      Appendix ID
                      CommentsFromtheDspsrtmentofDefense




                                G&ODRAFTREPORT- DATEDMAY 14, 1990
                                  GADCODE393367 - OSDCASE8305
                      "ARMYDEPOTS: PLANSABWDCNBDPORTBBNBWDISI‘RIBUTICN
                                CBNTRRATTHE REDRIVBRDEPOT"
                                    DEPARTMENT
                                            OP DEFENSECCW4BNTS


                                              ****

                                              FINDINGS
               .   -XNG       8: mound:       mchanized Distribution  Centers at Three
                   mu.             The GAOexplained that, in 1976, the Army
                   designated three depots to receive, store, and ship secondary
                   items (primarily repair parts and other support items) to
                   specific geographic areas in the United States and overseas.
                   According to the GAO, the Sharpe Army Depot was to serve the
                   western United States, Alaska, and the Pacific states, Europe,
                   Central America, the middle East, the Caribbean, and Puerto Rico;
                   and the Red River Depot was to serve the central United States.
                   The GAOobserved that, in 1980, the Army claimed that the new
                   distribution   centers were needed at the three depots to meet
                   increases in the workload expected to result from force
                   modernization efforts.
                   The CA0 described the objectives of the depot modernization
                   program as streamlining the supply operations by constructing
                   state-of-the-art  automated distribution  centers.  The CA0
                   observed that the automated centers were to integrate computers,
                   materiel-handling  systems, and bar coding--which would enable the
                   centers to receive, store, and ship supplies more efficiently.
Now on p. 2.       (pp. 3-5/GAO Draft Report)
                   &0D RBSP-:      Concur. The Department agrees that the Army
                   Area-oriented Depot concept, which evolved nearly fifteen years
                   ago, and the subsequent plans for the physical plant/equipment
                   and management system hardware/software modernizations were
                   developed to meet forecasted workload increases and to gain
                   efficiencies  in distribution center operations.
               .   H1;TmING@: &&acted workload Did Not Materialize.      The GAO
                   found that the projected workload increases used by the Army as




                     Page17                                GAO/NSLAD-90-184ArmyDepotModernizstion
                          Appendix   III
                          CanmentsFromthe Departmentof Defexwe




                    the primary justification    for construction of new distribution
                    centers did not materialize.     The GAOobserved that, although the
                    total workload was expected to increase by about 26 to 53 percent
                    over a 4-year period, the depot workload at the three sites has
                    actually remained at about its 1985 level.      (The GAOexplained
                    that the workload for the three depots was measured by the total
                    number of issues and receipts-that     is, the number of shipments
                    entering or leaving the depot each year.)
                    The GAOreferred        to its June 1986 report,
                                                              -DEPOTS:
                                                                  v Jusu
                    (OSDCase 6876), which (at that time) concluded that the Army
                    projections were based on questionable assumptions and
                    computation procedures and appeared to be overstated.
                    The GAOcompared the projected and actual workloads for each
                    depot for the period FY 1986 through FY 1989--and found that the
                    actual workload wab below the Army projections for all three
                    depot. According to the GAO, the Army had not looked into the
                    reasons as to why the projected increases did not occur. The GACI
                    reported Army officials   guessed that (1) budget cuts might have
                    reduced the number of orders from customer units, (2) budget cuts
                    might have slowed the Army force modernization effort, thus
                    delaying the introduction   of the new systems, and/or (3) the new
                    aystems that have been introduced are better constructed and more
                    trouble-free  than expected.
                    The GACalso pointed out that the workload for the New Cumberland
                    depot was below projections because (1) some of the workload was
                    shifted from New Cumberland to Europe beginning in 1986--after
                    the establishment of three European redistribution   facilities
                    --and (2) in anticipation  of construction,  some workload was
                    shifted to other depots.
                    The CA0 also emphasized that, in the referenced 1986 report, it
                    had concluded there were other viable and less costly options
                    than the proposed construction program to satisfy any workload
                    increases.   The GAOnoted the prior report recommendedthat the
                    Army (1) analyze options for improving (2) identify potential
                    savings to be gained by further consolidation or realignment of
Now on   pp. 2-4.   the depot system. (pp. 5-g/GAO Draft Report)
                    -RESPONSE:         Concur. The Department concurs that the
                    receipt/issue     workload increases were less than projected.            The



                                                        2




                          Page 18                                     GAO/NSIAD-SO-l&I   Army Depot Modernization
                               Comments From the Depnrtment of   Defense




                            DODfurther agrees that the recent and rapidly changing world
                            events and pressurea for reduced Defense spending will reduce the
                            receipt and issue workload during the 1990s.
                        .   OINDINa:      GQ@toff
                            v.            The GAOobserved that, since 1984, the estimated cost
                            of the three distribution   centers has increased 35 percent--from
                            about $488 million to about $658 million.     The GAOagain referred
                            to its 1986 audit report, which stated that about $404 million in
                            construction and procurement funds and about $94 million in
                            facility   design and systems development software development that
                            would be transferred from other Army accounts.
                            The GAOfound that the construction costs have now grown to an
                            estimated $459 million,   of which about $385 million has been
                            appropriated.    The GAOalso noted that the estimated   $84 million
                            for design and software costs has grown to about $199 million.
                            According to the GAO, those costs have thus far been funded
                            primarily with operation and maintenance and Army industrial
                            funds transferred from other requirements.     The GAOreported,
                            however, that the submisaiona to the Congress have not associated
                            the costs from the Army operations and maintenance Army
Now   on pp. 6.7.           industrial   funds with Army depot modernization. (pp. IO-WGAO
                            Draft Report)
                            s:                Concur. The Department agrees that the
                            modernization coats have exceeded the original projections.      The
                            development, design, and implementation of the state-of-the-art
                            Central Distribution    Centers was a monumental undertaking with a
                            number of inherent uncertainties.     The coats exceeded the
                            original projections primarily due to the underestimation of the
                            complexity of the software and its developmental coats.
                        .   -0:          -m                                   . The GAO observed
                            that the construction contract for the distribution     center at Red
                            River was canceled in April 1990. According to the GAO, the Army
                            does not plan to ccnnplete that proposed center. The GAOobserved
                            the Army determined that the Sharpe and New Cumberland Depots
                            have the capacity to handle the Red River supply workload--and
                            the Red River depot could fulfill  other missions.     The GAO
                            reported that construction was complete at the other two
                            distribution  centers, with Sharpe partially   operational.   The
                            GAOfound, however, that the software needed to achieve full
                            automation at the two centers is still    incomplete.



                                                                 3
                    Y




                              Page 19                                      GAO/NSIAD90-194   Army Depot Modembatlon
                      Appendix III:
                      Comments From the Department   of Defense




                  The GAOlearned that the development of the management and
                  control system and process control system software has been
                  delayed. According to the GAO, that system, originally   scheduled
                  for completion in June 1988, is now expected to be fully
                  integrated and tested at New Cumberland by March 1991. The GAO
                  also learned that the Sharpe managementand control system will
                  be adapted from the New Cumberland system.
                  The GAOfurther noted that the process and control system for New
                  Cumberland, originally   scheduled for completion in October 1989,
                  is now scheduled for completion in March 1991. The GAOpointed
                  out that the process control system for Sharpe, originally   part
                  of the Sharpe construction contract, was scheduled for completion
                  in April 1988. The GAOlearned that the Army terminated the
                  contract in May 1988 and the Sharpe process control system is now
Now on pp. 7-8.   to be adapted from the New Cumberland system. (pp. 11-14/GAO
                  Draft Report)
                  ~RESPONIE:       Concur.  The Department has canceled the
                  construction contract for the distribution   center at Red River.
                  The DODhas determined that the Sharpe and New Cumberland
                  Area-oriented Depots have the capacity to handle the Red River
                  Army Area-oriented Depot supply workload. Current plans call for
                  the attrition   of stocks and the transfer of the Red River supply
                  distribution  workload to Sharpe and New Cumberland over the next
                  five years.
                  On April 12, 1990, the Deputy Secretary of Defense made a Defense
                  Management Review Decision to consolidate supply depot
                  distribution   functions within the Department, The first step in
                  the consolidation process is to conduct a prototype of the
                  consolidation concept in the San Francisco Bay Area. The supply
                  depot functions at the supply depots in the San
                  Francisco/Sacramento areas (including Sharpe Army Area-oriented
                  Depot) will be managed and operated by the Defense Logistics
                  Agency. The plans and actions to consolidate the distribution
                  functions at the supply depots in the San Francisco/Sacramento
                  area are underway and the prototype will be operational by 1991.




                                                     4




                      Page 20                                     GAO/NSIAIMO-lS4   Army Depot Modemhtion
                  Cvmanente From the Department   of Defense




                                                  * * * *

                              MATTER FOR CONGRESSIONAL         CONSIDERATION

             .   SUGGESTION TO THE:             The GAOsuggested that the Congress
                 may wish to rescind $62.7 million of the $90 million appropriated
                 for the Red River center ($42 million in military   construction
Nowon p.9.       funds and $20.7 million in procurement funds).    (pp. 15-15/GAo
                 Draft Report)
             .   M)D:             Partially concur. The Department disagrees with
                 the GAOsuggestion that the Congress should rescind $62.7 million
                 of the $90 million appropriated for the Red River Central
                 Distribution Center. The Department has identified    that $39
                 million can be rescinded and would agree with a GAOsuggestion to
                 Congress for recision of that amount.




                  Page 21                                       GAO/NSIAD#O-184   Army Depot Modemization
Appendix       IV




Major Contributors to This Report


                        Henry L. Hinton, Associate Director
National Security and   Edward M. Balderson, Assistant Director
International Affairs
Division,
Washington,DC.
                        John M. Schaefer, Regional ManagementRepresentative
mm ti’rancisco
c-t--      r
                        Hector M. Castillo, Evaluator-in-Charge
RegionalOffice          Joseph M. Rosalez;Evaluator          -
                        Michael S. Sanabria, Evaluator




(aaaaa7)                Page 22                            GAO/NSIAD-90-W   Arn~y Depot Modernization
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