oversight

Defense Programs: Opportunities to Reform Key Business Practices

Published by the Government Accountability Office on 1997-03-05.

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

      United States
GAO   General Accounting  Office
      Washington, D.C. 20548

      National Secmily and
      International Affairs Division

      B-276316




      March 5, 1997

      The Honorable John R. Kasich
      Chairman, Committee on the Budget
      House of Representatives

      Subject: Defense Programs: Opportunities to Reform Key Business Practices

      Dear Mr. Chairman:

      At your request, we summarized information on the defense budget and
      Department of Defense (DOD) infrastructure, inventory management, financial
      management, and acquisition programs. Since these programs are among the
      areas we have designated as high risk, that is vulnerable to waste and
      mismanagement, and in need of major reforms, we relied heavily on our
      recently issued series of reports on high-risk areas’ in preparing this letter for
      you.

      We have reported on problems and made numerous suggestions for
      improvements and efficiencies in DOD’s infrastructure, inventory management,
      financial management, and acquisition programs for many years. While DOD
      has made progress in improving these programs, much remains to be done to
      fully implement the corrective actions needed to remove the high-risk
      designation. At the core of the high-risk problem areas is a lack of fundamental
      accountability. Until DOD incorporates accountability across its organization
      and programs and takes a&ion to improve basic management practices and
      processes, it will continue to run inefficient operations that ultimately divert
      funds from more pressing needs. Furthermore, it will continue to lack the



      %igh Risk Series: Defense Infrastructure (GAO&R-97-7, Feb. 1997); High Risk
      Series: Defense Inventorv Management (GAO/HR-97-5, Feb. 1997); High Risk
      Series: Defense Financial Management (GAOLHR-973, Feb. 1997); and High Risk
      Series: Defense Weauon Svstems Acauisition (GAO/HR-97-6, Feb. 1997).

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information needed to manage its vast resources of over $1 trillion in assets, 3
nriJlion military and civilian personnel, and a budget of over $250 billion.

As you know, landmark legislation in the 199Os,including the expanded Chief
Financial Officers Act of 1990 and the 1993 Government Performance and
Results Act, established broad management reforms that, if implemented
successfully, will help resolve high-risk problems and provide greater
accountability in many government programs and operations. High-risk areas
generally involve long-standing problems that are difficult to correct. Sustained
management attention and congressional oversight are necessary to achieve full
and effective implementation of legislative mandates, our suggestions, and
corrective measures by agencies.

BACKGROUND

The changing international security environment has prompted @nificant
changes in the defense program and budget. Since the fall of the Berlin Wall
and dissolution of the Soviet Union, DOD has shifted its focus away from a
strategy designed to meet the threat of global war to one oriented toward more
diverse dangers that DOD considers to be charaeteristie of the post-Cold War
security environment. These dangers include regional instability; the
proliferation of nuclear, biological, and chemical weapons; terrorism; and
dangers to democracy and reform in the former Soviet Union and elsewhere.
To counter large-scale regional aggression, the current U.S. strategy requires
military forces that are capable, in concert with regional allies, to fight and win
two major regional conflicts that occur nearly simultaneously.

DOD has taken steps to adjust its program and budget to reflect the realities of
the post- Cold War period. For example, it initiated a major downsizing
program to reduce the size of the military-active duty and reserve personnel-
and civilian force from a total of 4.4 million in fiscal year 1987 to 3.2 million
personnel in fiscal year 1996. By fiscal year 2001, this number is projected to
decrease to about 3 million. Of the active force, the enlisted ranks will be
reduced by the largest percentage-from about 1.9 million in fiscal year 1987 to
 1.2 million in fiscal year 2001, or 35 percent, compared to the officer corps for
this same time period-from about 307,000 to 222,000, or 28 percent. Table 1
provides a detailed breakdown of changes in active military (officer and
 enlisted), reserve, and civilian personnel in fiscal years 1987, 1996, and 2001.




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Table 1: Changes in the Numbers of Military and Civilian Personnel

Numbers in thousands

                                                                     Change from
 Category of        Fiscal year   Fiscal year    Fiscal year         fiscal year
 Personnel              1987         1996            2001            1987-2001
 Active military”         2,174          1,482            1,418              -756
    Offker                 307            234                  222
    Enlisted              1,853          1,236            1,184              -669
 Selected
 reserveb
 Civilians
 Total                    4,458          3,243            3,039

“Number includes military cadets.
bNumber includes service reserve components and National Guard.


DOD has also redueed its structure-numbers of aircraft wings, divisions, and
aircraft carriers. Table 2 shows the reduced force structure for selected
elements between fiscal year 1990 and 1996 and the projected structure for
fiscal year 1999 based on DOD’s bottom-up review. As required by the fiscal
year 1997 defense authorization act, DOD is reassessing the defense program,
including the structure of the force, as part of a quadrennial defense review
expected to be completed in May 1997, Therefore, changes to the bottom-up
review plan for the projected force structure may occur, depending on the
outcome of the review.




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Table 2: Changes in Selected Force Structure Since the End of the Cold War

                                                                   Fiscal year 1999plan
                                                                   based on
 Service         F%xai year 1990          Fiscal year 1996         bottom-up review
 hY              18 active divisions      10 active divisions      10 active divisions
                 57 reserve brigades      47 reserve brigades      42 reserve brigades
 Marine Corps    3 active divisions       3 active divisions       3 active divisions
                 1 reserve division       1 reserve division       1 reserve division
 Navy            16 aircraft carriers     12 aircraft carriers     12 aircraft carriers
                 546 battle force ships   359 battle force ships   346 battle force ships
 Air Force       24 active wings          13 active wings          13 active wings
                 12 reserve wings         8 reserve wings          7 reserve wings


Defense funding has also declined-by about $50 billion, or 17 percent, from
about $293 billion in fiscal year 1990 to $250 billion in fiscal year 1997. Of
DOD’s individual appropriation accounts, procurement has been reduced to the
greatest extent from about $95 billion in fiscal year 1990 to $39 billion in fiscal
year 1997, or 59 percent. DOD said it took advantage of the force drawdown
and slowed modernization to fully fund expenditures that guarantee near-term
readiness-spare parts, training, and maintenance. Readiness continues to be a
high priority for DOD.

Now that the drawdown in forces is nearly over, DOD wants to reverse the
trend in procurement spending and fund the modernization it believes is needed
to preserve the long-term readiness of the force against aging equipment. In its
fiscal year 1997 Future Years Defense Program (FYDP), DOD projected an
increase of about 54 percent in procurement spending, beginning in fiscal year
 1997, to achieve a level of about $60 billion by fiscal year 2001, compared to
$39 billion in fiscal year 1997. DOD’s strategy for achieving its modernization
plans is based on the assumptions that (1) the defense budget will modestly
increase from fiscal year 1998 through 2001 and (2) savings will be realized
from acquisition reform and by reducing infrastructure. The Secretary of
Defense has suggested that if savings do not materialize as expected, it may be
 necessary to reduce the force structure and adjust DOD’s strategy.



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The following sections discuss DOD’s infrastnxcture, inventory management,
financial management, and acquisition programs. For each area, we identify
key issues and related examples to highlight specific problems; the status of
DOD’s initiatives to make program improvements; and opportunities for
additional reforms. Enclosures I, II, and III provide additional information on
infrastructure, inventory management and financial management reforms.

INF’RASTRUCTURE

DOD defines infrastructure as those activities that provide support services to
mission programs, such as combat forces, and primarily operate from fixed
locations. In the past several years, DOD has taken steps to reduce its
infrastructure. However, it continues to keep unneeded facilities, operate many
activities inefficiently, and construct or upgrade unneeded facilities. As a result,
infrastructure remains a costly budget item. From 1997 to 2001, DOD plans to
spend $744 billion, or about 60 percent of its total obligation authority, for
infrastructure activities. Although DOD wants to reduce spending for
infrastructure activities, its budgets actually show an increase of $9 billion over
the next 5 years-from $146 billion in fiscal year 1997 to $155 billion in fiscal
year 2001. Most infrastructure activities are funded through DOD’s operation
and maintenance and military personnel appropriations. Therefore, if DOD is to
achieve significant infrastructure savings for force modernization, the savings
must come from these accounts.




l   At the time of the 1995 Base Realignment and Closure (BRAC) process,
    DOD’s overall depot system had 40 percent excess capacity. This figure was
    derived by comparing fiscal year 1996 program workload with maximum
    potential capacity. DOD currently has 21 major depots-7 depots have 50
    percent or more excess capacity, and 3 others have between 40 and 50
    percent excess capacity,

l   The executive branch intends to privatie the workload at two Air Force
    logistics centers. However, closing the centers and transferring the


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            workload to other centers would have enabled DOD to reduce total excess
            capacity within Air Force logistics centers from 45 to 8 percent.

l           After all current base closure a&ions are completed, DOD’s research and
            development laboratory infrastructure stih will have about 35 percent excess
            capacity, according to DOD officials.




l           Duplicate support services continue to operate where military bases are
            located close to one another or where similar functions are performed at
            multiple locations. For example, Fort Lewis and MeChord Air Force Base in
            Washington maintain separate airfield operations facilities. Fort Lewis
            personnel believe that both bases’airfield operations can be served by one
            facility. Fort Bragg and Pope Air Force Base in North Carolina have
            separate contract administration, supply and engineering, and other support
            services that potentially could be consolidated.

    l       To cover excessively high overhead costs, DOD frequently charges
            customers double or triple the cost of the basic transportation. The high
            overhead costs stem in part from an outdated and inefficient organizational
            structure and separate billing systems that could be streamlined.

    l       DOD estimates its processing costs for temporary duty travel-about $3.5
            billion in fiscal year 1993-are as much as 30 percent of the direct travel
            cost. This percentage is well above the lo-percent average reported for
            private companies and the 6-percent rate that industry considers an efficient
            operation.




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l    The services are trying to add to their testing capability to protect their
     infrastructure rather than consolidate. For example, the Navy intends to
     construct a large anechoic chamber-a test room lined with sound-absorbing
     material-at Patuxent River, Maryland, and the Air Force plans to add to its
     anechoic capacity at Edwards Air Force, California, even though the existing
     chamber at Edwards is underused.

*    DOD is spending $51 million in military construction funds on accounting
     facilities that are unneeded.

DOD’s Initiatives

DOD has taken some steps to reduce infrastructure. With the help of the BRAC
process, DOD has closed bases and reduced related personnel and other base
support costs. By DOD’s count, BRAC rounds in 1988, 1991, and 1993 produced
decisions to fully or partially close 70 major domestie bases and reduce plant
replacement value by 15 percent. DOD’s goal during the 1995 BRAC round was
to reduce the domestic base structure by a minimum of another 15 pereent-
achieving a total reduetion of 30 percent. However, decisions resulting from
this round will reduce the base structure by a total of 21 percent, or 9 percent
short of DOD’s goal. To its credit, DOD has programs to identify potential
infrastructure reductions in many areas, however it lacks an overall strategic


Opportunities for Reform

DOD has opportunities to
reduce infrastructure costs and
realize significant savings. As a
first step, DOD needs to develop     j i ,~li~~nate’.e~~l~~;~l                                     Ii’i.:.;
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establish time frames and
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personnel responsible for accomplishing fiscal and operational goals. In
developing the plan, DOD should consider using a variety of means to achieve
reductions, including consolidations, closings, reengineering, and privatizing
facilities and operations. It should also consider the need and timing for future
BRAC rounds, as suggested by the 1995 BRX Commission and others.

DOD also needs to take specific actions to eliminate unneeded and inefficient
property, facilities, and overhead. DOD has numerous opportunities to
eliminate excess capacity by consolidating workloads and closing facilities,
especially in the areas of depot maintenance, training, research, and financial
accounting. Greater efficiency could also be achieved if DOD consolidated and
eliminated duplicate support services where military bases are located close to
one another or where similar functions are performed at multiple locations.
DOD also needs to apply private industry’s best practices to reengineer key
processes such as transportation, travel, and pay. Enclosure I further discusses
reform opportunities.

INVENTORY MANAGEMENT

In 1992, we reported that DOD had wasted billions of dollars on excess
supplies. This problem resulted because DOD believed that it was better to
overbuy items than to manage with just the amount of stock needed. Had DOD
used effective inventory management and control techniques and modern
commercial inventory management practices, it would have had lower inventory
levels and would have avoided the burden and expense of storing excess
inventory. While some reform initiatives are underway, they are limited in
scope and being implemented very slowly, and in some cases, benefits may not
materialize for years, if at all. DOD needs to more aggressively pursue some
reform initiatives that apply best commercial practices and take steps to reform
the military services’policies and practices that result in overstated supply
requirements.




 l   DOD’s inventory management system is multilayered and based on a belief
     that it is better to overbuy items, whereas private sector companies use
     streamlined systems.

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    l   Inventories are often stored in as many as four different layers-depots,
        warehouses, and central and service end-user storage locations-- between
        suppliers and end users.

    * Inventory turns over slowly-about once every 4 years for electronics
      supplies compared to 4 times per year in the private sector.

    * Private sector practices include employing “just-in-time” practices that
      shift responsibility for storage and management to suppliers; using a few
      key suppliers to deliver items only when needed; and using direct delivery
      practices, electronic ordering systems, and bar-coding.

*   DOD conunonly overstates requirements and understates the amount of
    inventory on hand when budgeting for and buying spare parts and supplies
    as a result of questionable policies for determining needs anq poor
    accountability.

    0 The Army identified a deficit inventory valued at $211 million that was
      actually a $23 million deficit and, as a result, budgeted for unneeded parts
      and supplies.

    l   The Navy, in one year alone, overbudgeted by at least $60 million for 12
        F-404 engine parts and will incur unnecessary costs of about $27 million
        because it did not have adequate visibility over $5.7 billion in operating
        materials and supplies on board ships and at 17 redistribution sites.

    l   The Air Force excludes many of the assets it has on hand when it
        calculates the amounts of aviation spare parts it needs to buy.




l   About half of DOD’s inventory of spare parts, clothing, medical supplies, and
    other items, valued at $69.6 billion, includes items that are not needed to
    support war reserve or current operating requirements.

    l   In September 1994, the Air Force had $16 billion in aircraft parts that
        exceed its needs for daily operations and war reserves.

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     l       The services have stored at nonmjor locations $2.7 billion in inventory
             that is not needed to meet current operating and war reserve
             requirements.

 l   DOD spends millions of dollars to manage and store excess items.

     l       The Army has a 159-year supply of camouflage netting that exceeds war
             reserve and current operating requirements and will be replaced by a
             different item in 2003.

     l       The Army pays $9.42 per year to store a single item valued at $2.96 in a
             storage bin that could hold 259 of these items. The Army had 404 more
             of this item than it needed overall, and only 3 requests for the item had
             been processed in the last 2 years-none of those orders were filled from
             the storage site that contained the single item.

         l   The Navy and Defense Logistics Agency stock millions of dollars of
             unnecessary insurance items-parts that are not expected to fail through
             normal usage.

DOD’s Initiatives

In the past several years, DOD has reduced inventories and has implemented
some initiatives to improve its current management system and practices.
Between 1989 and 1995, as U.S. forces were downsized and budgets were
reduced, DOD reduced its inventories from $92.5 billion to $69.6 billion.’ DOD
is trying to develop a standard system for determining requirements but is
encountering implementation problems and delays. DOD also planned to
improve oversight of its inventory by acquiring total asset visibility by 1996.
However, according to its current plan, this initiative will not be completely
implemented until 2001. DOD has taken steps to identify ways to free up
 storage space and reduce storage costs by disposing of items that are not
needed or are used infrequently. However, it has not taken steps to consolidate
 small inventory quantities at nonmajor locations into fewer storage locations.




‘Much of this reduction resulted from revahring excess inventory and
unserviceable items.

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DOD has also adopted commercial practices to begin reengineering the existing
system, but its initiatives have generally been limited and represent only a small
portion of DOD’s operations. For example, the Defense Logistics Agency has
successfully used best inventory practices on personnel items (medicines, food,
and clothing), using direct vendor delivery for these items. However, these
initiatives deal with only about 3 percent of the items for which this concept
could be used, and DOD has not aggressively pursued additional opportunities
to apply these practices. Also, the Air Force is redesigning its logistics
operations, including testing leading-edge business practices that remove
unnecessary inventory layers, repair parts as they break, and rapidly transport
parts between end users and the repair facilities. However, at the time of our
review, this testing was being applied to less than 1 percent of the Air Force’s
inventory items.

Omortmities for Reform
DOD needs to significantly
reform its inventory
management system. DOD cm
further reduce excess
inventories and operate the
current system more efficiently
ad effectively. In the long
term, DOD should be more
aggressive in identifying and
adopting   be&   business   practices

from the private sector to
reengineer its inventory system.

DOD has numerous opportunities to make reforms and achieve savings. For
example, eliminating unneeded inventory that is often stored in small quantities
at nonmajor locations and infrequently requested could result in reduced
inventory holding costs of about $382 mUion a year. DOD could save $723
million by (1) reelaiming spare parts from excess aircraft, (2) considering parts
on hand at depot maintenance as an offset to spare and repair parts
requirements, (3) eliminating duplicate depot maintenance requirements, (4)
reducing overstated requirements, and (5) correcting inaccurate budget data.
DOD also needs to provide managers with modern, automated accounting and
management systems to better control and monitor its inventory.


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Also, DOD should expand its reengineering efforts to other areas. For example,
the Defense Logistic Agency could significantly reduce hardware inventories
and related management costs if it adopted innovative commercial practices
such as using supplier parks and other techniques that give established
commercial distribution networks the responsibility to manage and store
inventories and distribute inventory items directly to end users on a frequent
and regular basis. The Air Force could expand efforts to redesign its logistics
operations by making greater use of third-party logistics services, establishing
closer partnerships with suppliers, using local distribution centers, using
centralized repair facilities, and modifying repair facilities to accommodate
these practices. Enclosure II further discusses reform opportunities.

FINANCIAL MANAGEMENT

DOD needs accurate financial information and effective processes to safeguard
and manage its vast resources-over $1 trillion in assets, 3 million military and
civilian personnel, and a budget of about $250 billion for fiscal year 1997.
However, defense financial management systems are substandard, and its
outmoded processes are plagued by serious weaknesses and inefficiencies. For
example, it has been unable to match billions of dollars in disbursements to the
specific goods or services it is paying for. DOD has taken some important first
steps to resolve these problems, which are the result of decades of neglect, but
still has a long way to go to achieve meaningful and sustained financial
management. Addressing these problems is also critical to solving DOD’s other
high-risk areas.

In the past several years, Congress has passed important legislation to provide a
framework for DOD and other agencies to reform their financial management.3
Among other things, this legislation requires an organizational structure coupled
with specific responsibilities that provide direct accountability for financial
management improvements and annual measurements of achievements through
financial statement preparation and audits. To further help, the Federal
Accounting Standards Advisory Board has made substantial progress in
developing and recommending a comprehensive set of accounting concepts and
standards for the federal govermnent. Properly implemented, these


3This legislation includes the Chief FXnanciaIlOfficers Act of 1990, the
Government Management Reform Act of 1994, and the recently enacted Federal
Financial Management Improvement Act of 1996.

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requirements will provide a framework for DOD to strengthen not only its
financial management operations and reporting but also its ability to meet
critical mission objectives.


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l          Because of weaknesses in financial management systems, practices, and
           procedures, federal auditors have concluded that DOD will not likely be able
           to pass the test of an independent financial statement audit, a long-standing
           and fundamental prerequisite in state and 1ocaI governments, until the next
           century.

l         DOD’s existing accounting and financial management practices are disparate,
          nonstandard, and piecemeal and cannot be used to assemble a complete
          accounting for Department operations. Only 5 of DOD’s 249 reported
          primary financial systems conform to federal standards. This is a major
          reason why DOD lacks complete information on the costs to buy and
          operate weapon systems and contributes to DOD’s continuing purchases of
          unneeded mate&Is.

l         DOD has had a continuing problem in promptly or accurately matching
          billions of dollars in cash disbursements with the related obligations, or
          accounts payable, those payments are intended to cover. We recently
          estimated that DOD’s problem disbursements totaled at least $43 billion-$25
          billion more than reported by DOD.

l         Individuals responsible for carrying out DOD’s financial operations
          frequently lack the necessary experience, technical competencies, and
          training. For example, only about 58 percent of the key managers at central
          accounting locations, which are responsible for accounting for DOD’s $250
          billion annual budget, had more than the minimum amount of accounting
          training necessary to qualify as an accountant in the federal government, and
          only 6 of 107 key managers were certified public accountants. DOD has not
          yet defined minimum continuing professional education requirements for its
          financial workforce.

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l           DOD has not adhered to frmdamentti internal controls, which should be an
            inherent and routine aspect of a department’s operations. For example,
            DOD did not effectively reconcile its cash balances-comparable to balancing
            your checkbook; conduct physical counts of inventories-critical for
            detecting fraud and theft; reconcile payroll and personnel records-critical to
            ensuring that only valid personnel are paid when separate payroll and
            personnel systems are maintained; and detect and follow up on abnormal
            balances-essential for ensuring the accuracy of reports and identifying
            potential waste, fraud, or theft. One result of these problems is that DOD
            has paid millions of dollars in unauthorized military payroll payments.

    l        Pervasive weaknesses in controls over access to sensitive computer
             information place this data at risk of improper modification, theft,
             inappropriate disclosure, or destruction. As a result, computer hackers, or
             ill-intentioned authorized users, could make unauthorized payments to
             themselves or divert materials without detection.

    l        DOD has been plagued with duplicative and outmoded business practices
             that are complex, slow, and error-prone. For example, until recently a
             traveler was required to go through about 40 steps to gain approval and
             reimbursement for expenses. Such processes also contribute to contractor
             overpayments and DOD’s inability to account for billions of dollars.
             Antiquated and deficient business practices-unless substantially
             reengineered-severely limit DOD’s ability to overcome its deficiencies in
             financial management systems and operations.

        DOD Initiatives

        To DOD’s credit, its leadership has recognized the importance of tackling the
        broad range of financia3 management problems and has many reform initiatives
        underway. In laying out his blueprint for reform in February 1995, the
        Secretary of Defense called for a number of long-needed steps such as
        consolidating finance and accounting systems, validating disbursements before
        they are made, strengthening overall control mechanisms, and modernizing its
        business practices. The Department has taken the following specific actions in
        each of these areas.

        -    Attempted to identify all its financial management systems and modifying
             those systems to meet DOD-wide and federal requirements. We recently
             reported that DOD’s latest report on its inventory of financial systems,

        14                                          GAOINSIAD-97-99R Defense Reforms
B-276316



     however, still excludes hundreds of systems it uses to carry out financial
     operations; without such a comprehensive inventory of its financial systems,
     DOD’s ability to carry out its basic stewardship responsibilities will continue
     to be impaired.

     Established a defense accounting system program management office
     dedicated to providing centralized management control and oversight for
     Defense Finance and Accounting Service (DFAS) accounting systems.

     Begun a number of short and long-term initiatives to reduce its problem
     disbursements, such as implementing a policy to match disbursements to
     obligations, prior to payment, for payments.

     Upgraded skills and professionalism of its financial management workforce,
     by (1) improving the technical and managerial competeneies for accounting
     managers and stq (2) provided more on-the-job training to interns; and (3)
     developed a DFAS Career Development System which will identify
     competencies obtained through training, education, organizational
     assignments, and self-development initiatives.

     Reduced and clarified key internal control requirements and increased
     accountability on managers for ensuring these requirements are followed.

     Initiated efforts to reengineer business practices, including travel practices.




15                                           GAO/NSIAD-97-99R Defense Reforms
B-276316



Otmortunities for Reform

While DOD’s actions, planned
and underway, offer the
potential for significant progress,
we believe that many additional
actions are necessary. Since
1990, we and DOD auditors have
made over 400 recommendations
to improve DOD’s financial
management weaknesses. For
example, DOD needs to
continue efforts to improve its
finance and accounting systems.
Before it can do so effectively,
however, DOD must first have a
complete picture of what those
systems are, what information
they process, and how those
systems relate to each other.
Also, DOD needs to supplement its current efforts to reduce problem
disbursements by determinin g the extent to which ongoing initiatives will result
in improvements in areas that are the most significant contributors to
 disbursement problems.

To further improve the quality of its financial workforce, DOD needs to identify
the skills, experience, and number of personnel needed for its financial
operations; change its hiring criteria; and upgrade the job experience and
training of its financial managers. To strengthen internal controls, DOD needs to
take actions such as improving the quality of data in current financial systems,
implementing basic financial controls, and implementing a comprehensive
computer security management program. Further, rather than focusing on
information technology improvements within existing processes and
organization, DOD needs to adopt a more aggressive approach to reengineering
not bounded by existing processes and organization. Enclosure III further
discusses reform opportunities.




 16                                         GAO/NSIAD-97-99R Defense Reforms
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DEFRNSE ACQUISITION

DOD spends over $75 billion annually to research, develop, and procure aircraft,
ships, ground vehicles, missiles, and other weapon systems. Despite DOD’s
past and current efforts to reform the acquisition system, wasteful practices still
add billions of dollars to defense acquisition costs. While DOD expenditures
have produced many of the most capable weapons in the world, many new
weapon systems cost more and do less than anticipated, and schedules are
often delayed. Moreover, the need for some of these costly weapons,
particularly since the end of the Cold War, is questionable. DOD is pursuing a
number of positive initiatives that should, over time, improve the cost-
effectiveness of its acquisition processes. Our work, however, suggests that not
all of these specific reforms are sufficient and that stronger a&ions are needed.


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l          DOD’s process for determinin g weapon system needs and identifying
           solutions offers little assurance that its investments provide the greatest
           payoff in added capability and the most cost-effective alternatives.

            0 DOD does not routinely assessjoint mission needs and the aggregate
              capabilities of the services to meet requirements. Instead, DOD relies
              heavily on each military service to identify its requirements and propose
              solutions.

           l       For example, the operational deficiencies in the F/A-180 aircraft cited
                   by DOD to justify buying the F/A-18E!F either have not materialized as
                   projected or can be corrected with nonstructural changes to the C/D.
                   Furthermore, the E/F’s operational capabilities will be only marginally
                   improved over the C/D model but will cost an additional $17 billion.
                   Continuing to procure and upgrade the F/A-18CYDuntil the next
                   generation strike fighter achieves operational capability could provide
                   DOD greater capability at significantly lower cost.




17                                                                                                                              GAOLNSIAD-97-99R Defense Reforms
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* DOD makes major force structure and planning decisions without having
  completed analyses of the services’ combat air power requirements and
  capabilities.

             l       DOD is proceeding with some major air power modernization programs
                     without clear evidence that they are justified. Despite numerous
                     overlapping, often redundant interdiction capabilities, the services plan to
                     spend over $200 billion over the next 15 to 20 years to buy aircraft and
                     other weapons that will further enhance their interdiction capabilities.




l            DOD has historically experienced cost overruns, schedule delays, and
             performance shortfalls in its weapons acquisition programs.

                 0 The desire of program sponsors to keep program cost estimates as low as
                   possible and to present attractive milestone schedules encourages the use
                   of unreasonable assumptions about the pace and magnitude of the
                   technical effort, material costs, production rates, savings from
                   competition, and other factors.

    l            We continue to find examples of programs with overly optimistic projections
                 and excessive risks.

                 l   Air Force plans call for the Joint Air-to-Surface Standoff Missile to be
                     developed and initially deployed in 5 years for no more than $700,000 per
                     missile. However, the plan does not appear to allow enough time to
                     develop and test the complex technology needed and to integrate the
                     missile into the appropriate aircraft.

                 l   DOD’s estimated unit cost of $44 million (in fiscal year 1996 dollars) for
                     its F/A-18ELF’is understated. The estimate is based on buying 1,000
                     aircraft for the Navy and Marine Corps, producing 72 per year. The
                     Marines no longer plan to buy the tieraft, and Congress has questioned
                     the affordability of producing 72 aircraft per year under likely budgets.
                     By reducing the number of aircraft to be procured and the annual

        18                                                 GAO/NSIAD-97-99R Defense Reforms
B-276316



         production rate to more realistic goals, we calculate the unit
         cost at about $53 million (in fiscal year 1996 dollars).

0 The quality and credibility of DOD’s cost information remain a problem.

     l   As we reported in March 1996, the Navy’s financial reports excluded
         billions of dollars invested in building aircraft and missiles and
         modernizing weapons systems. Also, the Navy’s reported costs for ships
         under construction did not include all relevant costs.




l    DOD acquires weapons based on optimistic assumptions about the maturity
     and availability of enabling technologies.

*    DOD often buys large numbers of untested weapons during low-rate initial
     production to gain early commitment to and support for the programs. To
     help pay for these purchases, DOD has had to cut back by more than half its
     planned production rates for many weapons that have already been
     successfully tested. This practice is wasteful because DOD must often make
     costly modifications to these untested weapons to make them usable and
     must lower annual buys of tested, proven weapons, stretching out full-rate
     production for years due to a lack of funds.

     l   The Air Force’s C-17 airlift aircraft, the Navy’s T45A trainer aircraft, and
         the Army’s family of medium tactical vehicles encountered problems
         during test and evaluation that required major changes after significant
         quantities were bought during low-rate production.

     l   DOD, primarily because of funding limitations, has reduced the annual
         full-rate production for 17 of the 22 proven weapons we reviewed,
         extending the completion of weapons production an average of 8 years
         longer than planned. According to DOD records, if these weapons were
         produced at the originaUy planned rates and respective cost estimates, the
         quantities produced as of the end of fiscal year 1996 would have cost
         nearly $10 billion less.

19                                             GAOLNSIAD-97-99R Defense Reforms
B-276316



     l   The F-22 program involves considerable risk because it embodies
         important technological advances that are critical to its operational
         success. DOD’s plans, however, call for the program to enter production
         well before initial operational testing and evaluation begins. In December
         1996, the Air Force announced that (1) the development program would
         cost about $2.2 billion more than expected and (2) the program would be
         restructured and changes would be incorporated that make systems easier
         to produce in order to reduce risk before entering the production phase.
         The program changes would avoid about $13.1 billion of potential cost
         growth in the production program.

DOD’s Initiatives

DOD is implementing a variety of acquisition reforms and is reporting some
success in terms of cost savings or avoidance and other benefits. We are now
evaluating several of these initiatives. Two of the areas that DOD is
emphasizing are the processes by which it determines what to buy and how to
buy. In terms of what to buy, DOD is focusing on achieving (1) greater reliance
on commercial products and processes, (2) more timely infusion of new
technology into new or existing systems, and (3) an expanded role for the Joint
Requirements Oversight Council. For example:

- Solicitations for military products now state requirements in performance
  terms. If military or federal specifications or standards are necessary, a
  waiver to use them must be obtained.

- DOD has an Advanced Concept Technology Demonstration Program that
  emphasizes reduction of risk early in the acquisition process, compression of
  cycle time, and innovation. Technologists and operational users may work
  together to assess the usefulness of mature technologies. Military
  commanders can develop operational concepts prior to major acquisition
  decisions and dollar commitments.

- The Joint Requirements Oversight Council’s review of service programs and
  budgets has been expanded, and a war-fighting capabilities assessment
  process was established to support the Council. To be most helpful, these
  changes need to lead to comprehensive analyses that will assess needs for
  new acquisitions from a joint requirements perspective and identify
  opportunities to reduce some of the extensive overlaps in warfighting
  capabilities among the services.

20                                            GAO/NSIAD-97-99R Defense Reforms
B-276316      .



In considering how to buy, DOD has focused on teamwork, encouraging risk
management rather than risk avoidance, reducing reporting requirements, and
reducing layers of review and oversight that add no value. For example:

- DOD has a pilot program in which participants are given relief from certain
  statutes, regulations, and internal DOD acquisition directives. Savings are
  expected from, among other things, less government oversight in contractors’
  plants and reduced documentation requirements.

- The Secretary of Defense has directed the use of integrated product teams
  (1) to build more successful acquisition programs by developing executable
  and affordable program strategies and plans and (2) to identify and resolve
  problems early. This concept is a fundamental shift from conducting after-
  the-fact oversight.

- DOD has updated its regulations governing the acquisition of major weapon
  systems to, among other things, incorporate new laws and policies, separate
  mandatory policies and procedures from discretionary practices, and reduce
  the sheer volume and complexity of the regulations.

- DOD established a working group to track reforms to reduce the cost of
  managing and overseeing DOD’s contracts. Although DOD expects
  substantial savings from reforming DOD’s management and oversight
  requirements, the savings are likely to be significantly less than expected.

- In the past 2 years, DOD has adopted a broader approach for ensuring that
  products perform the way they are supposed to, based on teaming with the
  contractor to control processes while reducing reliance on inspection. We
  believe the results of this approach could be enhanced if DOD implemented
  some of the advanced quality concepts found in the commercial world.

- DOD is implementing an initiative to reduce costs under which the system
  performance and target costs are decided on the basis of cost-performance
  tradeoffs. The assumption is that the acquisition process will make cost
  more a constraint, and less a variable, while obtaining the needed
  effectiveness and suitability of the system.




21                                         GAO/NSIAD-97-99R Defense Reforms
B-276316



Onuortunities for Reform

DOD and Congress also need to                                     . :, : .::. ..:: :. ::,.. ::.:..:,!..,ij,::I       ,:,,
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take much stronger actions to                                   :“‘K;y. ~~~~~~1~~~,~e.:lli~,i::,~ii:ii.,:ll’i;::iii.:,iI:‘:Ii:.:.:i;:,I:‘,:1:
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of the acquisition culture. DOD                                                                  '. ::.:.:.;':,. ':,..,:ii;:i::.: ': :;: .:.,.:,: ::,..j,.:.:...::'I.::     :. 2..
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assessment process that (1)                                       : * T&t :s~ki&tiil$                                     :before: ~$M@c%Ic@;~,
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yields        more        compr&en&e                            : ":            .: .:..:'             ii     I.::'_-~'~,l.l:i."'.l-':i::;:i:-:-i-_r-:::~               ,'::.I..,:       ;.,I
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needs;         (2) compmes                  these       needs   I:        ; ):j.‘...:j:..::.       ~.::i.:i-::‘::i_::..~:~i,i.::-:~.ji::::,::.’::jI~..;:.~;.:(j,:..l~.i:~,~::.l’
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to aggregate service capabilities;
(3) determines the most cost-
effective means to satisfy shortages; and (4) assessesthe relative merits of
retiring alternative assets, reducing procurement quantities, or canceling
acquisition programs, where excesses exist.

While we support DOD’s reengineering of its weapon systems acquisition
process, not all of the specific reforms are sufficient. For example, in 1994, we
recommended that DOD establish better controls over the start and
continuation of low-rate initial production. DOD agreed to consider our specific
suggestions when it updated its acquisition regulations. However, in the 1996
update of those regulations, DOD included no controls over low-rate initial
production. We believe DOD missed an opportunity to reduce the risk of
prematurely starting production without doing any operational testing and
evaluation. Also, DOD needs to be careful in its zeal to reduce unnecessary
documentation and oversight requirements so that it does not, in effect,
eliminate those functions necessm to ensure that the acquisition programs are
meeting their objectives in a cost-effective manner.

 We conducted our work between November 1996 and February 1997 in
 accordance with generally accepted government auditing standards. We did
 not obtain agency comments on a draft of this report because it was based on
 our prior work.



 As arranged with your offices, unless you publicly announce its contents earlier,
 we plan no further distribution of this correspondence until 15 days after its
 issue date. At that time, we wiu send copies to the Ranking Minority Member

  22                                                                                GAOINSIAD-97-99R Defense Reforms
B-276316



of the House Budget Committee, the Secretary of Defense, and the Director,
OfEce of Management and Budget. We wiJl also provide copies to other
interested parties upon request.

Please contact me at (202) 512-6599 if you or your staff have any questions
concerning this report.

Sincerely yours,




Henry L. Hinton, Jr.
Assistant Comptroller General

Enclosures




23                                        GAO/NSIAD-97-99R Defense Reforms
ENCLOSURE I                                                                          ENCLOSURE I



                   OPPORTUNITIES TO REDUCE DOD’S INFRASTRUCTURE ACTIVITIES

As a result of recent base realignment and closure rounds, DOD has closed some
unneeded facilities and realigned others. At the same time, DOD continues to keep more
facilities than it needs, operate many activities inefficiently, and construct or upgrade
unneeded facilities. Our work to date has identified numerous areas where DOD’s
infrastructure activities can be eliminated, streamlined, or reengineered to be made more
efficient. While DOD has made some progress in this area, we believe that additional
actions could further reduce infrastructure, such as the following measures.

l           Consolidate Air Force and Navy electronic warfare threat testing capabilities and high
            performance fixed-wing aircraft testing capabilities.

l           Consolidate services’ rotary wing training at one location to reduce the amount of
            unused ramp space, now twice the space needed.

l           Identify opportunities to reduce excess capacity in research and development laboratory
            infrastructure.

0 Complete a cost analysis that considers the savings potential of consolidating the San
  Antonio and Sacramento depot maintenance workloads at other DOD depots, before
  privatizing any San Antonio or Sacramento workloads.

    l       Review the cost implications of delaying the transfer of ground communications and
            electronic equipment from Sacramento Air Logistics Center to the Tobyhanna Army
            Depot, Pennsylvania

    l       Evaluate the cost effectiveness of consolidating all tactical missile workload at the
            Tobyhanna depot.

        l   Eliminate duplicate support services by, for example, arranging for airfield operations
            facilities to serve both Fort Lewis and McChord Air Force Base in Washington and
            consolidating contract administration, supply and engineering, and other support
            services at Fort Bragg and Pope Air Force Base in North Carolina.

        l   Incorporate commercial practices in employee pay functions to reduce the number of
            employees involved with civilian payroll functions by an additional 470 persons, save
            $16 million in operating costs, and reduce the number of locations needed for civilian
            pay functions.


                                                       24          GAO/NSlAD-97-99RDefenseReforms
ENCLOSURE I                                                                  ENCLOSURE I



l   Consider changes to the defense transportation system’s organizational structure to
    address duplication and overlap.

l   Institute a single, intermodal billing system for transportation services provided by the
    U.S. Transportation Command to replace inefficient separate billing systems.

l   Reduce the number of employees for civilian payroll functions by an additional 470
    persons, reduce operating costs by $16 million, and further reduce the number of
    operating locations for civilian pay functions.

l   Consider closing DOD’s Uniformed Services University of the Health Sciences because it
    costs twice as much to educate a physician in this school as it does to provide
    scholarships for students to attend civilian medical schools. This action would achieve
    savings of $272 million during fiscal years 1997-2001.

l   Apply the best practices of private industry to travel processing operations to improve
    service and reduce costs.




                                               25          GAO/NSIAD-97-99R Defense Reforms
ENCLOSURE II                                                                      ENCLOSURE II


              OPPORTUNITIES FOR REFORMING DOD’S INVENTORY MANAGEMENT

While we continue to see pockets of improvement, DOD has made little progress in
correcting systemic problems that have traditionally resulted in large unneeded
inventories. In the short term, DOD needs to improve the efficiency of its current
inventory system. However, in the long run, DOD must adopt more efficient and effective
modern business practices. To achieve these goals, DOD should take the following
actions.

l       Implement private sector practices that streamline logistics operations and reduce
        layers of inventory, including supplier parks and other actions that give established
        commercial distribution networks the responsibility to manage, store, and distribute
        inventory directly to end users on a frequent and regular basis.

l       Improve efforts to redesign Air Force logistics operations by testing additional
        commercial practices such as the greater use of third-party services, closer partnerships
        with suppliers, the use of local distribution centers, the use of centralized repair
        facilities, and the modification of repair facilities to accommodate these practices.

l       Take long-range action to eliminate the overstocking of items, increase the use of
        commercial practices, put in place and monitor improved performance measures that
        stress cost-effectiveness and inventory reductions, and improve the computer systems
        used in inventory management.

    * Place top   management emphasis on (1) establishing inventory indicators that highlight
      reduction   and disposal of unneeded inventory, (2) implementing efficient and effective
      inventory   management practices, and (3) training personnel in those practices, and
      rewarding   the right behavior.

    * Improve the accuracy of data and the quantity, condition, and value of inventory items
      managed through current logistics and financial systems and aggressively enforce
      existing policies and procedures to minimize the acquisition and accumulation of
      unnecessary inventory.

    l   Renew emphasis on implementing initiatives to reduce the lead time for acquiring
        inventory items, periodically validate and update old lead-time data for long lead-time
        items, and consider lead-time reductions as a factor in deciding whether to continue
        purchasing spare parts from the prime contractor or from the actual manufacturer.

    l   Review insurance items-spare parts that are not expected to fail through normal usage
        to ensure that they are mission essential and stocked in appropriate quantities.

                                                   26          GAOINSIAD-97-99R Defense Reforms
ENCLOSURE II                                                                ENCLOSURE II


l   F’urther reduce inventory by reelaiming spare parts from excess aircraft; considering
    parts on hand at the depot maintenance facilities as an offset to spare and repair parts
    requirements; eliminating duplicate depot maintenance requirements; reducing
    requirements that were overstated due to inaccurate lead times, demand rates , and due-
    out quantities; and correcting inaccurate budget data.




                                             27          GAO/NSlAD-97-99RDefenseReforms
ENCLOSUREIII                                                                           ENCLOSUREIII


                   OPPORTUNITIES FOR REFORMING DOD’S FINANCIAL MANAGEMENT

DOD’s financial management systems, practices, and procedures continue to be hampered
by significant weaknesses. To DOD’s credit, its leadership has recognized the importance
of tackling the broad range of financial management problems and has many reform
initiatives underway. While DOD’s actions, planned and underway, offer the potential for
significant progress, we believe that many additional actions are necessary, including the
following measures.

l           Pursue short-term actions to improve the quality and reliability of data

l            Use standard data elements, such as object class codes.

* Conduct a comprehensive inventory of systems used to carry out its financial
  operations, and once, completed, prioritize system improvements that must be made,
  identify data requirements, and begin integrating the systems.

l            Determine whether the multitude of its efforts to reduce problem disbursements will
             result in improvements in the areas that most significantly contribute to its problems.

    l        Determine the appropriate number of staff with the requisite skills to ensure that its
             plan for financial reform will be implemented.

    * Establish an independent, outside board of experts to provide counsel, oversight, and
      perspective to DOD’s reform efforts.

    0 Address staffing issues, such as filling financial management vacancies, upgrading the
      experience of financial managers, and using contractors.

        l    Enhance its hiring criteria to include demonstrated experience in successfully
             implementing accounting or fmanee systems and demonstrated technical competency in
             accounting.

        * Clean up existing data in its financial systems and place special emphasis on ensuring
          that basic accounting policies and procedures are followed so as to improve data
          accuracy in the current systems while new systems are under development.

            * Place high priority on implementing basic controls, such as conducting periodic physical
              inventories, reconc5ling accounts, and analyzing abnormal balances or fluctuations.




                                                        28          GAOiNSIAD-97-99RDefenseReforms
ENCLOSURE III                                                               ENCLOSURE III


l   Develop a comprehensive computer security management program, including limiting
    computer system access, requiring sensitive data files and critical production programs
    to be identified and access to them monitored, strengthening security software
    standards in critical areas, controlling physical security at computer faeilities, and
    providing for completing and testing disaster recovery plans.

l   Pursue reengineering approaches that are not bounded by existing processes and
    organization.




                                              29         GAONXAD-97-99R     Defense Reforms
                               RELATED GAO PRODUCTS
INFRASTRUCTURE

Future Years Defense Proaam: Ontimistic Estimates Lead to Billions in Overnrogramming
(GAOINSIAD-94210, July 1994).

Militarv Bases: Analvsis of DOD’s 1995 Process and Recommendations for Closure and
Realignment (GAO/NSIAD-95133, April 1995).

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

Defense Infrastructure: Budget Estimates for 19962001 Offer LittIe Savings for
Modernization (GAO/NSIAD-96-131, April 1996).

Militarv Bases: Onoortunities for Savings in Installation Sunnort Costs Are Being Missed
(GAO/NSIAD-96-108, April 1996).

Defense Infrastructure:   Costs Proiected to Increase Between 1997 and 2001 (GAO/NSIAD
96-174, May 1996).

Air Force Aircraft:   Consolidating Fighter Sauadrons CouId Reduce Costs (GAO/NSIAD-96
82, May 1996).

Armv Denot Maintenance: Privatization Without Further Downsizing Increases Costly
Excess Canacity (GAO/NSIAD-96-201, September 1996).

Air Force Denot Maintenance: Privatization-In-Place Plans Are Cost& While Excess
Canacitv Exists (GAO/NSIAD-97-13, December 1996).

High Risk Series: Defense Infrastructure (GAO/I-IR-97-7,February 1997).


INVENTORY MANAGEMENT

Defense Inventorv: Changes in DOD’s Inventorv Renorting! 1989-1992(GAO/NSIAD-94112,
February 1994).

Defense SUDD~V: Acauisition Leadtime Reauirements Can Be SignificanUv Reduced
(GAO/NSIAD-95-2, December 1994).

Defense SUDD~V:Inventories Contain Nonessential and Excessive Insurance Stocks
(GAO/NSIAD-951, January 1995).

                                            30          GAO/NSIAD-97-99RDefense Reforms
                              RELATED GAO PRODUCTS
Inventor-v Management: DOD Can Build on Progress Using Best Practices to Achieve
Substantial Savings (GAO/NSIAD-95142, August 1995).

Armv Inventor-v: Budget Reauests for Snare and Repair Parts Are Not Reliable
(GAO/NSIAD-96-3, December 1995).

Best Management Practices: Reengineering the Air Forces’ Logistics System Can Yield
Substantial Savings (GAO/NSIAD-96-5, February 1996).

Inventors Management: Adontinn Best Practices Could Enhance Naw Efforts to Achieve
Efficiencies and Savings (GAO/NSIAD-96-156,July 1996).

Defense Inventor-v: Snare and ReDair Parts Inventorv Costs Can Be Reduced
(GAO/NSIAD-97-47, January 1997).

Defense Logistics: Much of the Inventory Exceeds Current Needs (GAO/NSIAD-97-71,
February 1997).

Bigh Risk Series: Defense Inventors’ Management (GAO/IIR-97-5, February 1997).


DOD FINANCIAL MANAGEMENT

Travel Process Reennineerinn: DOD Faces Challenges in Using Industry Practices to
Reduce Costs (GAO/AIMD/NSIAD-9590, March 1995).

CFO Act Financial Audits: Increased Attention Must Be Given to Prenarinn Naw’s
Financial Renorts (GAOKIMD-96-7, March 1996).

Information Securilx Comnuter Attacks at Denartment of Defense Pose Increasing Risks
(GAO/AIMD-96-84, May 1996).

Financial Management: DOD Needs to Lower the Disbursement Prevalidation Threshold
(GAO/AIMD-96-82, June 1996).

CFO Act Financial Audits: Naw Plant Pronertv Accounting and Renorting Is Unreliable
(GAO/AIMD-96-65, July 1996).

Naw Financial Management: ImDroved Management of Onerating Materials and Sunnlies
Could Yield Significant Savings (GAO/AIMD-96-94, August 1996).




                                          31         GAO/NSIAD-97-99RDefense Reforms
                              RELATED GAO PRODUCTS
DOD Accounting Systems: Efforts to Imnrove Svstem for Naw Need Overall Structure
(GAOKIMD-96-99, September 1996).

High Risk Series: Defense Financial Management (GAO/HI&97-3, February 1997).

DOD Problem Disbursements (GAO/AIMD-97-36R, February 1997).


ACQUISITION REFORM

Tactical Aircraft: Concurrency in Development and Production of F-22 Aircraft Should Be
Reduced (GAOPNSIAD9559, April 1995)

Aeauisition Reform: Efforts to Reduce the Cost to Manage and Oversee DOD Contracts
(GAO/NSIAD-96-106, April 1996) .

U.S. Combat Air Power: Reassessing Plans to Modernize Interdiction CaDabilitieS Could
Save Billions (GAOLNSIAD-96-72,May 1996).

Naw Aviation: F/A-18 E/F WiIl Provide Martial   Onerational Improvement at B&h Cost
(GAO/NSIAD-96-98, June 1996).

Combat Air Power: Joint Mission Assessments Needed Before Making Program and
Budget Decisions (GAOLNSIAD-96-177,September 1996).

Acauisition Reform: Imnlementation of Title V of the Federal Acauisition Streamhning Act
of 1994 (GAO/NSIAD-97-22BR, October 1996).

High Risk Series: Defense Weanon Svstems Aeauisition (GAO/HR-97-6, February 1997).




(Code 701106)

                                           32         GAO/NSIAD-97-99R Defense Reforms
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