oversight

Navy Ordnance: Analysis of Business Area Efforts to Streamline Operations and Reduce Costs

Published by the Government Accountability Office on 1997-10-15.

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

                       United States General Accounting Office

GAO                    Report to the Chairman, Subcommittee
                       on Military Readiness, Committee on
                       National Security, House of
                       Representatives

October 1997
                       NAVY ORDNANCE
                       Analysis of Business
                       Area Efforts to
                       Streamline Operations
                       and Reduce Costs




GAO/AIMD/NSIAD-98-24
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             Accounting and Information
             Management Division

             B-274841

             October 15, 1997

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

             Dear Mr. Chairman:

             This is our second report in response to your request that we review
             financial and management issues related to the ordnance business area of
             the Navy Working Capital Fund. The Navy reorganized this business area
             in 1993 in order to reduce costs and address various deficiencies in
             ordnance logistics management that were identified during Desert
             Shield/Desert Storm operations and by various working groups and
             studies. However, the business area has experienced financial difficulties
             since the reorganization—losing a reported $212 million during fiscal years
             1994 through 1996 despite price increases of about 78 percent. Our
             March 1997 report1 discussed the causes of these price increases and
             losses, including the fact that business area managers have not been able
             to reduce overhead costs as rapidly as their workload has declined. This
             second report (1) provides our evaluation of the Navy’s proposed and
             ongoing actions to reduce the business area’s costs and (2) identifies
             additional cost reduction opportunities.


             The Navy ordnance business area, which consists of the Naval Ordnance
Background   Center (NOC) headquarters and subordinate activities, such as Naval
             weapons stations, operates under the revolving fund concept as part of the
             Navy Working Capital Fund. It provides various services, including
             ammunition storage and distribution,2 ordnance engineering, and missile
             maintenance, to customers who consist primarily of Defense
             organizations, but also include foreign governments. Revolving fund
             activities rely on sales revenue rather than direct congressional
             appropriations to finance their operations and are expected to operate on
             a break-even basis over time—that is, to neither make a profit nor incur a
             loss, but to recover all costs. During fiscal year 1996, the Navy ordnance
             business area reported revenue of about $563 million and costs of about

             1
              Navy Ordnance: Analysis of Business Area Price Increases and Financial Losses
             (GAO/AIMD/NSIAD-97-74, March 14, 1997).
             2
              Ammunition storage and distribution, which is one of the business area’s core requirements and
             largest workloads, involves the receipt, storage, segregation, and issue of ammunition, as well as
             services related to loading ammunition on to and off of naval ships and commercial vessels.



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                   $600 million, for a net operating loss of about $37 million. In accordance
                   with current Department of Defense (DOD) policy, this loss and the
                   $175 million the business area lost during fiscal years 1994 and 1995 will
                   be recouped by adding surcharges to subsequent years’ prices.

                   As discussed in our March 1997 report, higher-than-expected overhead
                   costs were the primary cause of the losses that the business area incurred
                   during fiscal years 1994 through 1996. We also testified on this problem in
                   May 1997,3 and recommended that the Secretary of the Navy develop a
                   plan to streamline the Naval ordnance business area’s operations and
                   reduce its overhead costs. The Navy has initiated a restructuring of the
                   business area that, according to the Secretary of the Navy, is “akin to
                   placing it in receivership.”


                   The Navy is in the process of developing the cost reduction plan we
Results in Brief   recommended in our March 1997 report and has proposed and begun
                   implementing a number of actions to reduce its ordnance business area’s
                   annual operating costs by $151 million, or 25 percent, between fiscal year
                   1996 and 1999. This is a significant step in the right direction and should
                   result in substantial cost reductions and more streamlined operations.

                   Additionally, our review of the business area’s operations and discussions
                   with the Office of the Secretary of Defense (OSD) and Navy ordnance
                   officials indicate that the Navy has both an opportunity and the authority
                   to further reduce Navy ordnance costs. Specifically, (1) redundant
                   ordnance engineering capability exists within the business area and
                   between the business area and other Navy organizations, (2) military
                   personnel are performing work that could be performed by less expensive
                   civilian employees, (3) redundant missile maintenance capability exists,
                   and (4) no financial incentive exists for customers to store only needed
                   ammunition (the business area’s inventory records show that 43 percent of
                   the ammunition stored was unneeded as of May 1, 1997) since they do not
                   directly pay for storage costs.

                   While most of the planned cost reduction actions appear to be
                   appropriate, it remains to be seen whether the business area will reduce
                   costs by $151 million. In addition, our review of available data indicates
                   that one of the cost reduction actions—the planned personnel
                   reductions—may adversely affect the Concord Naval Weapons Station’s

                   3
                    Defense Depot Maintenance: Challenges Facing DOD in Managing Working Capital Funds
                   (GAO/T-NSIAD/AIMD-97-152, May 7, 1997).



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                        ability to load ships during mobilization, thus creating potential readiness
                        problems. These personnel reductions are likely to have little impact on
                        the Navy, but could have a significant impact on the Army and Air Force,
                        which would rely heavily on Concord during a major contingency
                        operation.


                        The objective of our audit of the Navy ordnance business area was to
Objective, Scope, and   assess the Navy’s efforts to reduce costs and streamline its operations. Our
Methodology             current audit of the restructuring of the Navy ordnance business area is a
                        continuation of our work on the business area’s price increases and
                        financial losses (GAO/AIMD/NSIAD-97-74, March 14, 1997). In that report we
                        recommended that the Secretary of Defense direct the Secretary of the
                        Navy to develop a plan to streamline the Navy ordnance business
                        operations and reduce its infrastructure costs, including overhead. This
                        plan should (1) concentrate on eliminating unnecessary infrastructure,
                        including overhead, (2) identify specific actions that need to be
                        accomplished, (3) include realistic assumptions about the savings that can
                        be achieved, (4) establish milestones, and (5) clearly delineate
                        responsibilities for performing the tasks in the plan.

                        To evaluate the actions being taken or considered by the NOC to streamline
                        its operations and reduce costs, we (1) used the work that we performed
                        in analyzing the business area’s price increases and financial losses and
                        (2) analyzed budget reports to identify planned actions and discussed the
                        advantages and disadvantages of the planned actions with Navy, OSD, U.S.
                        Transportation Command, and Joint Staff officials. In analyzing the
                        actions, we determined (1) if specific steps and milestones were
                        developed by the NOC to accomplish the actions, (2) whether the initiatives
                        appeared reasonable and could result in improved operations, (3) what
                        dollar savings were estimated to result from the implementation of the
                        actions, (4) whether the actions went far enough in reducing costs and
                        improving operations, and (5) what other actions not being considered by
                        the NOC could result in further cost reductions or streamlined operations.
                        We did not independently verify the financial information provided by the
                        Navy ordnance business area.

                        We performed our work at the Office of the DOD Comptroller and Joint
                        Staff, Washington, D.C.; Offices of the Assistant Secretary of Navy
                        (Financial Management and Comptroller), Naval Sea Systems Command,
                        Naval Air Systems Command, and Headquarters, Defense Finance and
                        Accounting Service, all located in Arlington, Virginia; Headquarters, U.S.



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                          Atlantic Fleet, Norfolk, Virginia; Naval Ordnance Center Headquarters,
                          Indian Head, Maryland; Naval Ordnance Center Atlantic Division,
                          Yorktown, Virginia; Naval Ordnance Center Pacific Division, Seal Beach,
                          California; Naval Weapons Station, Yorktown, Virginia; Naval Weapons
                          Station, Charleston, South Carolina; Naval Weapons Station, Earle, New
                          Jersey; Naval Weapons Station, Seal Beach, California; Naval Weapons
                          Station, Concord, California; Naval Weapons Station Detachment,
                          Fallbrook, California; Naval Warfare Assessment Division, Corona,
                          California; and U.S. Transportation Command, Scott Air Force Base,
                          Illinois. Our work was performed from June 1996 through September 1997
                          in accordance with generally accepted government auditing standards.

                          We requested written comments on a draft of this report. The Under
                          Secretary of Defense (Comptroller) provided us with written comments,
                          which we incorporated where appropriate. These comments are reprinted
                          in appendix I.


                          The Navy has incorporated a goal to reduce annual costs by $151 million
Navy’s Proposed and       into its ordnance business area’s budget estimate and has identified the
Ongoing Actions           major actions that will be taken to achieve this goal. Our analysis of
                          available data indicates that the planned actions should result in
                          substantial cost reductions and more streamlined operations. However, we
                          cannot fully evaluate the reasonableness of the cost reduction goal at this
                          time because the Navy does not expect to finalize the cost reduction plan
                          until October 1997.


Ongoing Restructuring     During the fiscal year 1998 budget review process, OSD officials worked
Should Reduce Costs and   with the Navy to formulate a restructuring of the Navy ordnance business
Streamline Operations     area. According to the budget estimate the Navy submitted to the Congress
                          in February 1997, this restructuring will allow the ordnance business area
                          to achieve substantial cost and personnel reductions without adversely
                          affecting ordnance activities’ ability to satisfy their customers’ peacetime
                          and contingency requirements. Specifically, the budget estimate indicated
                          that between fiscal years 1996 and 1999, the business area’s civilian and
                          military fiscal year end strengths will decline by 18 percent and 23 percent,
                          respectively, and its annual costs will decline by $151 million, or 25
                          percent. The budget also indicated that the business area will increase its
                          fiscal year 1998 prices in order to recover $224 million of prior year losses
                          and achieve a zero accumulated operating result by the end of fiscal year
                          1998.



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                      The Navy’s fiscal year 1998 budget submission also indicated that the
                      planned restructuring of the business area (1) is based on an assessment
                      of whether current missions should be retained in the business area,
                      outsourced to the private sector, or transferred to other organizations and
                      (2) will make fundamental changes in how the business area is organized
                      and conducts its business. Our assessment of the individual actions—most
                      of which are expected to be initiated by October 1997 and completed
                      during fiscal year 1998—shows that the Navy is planning to reduce costs
                      by eliminating or consolidating redundant operations and reducing the
                      number of positions in the business area. These actions, which are listed
                      below, should help to streamline the Navy ordnance operations and
                      reduce costs.

                  •   Properly sizing the business area’s workforce to accomplish the projected
                      workload by eliminating about 800 positions, or about 18 percent of the
                      total, before the end of October 1997.
                  •   Enhancing the business area’s ability to respond to unanticipated
                      workload changes by increasing the percentage of temporary workers in
                      the work force from 8 percent to 20 percent.
                  •   Enhancing the business area’s ability to identify redundant ordnance
                      engineering capability and to streamline its information resource functions
                      by consolidating management responsibility for these areas by October 1,
                      1997.
                  •   Reducing overall operating costs by significantly cutting back on
                      operations at the Charleston and Concord Weapons Stations, beginning in
                      October 1997.
                  •   Eliminating redundant capability and reducing costs by consolidating
                      (1) some weapons station functions, such as safety and workload
                      planning, at fewer locations, (2) inventory management functions at the
                      Inventory Management and Systems Division, and (3) maintenance work
                      on the Standard Missile at the Seal Beach Naval Weapons Station.
                  •   Reducing overhead contract costs, such as utilities and real property
                      maintenance during fiscal year 1998.
                  •   Enhancing business area managers’ ability to focus on their core ordnance
                      missions of explosive safety, ordnance distribution, and inventory
                      management by transferring east coast base support missions to the
                      Atlantic Fleet on October 1, 1997.


                      The Navy’s planned restructuring of its ordnance business area will reduce
Additional Cost       overhead costs and is an important first step toward the elimination of the
Reductions Are        redundant capability both within the business area and between the
Possible              business area and other organizations. However, as discussed in the


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                               following sections, our analysis indicates that there are opportunities for
                               additional cost reductions by (1) developing and implementing a detailed
                               plan to eliminate redundant ordnance engineering capability,
                               (2) converting military guard positions to civilian status, and
                               (3) implementing two actions that Navy ordnance officials are currently
                               considering.


Elimination of Redundant       Navy ordnance officials plan to consolidate management responsibility for
Engineering Capability         the business area’s nine separate ordnance engineering activities under a
Could Yield Substantial        single manager on October 1, 1997. This will allow this manager to have
                               visibility over all of the business area’s engineering resources and should
Savings                        facilitate more effective management of these engineering resources.
                               However, it will not result in any savings unless action is also taken to
                               eliminate the redundant ordnance engineering capability that previous
                               studies have identified both within the ordnance business area and
                               between the business area and other Navy organizations.

                               For example, a 1993 Navy study estimated that 435 work years, or
                               $22 million, could be saved annually by reducing Navy-wide in-service
                               ordnance engineering functions from 20 separate activities to 8
                               consolidated activities. However, Navy ordnance officials stated that these
                               consolidations were never implemented. They also stated that although
                               they did not know why the consolidations were not implemented, they
                               believe it was because (1) the Navy’s ordnance engineering personnel are
                               managed by the NOC and three different major research and development
                               organizations and (2) the Navy did not require these four organizations to
                               consolidate their ordnance in-service engineering functions.


Converting Military Guard      Since 1954, DOD Directive 1100.4 has required the military services to staff
Positions to Civilian Status   positions with civilian personnel unless the services deem a position
Could Save Money               military essential for reasons such as combat readiness or training. This is
                               primarily because, as we have previously reported,4 on average, a civilian
                               employee in a support position costs the government about $15,000 per
                               year less than a military person of comparable pay grade.

                               Our analysis showed that the percentage of military personnel in the NOC
                               workforce is about six times greater than in other Navy Working Capital
                               Fund activities, with most of these positions being military guards such as

                               4
                               DOD Force Mix Issues: Greater Reliance on Civilians in Support Roles Could Provide Significant
                               Benefits (GAO/NSIAD-95-5, October 19, 1994).



                               Page 6                                                  GAO/AIMD/NSIAD-98-24 Navy Ordnance
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                              personnel who guard access to the weapons station at the main entrance.
                              Further, Navy ordnance officials indicated that they know of no reason
                              why the guard positions should not be converted to civilian status. In fact,
                              these officials said that they would prefer to have civilian guards since
                              they are cheaper than military guards, and they noted that all of their
                              activities already have some civilian security positions. Consequently, the
                              Navy can save about $6.8 million annually by converting the NOC’s guard
                              positions to civilian status (based on the $15,000 per position savings
                              estimate).

                              NOC  officials told us that they reviewed the need for all of their military
                              positions, and indicated that they plan to eliminate some of these
                              positions. However, they stated that they do not plan to convert any
                              military guard positions to civilian status. A Navy Comptroller official told
                              us that (1) all of the NOC’s guard functions will probably be transferred to
                              the Atlantic and Pacific fleets as part of the ordnance business area
                              restructuring and (2) the fleet commanders, not the NOC, should, therefore,
                              decide whether the military guard positions should be converted to
                              civilian status.


Navy Is Considering           Navy ordnance officials are currently considering two additional
Additional Actions to         actions—further consolidating the business area’s missile maintenance
Reduce Costs                  work and charging individual customers for the storage of
                              ammunition—that would result in additional cost reductions and a more
                              efficient operation, if implemented. As discussed below, consolidating
                              missile maintenance work would allow the business area to reduce the
                              fixed overhead cost that is associated with this mission, and charging
                              customers for ammunition storage services would give customers an
                              incentive to either relocate or dispose of unneeded ammunition and, in
                              turn, could result in lower storage costs.

Further Consolidation of      The Navy ordnance business area, which has had a substantial amount of
Missile Maintenance Work Is   excess missile maintenance repair capacity for several years, is being
Possible                      forced to spread fixed missile maintenance overhead costs over a
                              declining workload base that is expected to account for only 3 percent of
                              the business area’s total revenue in fiscal year 1998. This problem, which is
                              caused by factors such as force structure downsizing, continues even
                              though the business area recently achieved estimated annual savings of
                              $2.3 million by consolidating all maintenance work on the Standard Missile
                              at one location. The following table shows the substantial decline in work
                              related to four specific types of missiles.



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Table 1: Navy Ordnance Business
Area’s Missile Maintenance Workload       Number of missiles repaired
Trend for Four Missiles                                                                                   Fiscal year
                                                                                                                        1997           1998
                                          Type of missile                             1994      1995      1996     (estimate)     (estimate)
                                          Harm                                        1,463       765       186            162              73
                                          Harpoon                                       479       474       496            367              95
                                          Standard                                    2,497     2,945     1,082            500              930
                                          Sidewinder                                  1,806     2,288     1,292            337              601
                                          Note: Actual data for fiscal years 1994, 1995, and 1996, and planned data for fiscal years 1997
                                          and 1998.



                                          NOC  officials are currently evaluating several alternatives for consolidating
                                          missile maintenance work, including (1) consolidating all work on air
                                          launched missiles at one Naval weapons station, (2) transferring all or part
                                          of the business area’s missile maintenance work to the Letterkenny Army
                                          Depot, Ogden Air Logistics Center and/or a private contractor, and
                                          (3) accomplishing all or part of the work in Navy regional maintenance
                                          centers. According to DOD, the evaluation of these alternatives should be
                                          completed in the spring of 1998.

                                          Based on our discussions with Navy ordnance and maintenance officials,
                                          the NOC’s evaluations of maintenance consolidation alternatives should

                                      •   identify the total cost of the various alternatives, including onetime
                                          implementation costs and costs that are not included in depot
                                          maintenance sales prices, such as the cost of shipping items from coastal
                                          locations to inland depots and/or contractor plants and
                                      •   assess each alternative’s potential impact on readiness.

Charging for Ammunition                   The Navy ordnance business area incurs costs to store ammunition for
Storage Could Result in Lower             customers that are not required to pay for this storage service. Instead,
Costs and Other Benefits                  this storage cost is added to the price charged to load ammunition on and
                                          off Naval ships and commercial vessels. As shown in the following figure,
                                          the business area’s inventory records indicate that 51,231 tons, or about
                                          43 percent, of ammunition stored at the weapons stations was not needed
                                          as of May 1, 1997, because (1) there is no requirement for it or (2) the
                                          quantity on hand exceeds the required level.




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Figure 1: Amount of Ordnance Stored
at Naval Weapons Stations as of
May 1, 1997                           Unit of measure is tons
                                      30,000


                                      25,000


                                      20,000


                                      15,000


                                      10,000


                                       5,000


                                           0
                                               Charleston             Earle            Port Hadlock          Yorktown
                                                            Concord           Fallbrook           Seal Beach

                                                                      Required   Not needed




                                      If the business area charged customers for ammunition storage, the costs
                                      of the storage service would (1) be charged to the customers that benefit
                                      from this service and (2) provide a financial incentive for customers to
                                      either relocate or dispose of unneeded ammunition. This, in turn, could
                                      allow the business area to reduce the number of locations where
                                      ammunition is stored and thereby reduce operating costs. This approach
                                      has been adopted by the Defense Logistics Agency, which also performs
                                      receipt, storage, and issue functions, and the agency stated that instituting
                                      such user charges has helped to reduce infrastructure costs by allowing it
                                      to eliminate unneeded storage space. In addition, we recently
                                      recommended such an approach in our report, Defense Ammunition:
                                      Significant Problems Left Unattended Will Get Worse (GAO/NSIAD-96-129,
                                      June 21, 1996).

                                      Navy ordnance officials told us that they are currently considering
                                      charging customers for the storage of ammunition and are taking steps to
                                      do so. These officials informed us that they (1) have discussed DLA’s
                                      experience in charging a storage cost with DLA officials, (2) have discussed
                                      this matter with the torpedo program manager and sent a letter addressing



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                       the cost to move the torpedoes off the weapons stations, (3) are drafting
                       similar letters to the other ordnance program managers, and (4) are in the
                       process of determining ammunition storage costs for use in developing
                       storage fees.


                       Most aspects of the Navy’s planned restructuring of its ordnance business
Some Personnel         area appear to be cost-effective alternatives. However, DOD budget
Reductions Could       documents indicate that the Navy’s fiscal year 1998 budget submission for
Adversely Affect       its ordnance business area did not adequately consider the impact that
                       planned personnel reductions would have on the business area’s ability to
Customer Support       support non-Navy customers during mobilization. These documents also
                       indicate that the Navy was proposing to reduce the operating status of
                       some weapons stations, including Concord. However, OSD officials were
                       concerned with the Navy’s proposal because these weapons stations

                   •   would handle a majority of all DOD-wide, Army, Air Force, and U.S.
                       Transportation Command explosive cargo in the event of a major
                       contingency;
                   •   have 10 times the explosive cargo capacity of the ports considered for
                       retention;
                   •   are having their facilities expanded by the Army to accomplish additional
                       U.S. Transportation Command work; and
                   •   have specialized explosive storage areas that must be retained to support
                       current inventories of Navy missiles.

                       OSD officials concluded that no alternative to these ports exists and that
                       DOD must, therefore, keep these ports operational. The Deputy Secretary of
                       Defense agreed with this assessment and, in December 1996, directed the
                       Navy not to place any port in a functional caretaker status or reduce its
                       ordnance handling capability until a detailed plan is (1) coordinated within
                       OSD, the Joint Staff, and the other Military Departments and (2) approved
                       by the Secretary of Defense.

                       According to U.S. Transportation Command and Navy ordnance officials, a
                       May 1997 DOD-wide paper mobilization exercise validated the OSD officials’
                       concerns about Concord Naval Weapons Station performing its
                       mobilization mission. Specifically, the exercise demonstrated that, among
                       other things, (1) the Concord Naval Weapons Station is one of three ports
                       that are essential to DOD for getting ordnance items to its warfighters
                       during mobilization and (2) if Concord is not sufficiently staffed or




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              equipped, there could be a delay in getting ordnance to the warfighter
              during mobilization.

              According to Navy ordnance, OSD, the Joint Staff, and U.S. Transportation
              Command officials, although there is widespread agreement that Concord
              is needed by all of the military services to meet ammunition out-loading
              requirements during mobilization, there is no agreement on how to finance
              the personnel that will be needed in order to accomplish this mission. The
              Army and Air Force do not believe they should subsidize the operations of
              a Navy base. At the same time, Navy officials do not believe they should
              finance the entire DOD mobilization requirement at Concord because
              (1) most of their facilities in the San Francisco Bay area have been closed
              and Concord is, therefore, no longer needed by the Navy during
              peacetime, (2) the Army and Air Force need Concord more than the Navy
              does, and (3) Concord does not receive enough ship loading and unloading
              work during peacetime to keep the current work force fully employed.
              Accordingly, the Navy plans to retain some personnel at Concord, but has
              shifted all of its peacetime ship loading and unloading operations out of
              Concord and plans to gradually transfer ammunition currently stored at
              Concord to other locations.

              Navy, OSD, and Joint Staff officials informed us that several actions are
              needed to ensure that Concord has sufficient, qualified personnel to load
              ammunition onto ships: (1) revalidate the ammunition out-loading
              mobilization requirements for Concord, (2) determine the minimum
              number of full-time permanent personnel that Concord needs during
              peacetime in order to ensure that it can quickly and effectively expand its
              operations to accomplish its mobilization mission (the core workforce),
              (3) ensure that Concord’s core workforce is sufficiently trained to
              accomplish its mobilization mission, and (4) determine a method, either
              through a direct appropriation or the Working Capital Funds, to finance
              the Concord’s mobilization requirements.


              To the Navy’s credit, it has acted to reduce its ordnance business area’s
Conclusions   annual cost by $151 million and has incorporated this cost reduction goal
              into the business area’s budget estimate. Our analysis of available data
              indicates that, in general, the planned actions should result in substantial
              cost reductions and more streamlined Navy ordnance operations. The
              Navy could reduce its cost further and prevent a possible degradation of
              military readiness by taking the additional actions recommended in this
              report. Further, the Navy still needs to ensure that a final restructuring



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                         plan is completed so that it can tie together all of its planned actions and
                         establish specific accountability, schedules, and milestones as needed to
                         gauge progress.


                         In order for the Concord Weapons Station to accomplish its mobilization
Recommendations          mission, we recommend that the Secretary of Defense

                     •   revalidate the amount of ammunition Concord Weapons Station needs to
                         load onto ships during mobilization,
                     •   direct the Secretary of the Navy to determine the minimum number of
                         personnel Concord Weapons Station needs during peacetime in order to
                         ensure that it can quickly and effectively expand its operations to
                         accomplish its mobilization mission, and
                     •   ensure that Concord’s core workforce is sufficiently trained to accomplish
                         its mobilization mission.

                         We recommend that the Secretary of the Navy

                     •   incorporate into the NOC’s detailed cost reduction plan (1) specific actions
                         that need to be accomplished, (2) realistic assumptions about the savings
                         that can be achieved, (3) milestones, and (4) clearly delineated
                         responsibilities for performing the tasks in the plan;
                     •   evaluate the cost-effectiveness of (1) consolidating all or most of the
                         business area’s missile maintenance workload at one location and/or
                         (2) transferring all or some of this work to public depots or the private
                         sector;
                     •   develop and implement policies and procedures for charging customers
                         for ammunition storage services;
                     •   evaluate the appropriateness of converting military guard positions to
                         civilian positions;
                     •   direct the NOC Commander to determine if it would be cost-beneficial to
                         convert non-guard military positions to civilian status; and
                     •   eliminate the excess ordnance engineering capability that previous studies
                         have identified both within the NOC and between the NOC and other Navy
                         organizations.


                         In its written comments on this report which identifies the actions the
Agency Comments          Navy ordnance business area is taking to reduce costs and streamline its
and Our Evaluation       operations, DOD agreed fully with five of our eight recommendations. It




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partially concurred with the remaining three recommendations, as
discussed below.

In our draft report, we recommended that the Secretary of Defense direct
the Secretary of the Navy to (1) determine the minimum number of
personnel Concord Weapons Station needs during peacetime in order to
ensure that it can quickly and effectively expand its operation to
accomplish its mobilization mission and (2) ensure that this core
workforce is sufficiently trained to accomplish its mobilization mission. In
partially concurring with this recommendation, DOD agreed that both of
these tasks should be accomplished and that the Navy should be
responsible for identifying the peacetime manning requirement. However,
it indicated that this core workforce cannot be adequately trained for its
mobilization mission unless it is given the appropriate amount and type of
work during peacetime. DOD further stated it will take steps during the
fiscal year 1999 budget process to ensure that adequate and funded
workload is provided to Concord. We agree with DOD’s comment and
revised our final report to recommend that DOD act to ensure that the core
workforce is sufficiently trained.

Concerning our recommendation to charge customers for ammunition
storage services, the Navy agreed that action should be taken to (1) store
only necessary ammunition at its weapons stations and (2) transfer excess
ammunition to inland storage sites or disposal. The Navy believes that this
can be accomplished without imposing a separate fee for storing
ammunition. However, Navy records show that 51,231 tons, or about
43 percent, of ammunition stored at weapons stations was not needed as
of May 1997. As stated in this report, because of the persistent nature of
this problem, we continue to believe that charging customers for
ammunition storage will provide the financial incentive for customers to
relocate or dispose of unneeded ammunition.

Finally, concerning our recommendation to convert military guard
positions to civilian positions, the Navy stated that it is in the process of
transferring the Navy ordnance east coast security positions to the Atlantic
Fleet and that it plans to transfer the west coast security positions to the
Pacific Fleet. It believes that the two Fleet Commanders need time to
evaluate the appropriateness of converting the military guard positions to
civilian positions. We agree with DOD’s comment that this decision should
be made by the Fleet Commanders and have revised our recommendation
accordingly. As part of this evaluation, the Navy needs to consider the cost
of the guard positions since a civilian employee in a support position costs



Page 13                                    GAO/AIMD/NSIAD-98-24 Navy Ordnance
B-274841




the government about $15,000 per year less than a military person of
comparable pay grade.


We are sending copies of this report to the Ranking Minority Member of
your Subcommittee; the Chairmen and Ranking Minority Members of the
Senate Committee on Armed Services; the Senate Committee on
Appropriations, Subcommittee on Defense; the House Committee on
Appropriations, Subcommittee on National Security; the Senate and House
Committees on the Budget; the Secretary of Defense; and the Secretary of
the Navy. Copies will also be made available to others upon request. If you
have any questions about this report, please call Greg Pugnetti at
(202) 512-6240. Other major contributors to this report are listed in
appendix II.

Sincerely yours,




Jack L. Brock, Jr.
Director, Defense Information and
  Financial Management Systems
Accounting and Information
  Management Division




David R. Warren
Director, Defense Management
National Security and International
  Affairs Division




Page 14                                   GAO/AIMD/NSIAD-98-24 Navy Ordnance
Page 15   GAO/AIMD/NSIAD-98-24 Navy Ordnance
Appendix I

Comments From the Department of Defense




             Page 16        GAO/AIMD/NSIAD-98-24 Navy Ordnance
Appendix I
Comments From the Department of Defense




Page 17                                   GAO/AIMD/NSIAD-98-24 Navy Ordnance
Appendix I
Comments From the Department of Defense




Page 18                                   GAO/AIMD/NSIAD-98-24 Navy Ordnance
Appendix I
Comments From the Department of Defense




Page 19                                   GAO/AIMD/NSIAD-98-24 Navy Ordnance
Appendix II

Major Contributors to This Report


                       Gregory E. Pugnetti, Assistant Director
Accounting and         Ron L. Tobias, Senior Auditor
Information            William A. Hill, Senior Auditor
Management Division,   Cristina Chaplain, Communications Analyst

Washington, D.C.
                       Karl J. Gustafson, Evaluator-In-Charge
San Francisco          Eddie W. Uyekawa, Senior Evaluator
Regional Office




(511612 and 709229)    Page 20                                  GAO/AIMD/NSIAD-98-24 Navy Ordnance
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