**VA LOGISTICS IN THE 21^ST^ CENTURY -- "CREATIVELY FLEXING OUR
MUSCLES"**

**Gary J. Krump**

**Deputy Assistant Secretary for Acquisition and Materiel Management**

**1999 National Logistics Management Training Symposium**

June 8, 1999

"*The Best Way to Predict the Future is to Create It"*

*\--Peter F. Drucker*

Two years ago, the theme of my presentation was \"The Logic of
Logistics\-\--Balancing Cooperation and Independence.\" Last year, my
theme was, \"Integrating VA\'s Business System," and while we have made
strides in both those areas, there is still much to be done. I am
confident, with the impending completion of the VHA Logistics Office and
with the Under Secretary's clear endorsement of "standardization" in the
pending VHA Directive; the pending changes in VBA log support and the
evolution in NCA logistics, that we will be achieving the requisite
balance and integration. But perhaps of more immediate import in
contributing towards, for example, VA's and especially VHA's FY 2000
budget needs, is to aggressively take advantage of the size of VA and
VA\'s acquisition dollars to fully leverage our position in the market.
I think that principle will be repeated in many of the presentations
this week\-\--from Tony Principe's address on the Transition Commission
recommendations, to George Patterson and John Ogden's discussion
regarding how they collectively worked to unify and leverage VA's
pharmaceutical requirements.

As all of us in the Federal logistics field know, it is not enough to be
the "Big Gorilla." We answer to the Presidential administration and its
priorities, to Congress and its priorities, to the taxpayer, and
ultimately to our primary constituent, the veteran. We need to
consolidate our strength, using it wisely and judiciously. As Drucker
points out, we can best predict and, therefore, optimize, the future by
doing what is necessary to create it to be the way we want it.

*"Power has only One Duty to Secure the Social Welfare of the People"*

*\--Benjamin Disraeli*

As VA logisticians, the "social welfare" that must always be our
foremost concern is providing increased benefits to our veteran
constituents. Other objectives, as important as they might be, must be
subordinate to this tenet. As we coalesce our power through
standardization, national contracting, and other committed volume
procurements, we must ensure that so doing will optimize VA's ability to
provide benefits to veterans.

I would like to spend a few minutes describing how I believe the VA's
logistics system will evolve in the next millennium. These are not
really predictions, but, instead, are projections on how I think we
should "create" our logistics system as we leave the 20^th^ century.

First, I would like to spend some time discussing "standardization." Not
a new concept; in fact, it is a method by which we have already saved
millions of dollars. However, we do need to build on those successes,
and build quickly.

Second, I would like to touch very lightly on further leveraging our
market power by partnering with OGA's.

Third, JIT, also not a new concept, will take on even greater
significance.

Fourth, I want to discuss national contracting initiatives, both those
ongoing and those to be considered in the future. I believe we are not
taking full advantage of the savings and efficiencies that can be
derived from national contracting and national contracting concepts.

Fifth, we need to have a fully integrated and interactive IT system that
facilitates contracting actions, procurement history, and ease of
ordering.

Sixth, I'd like to touch on the means by which we can optimize revenue
generation and cost avoidance through integrating the parts of our
logistics system\-\--meaning, cooperation between the national/OA&MM
level and contracting/materiel management levels within each
administration.

Seventh, we need to continue to aggressively use the Supply Fund for the
benefit of VA. While we have been incredibly creative to date, we need
to continue to find even more beneficial uses for this
**[very]{.underline} [flexible]{.underline} [asset]{.underline}**.

Eighth, we must find **[the]{.underline}** appropriate inventory levels
and take advantage of new materiel management techniques to support
them. We need to reduce our inventory investment right up to the point
that we find the "extra juice is no longer worth the extra squeeze."
(Marginal Utility).

And finally, we need to recognize that the progress we make in these
areas will result in reduced staffing needs. We must begin to take steps
to ameliorate the impact of such reductions. If we fail to plan for
these eventualities, we might as well plan to fail.

Now, in detail, let's look at each of these points. While the main
examples cited are VHA, the principles in those examples are applicable
VA-wide.

**[VA Standardization in the 21^st^ Century]{.underline}**

**[Standardization/Compliance]{.underline}.** We need to act more like
an integrated healthcare and IT acquisition system. Unless there is an
overriding clinical or business reason, all our medical and IT
commodities should be standardized throughout the VA system. Much like
our proven success with pharmaceuticals, we must aggressively seek to
standardize medicine/surgery equipment and IT items. I believe that in
VHA, the VHA Logistics Office will be in the best position to monitor
standardization compliance, and should be empowered to do so.

**[User Groups Are The Key]{.underline}.** They have been identified in
e.g., VHA for many med/surg and dental commodity areas, but they need
that nudge, that catalyst, and that can only come from VHA management.
My office will continue to provide procurement history data and
administrative, technical, and contracting support to these groups, but,
the decision to standardize is necessarily a clinical/VHA
decision\-\-\--and VHA management has to set clear and aggressive goals
for the user groups. Correspondent groups need to be established for VBA
and NCA.

**[Committed Volume Contracting]{.underline}.** Our creative use to date
of the FSS/BPA process to extract savings through standardization has
been very successful\-\--averaging approximately 17% cost savings per
standardized item. But, we can achieve even more advantageous prices
with committed volume contracts\-\--either through the BPA process or
through separate national contract actions.

**Small Business Issues**. Our ability to take full economic advantage
of standardized item/leveraged contracting has heretofore been
constrained by SBA's current position on small business issues. For
example, we have been stopped in the past from doing full and open
competition for standardized med/surg items because there were two small
business firms that could, arguably, "have met our needs." I submit to
you, however, that restricting competition to two firms that, up until
that time, had met less than three percent of VA's market needs is not
good business practice, is certainly not in VA's best economic interest,
and will never fly with our customers, irrespective of small business
legislation.

We hope to elicit the support of Scott Denniston in gaining a more
reasoned approach with SBA to use aggressive subcontracting plans to
ensure that small business entities are provided business opportunities
resulting from these standardization contracting efforts. In this way,
we can proceed with the most effective standardization contracts while
continuing to support the small businesses of our nation. This may be
quite a battle, but one that I believe is worth waging. Absent victory
in that battle, we will of necessity continue using the BPA technique.
We all support and believe the socio-economic programs are important.
However, socio-economic goals should never be achieved at the expense of
our veterans.

**[Just-In-Time Delivery in the 21^st^ Century]{.underline}**

One of the most fundamental changes in VA's logistics system has been
the reliance on JIT commercial delivery systems. These systems, e.g.,
prime vendors, allowed us to transition from our Depots with attendant
significant one-time and ongoing savings. JIT\'s impact locally has been
significant as well, allowing for more efficient ordering and internal
delivery, and more effective payment systems.

Prime vendor systems are also becoming increasingly effective at
ensuring standardization compliance and are providing very useful
management reports. We will expand our use of prime vendors, which will
expand the menu of options and features available to choose from. My
office and the Office of Finance are exploring optimum payment
processing options for PVs and other national contracting initiatives,
to ensure we take full advantage of what JIT systems have to offer at
the best possible value.

**[Partnering with OGAs/DoD in the 21^st^ Century]{.underline}**

As some of you may be aware, VA is in the process of concluding an MOA
with the Department of Defense to combine the strengths and buying power
of VA with those of the DoD to achieve lower medical materiel and
services costs for our respective departments and to eliminate
redundancies in contracting. The national MOA is in addition to the
MOU's that the Office of Acquisition and Materiel Management has signed
with the Departments of the Air Force and the Army, to explore areas
where we can share resources, partner in cost saving logistics efforts,
and avoid unnecessary duplication of services. Working in conjunction
with VHA's VISN Logistic Representatives, my office is sponsoring
Regional Summits with VA, DoD, and OGA activities to explore
opportunities for sharing resources and partnering at the regional and
local level. We believe all of these interrelated efforts will help us
contain costs and in some cases generate additional revenues for VHA
activities as we enter the 21^st^ century.

We are fortunate to have Tony Principi here this week to address the
Transition Commission, its recommendations, and what it means to us.
Suffice it to say that an underlying precept throughout that
Commission's report is that we should eliminate redundancies between
agencies, share resources, and optimize our combined purchasing power.

For example, one way to accomplish this is that we have entered into a
partnership agreement with the United States Army Medical Command
focusing on joint procurement, readiness support, and OA&MM repair
services. Five major Army Medical Treatment Facilities have already
established agreements with the Denver Distribution Center and are
receiving substantial savings by procuring hearing aids, hearing aid
accessories and batteries for active duty soldiers, against DDC
contracts. We also reached an agreement with our Army partners
authorizing Walter Reed Army Medical Center to utilize the endoscope and
other repair services of our Hines Service and Distribution Center
facility, thus allowing Walter Reed to realize significant savings over
previous sources. Considering our successes with the Army, we look
forward to establishing similar partnership agreements with Navy and Air
Force.

It should also be emphasized here that many of you are already putting
into practice many of the recommendations in the Transition Commission,
and the proposed VA/DoD MOA. Nothing better exemplifies in my mind how
cooperation between Federal agencies can be beneficial than the Alaska
Federal Healthcare Partnership. Cooperation between Air Force and VA
established the Joint Venture Medical Treatment Facility at Elmendorf
Air Force Base. And the cooperation between VA, Army, Air Force, Coast
Guard, IHS, and the Native Tribal Health Consortium has resulted in
decreased costs for the provision of health care to their respective
customers, at a reduction in the administrative cost of providing those
services. I am proud to say that OA&MM has participated in both of these
cooperative efforts and congratulations to those of you from the "frozen
tundra" who put such cooperation into practice.

**[National Contract Initiatives in the 21^st^ Century]{.underline}**

As I mentioned earlier, 2 years ago the theme of my presentation was the
"Logic of Logistics: Balancing Cooperation and Independence."
Cooperation, translated to mean collective commitment\-\--a better term,
perhaps, than "mandatory use"\-\--when strategically used, results in
significant savings. For example, from 1996 to date, VA has saved over
\$500 million through mandatory pharmaceutical contracts; SPV contracts
will save 10% or \$33 million over the life of the program. To borrow a
thought from Everett Dirksen, \$30 million here, \$500 million there,
pretty soon we're talking about real money!

What I've listed here is meant to be illustrative of where we can reach
out to OGA's and achieve significant savings through collective
commitment. Service and medical hardware contracts, such as Telemedicine
and Ambulance Services, are examples of areas in which a carefully
leveraged contracting strategy can be expected to result in significant
savings. They will, of course, require coordination with field entities
and shared responsibilities and authorities. But the juice, I'm
convinced, **[will]{.underline}** be worth the squeeze.

Look at software licensing: the Microsoft License Agreement through PCHS
enabled us to obtain their license at significantly reduced
prices\-\--\$147 per license as opposed to many times that if purchased
individually!

Mandatory IT contracts are somewhat controversial. However, collective
commitment will drive better terms and better prices, and certainly will
help in ensuring an interoperable system.

**[Coherent/Cohesive Use of Electronic Commerce in the 21^st^
Century]{.underline}**

Our vision for EC in the 21^st^ century envisions a fully automated
electronic process for our buying and paying functions. In the next
century, VA will utilize prime vendor proprietary order processing
systems and web-based electronic catalogs to place most, if not all, of
our small purchase orders electronically. These order processing systems
will be seamlessly integrated with electronic payment processes such as
purchase cards and EDI. "Using service" and "purchasing personnel" will
be able to access vendor and VA electronic catalogs from their desktop
computers to view items, compare prices, determine stock availability,
place orders using point and click technology, and pay for line items
ordered using their purchase cards. Because both the buying and paying
functions will be fully automated, we will be able to analyze the data
that will be captured, for procurement history purposes.

We have already developed and completed the testing of a new
Internet-based system for VA contracting officers to use in support of
the acquisition process entitled the "VA Business Opportunities System."
This systems will provide electronic tools allowing for increased
competition, centralized data collection, and document
processing/distribution. A workshop will be conducted Wednesday and
Thursday on the VA BOS, and I encourage you to attend to learn more
about it.

**[Integrated Logistics Revenue Generation in the 21^st^
Century]{.underline}**

We are in a unique position, and a very enviable position, to enhance
our VA resources\-\--provided we take full advantage of it. DoD
entities, Indian Health Service, Center for Disease Control, and HCFA,
just to name a few, have approached VA to provide contracting and
logistics support at both the National and the local levels. DoD's own
IG has even recommended that DoD begin relying on VA for its medical
commodity contracting needs. The Transition Commission seemingly
supports that premise. But, what we need to do is collectively take
advantage of the opportunity that has presented itself. We have done
some of that with the \"summits\" we have sponsored which have brought
together Federal entities in various geographic regions. We have
collaborated as a system to provide support to various DoD initiatives.
**[But we can do better]{.underline}.** It is my belief and expectation
that working with the new VHA Logistics Office, and the logistics
liaisons in the other administrations, that VA's full logistics system,
Nationally and locally, can become the preferred contracting and
logistics provider of choice within the Federal Government.

1VA + Fund \-- Later this week, there will be a workshop that will
review some of the more unique successes experienced in the first year
of the 1VA + Fund program. In the initial year, there were 121
agreements processed for nearly \$90 million. That means program offices
elected 121 times to preserve available year end funds to allow time for
the most effective expenditure to achieve identified and bona fide
program needs. Every major office within VA, including the Inspector
General, executed at least one agreement.

During the first half of this fiscal year, contract awards were made
totaling \$23.4 million against 45 of the agreements. It is encouraging
to note that at the present rate, most of the first year monies will be
expended in the current year.

While the 1VA + Fund program continues to work favorably for VA, we are
still experiencing unresolved problems in the attendant fiscal policy
and accounting transactions. Nevertheless, we are expecting even more
program office participation in this, the second year, of the 1VA + Fund
program. It is fulfilling an important need and continuing throughout
VA.

But, important changes **[are]{.underline}** nonetheless in the making.
We are pressing an FY 2001 legislative initiative that would allow for
use of the 1VA + Fund for NRM projects and to open the program to OGAs.
OGA authority would assist our joint contracting initiatives and would
also be a new revenue opportunity. Another change will initiate a 1% fee
for use of the 1VA + Fund program. The 1VA + Fund workshop later this
week will provide more detail.

**[Supply Fund Capital Leasing Program]{.underline}** -

The Capital Lease program enables program offices to acquire needed
assets on a lease-to-own basis without up-front scoring of the lease
obligation. Under the Capital Lease program, equipment can be procured
in advance of appropriated funding and can be paid for in part or in
whole from savings generated by the use of the equipment. While this may
not be a panacea to be used carelessly, it is nevertheless an excellent
and cost-effective tool in instances where it serves the needs of a
program office.

I am pleased to say that the Capital Lease program has come into its own
during this past year. We have more leases and more dollar value under
lease than ever before. As of April 30, we have executed 25 leases worth
\$16.1million There are another 4 proposals worth \$2.9 million that are
awaiting signatures at medical centers, VISNs, or other program offices.

I would like to mention just one example of creative use of the Capital
Lease program. Lacking funding to purchase space saving furniture and
fiber-optic cabling, a VA office found that, by obtaining the furniture
and cabling through a Capital Lease, they could reduce the square
footage of their GSA-leased space and more than offset the capital lease
payments through savings in space rental costs. Now
**[that]{.underline}** is creative. And, creative is what we must be in
these times of tight budgets and competition to protect base program
costs.

**[Optimum Materiel Management Strategies for the 21^st^
Century]{.underline}**

In the materiel management area, we envision two developments that will
have a major impact on the way VA conducts its logistics business.
First, new technology will become available that will dramatically
improve materiel management operations. We operate in an automated age,
and this automation will continue to change the business practices in
almost everything we do. This is no different in the materiel management
field. for example, IFCAP/GIP has been the backbone of the VHA inventory
management program in VA for the past 10 years. It has been continuously
improved to the point where its integration with the rest of VISTA is so
complicated that it is difficult to modify. Recently, we added bar code
capability to GIP, and my office arranged the purchase of bar code
scanners for all VA Medical Centers. Now, we are looking at a new
technology, described as point-of-use equipment, that automatically
tracks the utilization of supplies. This equipment dispenses supplies to
authorized users and records every transaction, even down to the patient
if necessary. Initial studies have shown this equipment to dramatically
reduce the amount of standing inventory and to decrease supply
consumption by as much as 30 percent! In addition, we are working on
developing interfaces between our computer systems and prime vendors,
which will create a seamless and paperless arrangement for ordering and
payment.

Second, In our household goods program, our move management services
contractor, working with Bill Bardwell of my staff, has implemented an
Internet solution for scheduling and providing information on moves for
transferees. As a result, household goods moves can be arranged
instantly through Internet transactions, and status information is
available up-to-the-minute.

Third, in the forms and publications program arena, we are developing an
electronic forms system to enable users to access forms directly from
the internet. Currently, VA stocks over 9,000 forms at our Service and
Distribution Center at Hines, Illinois. As you can imagine, that is a
heck of a lot of paper and probably not the best way to do business.
Therefore, we think electronic storage of forms may be a technological
answer to an antiquated system of warehousing paper.

In addition, our Publications Service has obtained state-of-the art
duplicating equipment that enables it to produce professional quality,
customized documents for our customers' smaller jobs without having to
contract the work to commercial printers. This not only speeds up the
process, but it also saves our customers money.

Finally, at the Denver Distribution Center, VA's most recent Cary Award
Trophy winner, the Remote Order Entry System, or "ROES," will be
completely redesigned to provide more features to users. For example, we
hope to develop a centralized patient database and to include some
web-based applications.

In summary, these new technologies will improve VA's operations for our
customers, reduce costs, and keep VA's Materiel Management systems among
the most progressive in the industry. My office will continue to seek
out opportunities to apply technology to VA's programs where it makes
sense to do so. Never before have so many options become available, and
even more are likely to emerge.

Whatever wonders our technology brings, It is a fact of life that
Materiel Management presently relies on people to physically distribute
supplies to wherever they need to be. However, there are some ways to do
this that are better than others, which brings me to the second
development we envision for the next millennium. That is, the
realization that Materiel Management operations must be carefully
coordinated to obtain the efficiencies required by today's austere
resources.

The VISN structure has encouraged a significant amount of much needed
innovation to the VA system. However, like all experiments, not all
ideas work as well as intended. A case in point, we believe, is the
practice of separating logistics functions, particularly materiel
management functions, and distributing them to various organizational
elements.

For example, we sometimes see at the same facility warehousing assigned
to Engineering Service, distribution assigned to Pharmacy Service, and
SPD assigned to Nursing Service. While well intentioned, it is our view
that fracturing the materiel management system is counterproductive.
Separating Materiel Management functions eliminates the efficiencies
that are possible if the operation were properly coordinated. A
well-coordinated Materiel Management program provides a system to
effectively obtain supplies, facilitate product standardization,
efficiently distribute supplies, and provide expert knowledge in the
preparation and utilization of products.

We have already seen some facilities that had broken up Materiel
Management recombine the operation. They have recognized the benefits
that a single logistics operation offers. For example, the PROGRESS
program OA&MM has been advocating for the past 5 years encourages the
use of dedicated materiel managers to provide automatic supply support
to users. In this manner, inventory management is performed by materiel
management professionals who can devote the time, effort, and expertise
necessary to assure proper utilization of supplies. Furthermore, health
care practitioners need not take time away from patient care to do
inventories, replenish supplies, and conduct other Materiel Management
tasks. Wherever implemented, a PROGRESS-type approach always has
resulted in, at a minimum, hundreds of thousands of dollars in cost
savings.

For these reasons, we are quite certain VA materiel management in the
new millennium will see increased application of technology and a return
to centralized logistics organizations. These two developments have the
potential to reduce VA supply costs through better inventory management.

**[Reduced/Redeployed Logistics Staffing in the 21^st^
Century]{.underline}**

The VA logistics systems, particularly in VHA and OA&MM, have already
experienced significant reductions in staffing brought about by new
technologies and new techniques. In my organization, for example, we are
over 40% fewer in staff than 5 years ago, primarily due to the closure
of our Depot system. That closure was an economic decision and was based
upon our ability to distribute products more efficiently through private
sector mechanisms. Field logistics organizations have also experienced
significant reductions because of JIT delivery systems and increased use
of the purchase card.

I think the reductions in logistics staffing at the field level will
inevitably continue. I believe those reductions will be prompted by the
reasons identified here. If mandatory use of standardized items is
directed; if mandatory medical/surgical PV is directed, as now is the
case for pharmaceuticals and subsistence; if there is increased use of
national contracts; if there is made available an \"electronic
catalogue;\" and if there is increased utilization of point-of-use
technology\-\-\--all of which I have predicted\-\-\--then reduction in
the need for logistics staff as currently constituted is inevitable.
Frankly, I think it is inevitable in any event, due to the shrinking
resource base.

I do believe, however, that with these reductions and changes come
**[possibilities]{.underline}**. The VHA logistics community, where the
changes will be the most dramatic, have the Enhanced Sharing legislation
that provides them an opportunity to focus on revenue enhancement
possibilities. Many heretofore "purchasing logisticians" have already
made that transition. That alternative, and others, should be carefully
considered if, as I predict, staff reductions in traditional logistics
functions occur.

*"There is nothing stable in the world; uproar's your only music."*

*\--John Keats*

What I have attempted to provide you is my perspective, my predictions
if you will, regarding where we are and should be heading as a logistics
system in the new millennium. It is perhaps not a comfortable scenario.
But as Keats so rightly said approximately 200 years ago, whether you
buy into my predictions or not, our system will change, it will not
remain stable. But that does not mean that we cannot guide that change,
take advantage of that change, and even make some of those changes.

What is also perfectly clear to me is that we must work together, my
organization at the National level and the logisticians in the field,
with the coalescing force of the VHA Logistics Office, and the liaison
offices in the other administrations. We must manage the on-going change
to the best advantage of VA. OA&MM is prepared to work with these
liaison offices to achieve this positive change. We owe the taxpayer and
the veteran no less.

OA&MM will continue to be responsible for National contracting and will
provide oversight to the Acquisition and Materiel Management system of
VA. But, most certainly, we cannot do these things in isolation and must
and will work with VHA, VBA, NCA, and the field structure to ensure a
coherent logistics system. Todd Grams will speak on Thursday and provide
his perspective on the new VHA Logistics Office; I urge all of you to
take advantage of this opportunity for hearing his perspective. One
priority I know Todd shares with me: that is the intent to make VA\'s
logistics system the most efficient, effective, and streamlined system
it can be. I am equally confident that everyone in this room shares that
objective.

Thank you.