GAO

United States General Accounting Office

Report to the Chairman, Subcommittee

on Military Readiness, Committee on

Armed Services, House of

Representatives

August 2000 AIR FORCE DEPOT

MAINTENANCE

Budgeting Difficulties

and Operational

Inefficiencies

GAO/AIMD/NSIAD-00-185

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Contents

Letter 3

Appendixes Appendix I: Comments From the Department of Defense 34

Appendix II: GAO Contacts and Staff Acknowledgments 40

Tables Table 1: The Activity Group’s Budgeted and Actual Total

Material Costs, Direct Labor Hours, and Material

Costs per Direct Labor Hour for Fiscal Years 1997

Through 2000 11

Table 2: Original and Revised Budget Estimates for the Air

Force Depot Maintenance Activity Group’s Savings for

Fiscal Years 1996 Through 1999 25

Table 3: Depot Maintenance Activity Group’s Total Anticipated

Savings by Major Initiative for Fiscal Years 2000

Through 2007 26

Table 4: Depot Maintenance Activity Group’s Anticipated

Savings for Fiscal Years 2000 Through 2007 27

Figures Figure 1: Depot Maintenance Activity Group’s Budgeted

and Actual Material Costs per Direct Labor Hour of

Work Accomplished 10

Figure 2: Comparison of the Depot Maintenance Activity Group’s

Budgeted and Actual Output-per-Paid-Man-Day for

Fiscal Years 1988 Through 2000 and Budgeted for

Fiscal Year 2001 18
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United States General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-285446 Letr

August 15, 2000

The Honorable Herbert H. Bateman

Chairman, Subcommittee on Military Readiness

Committee on Armed Services

House of Representatives

Dear Mr. Chairman:

The Air Force depot maintenance activity group supports combat readiness

by providing the depot repair services necessary to keep Air Force units

operating worldwide. The group generates about $5 billion in annual

revenue principally by repairing and overhauling a wide range of assets

including aircraft, missiles, aircraft engines, electronics, avionics, software,

and repairable inventory items for military services, other government

agencies, and foreign governments. In doing so, this group operates under

the working capital fund concept, where customers are to be charged the

anticipated actual costs of providing goods and services to them.

This is the second report in response to your request that we review

financial and management issues related to the depot maintenance activity

group of the Air Force Working Capital Fund. In December 1999, we

reported1 that the depot maintenance activity group incurred losses

totaling about $623 million2 during fiscal years 1994 through 1998 on sales

of about $21.8 billion. We also reported on the different methods that the

Air Force used to recover the losses. This second report addresses how

financial operations have been and may continue to be adversely affected

by (1) higher-than-budgeted material costs and inadequate internal controls

over material, (2) lower-than-budgeted productivity, and (3) the failure to

attain expected savings from reform initiatives.

1

Air Force Depot Maintenance: Analysis of Its Financial Operations (GAO/AIMD/NSIAD-00-

38, December 10, 1999).

2

The $623 million loss includes a $98.8 million accounting adjustment that does not need to

be recovered from customers.
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Results in Brief For years the depot maintenance activity group has experienced difficulties

in accurately budgeting for material costs, workforce productivity, and

savings to be achieved through productivity improvements and other

reform initiatives. These difficulties have adversely impacted the activity

group’s financial operations, resulting in hundreds of millions of dollars in

operating losses and limited the group’s ability to provide timely support to

its customers. Although actions are underway to improve some problems,

such as poor budget estimation and operational inefficiencies including

declining productivity rates, it is uncertain to what extent the Air Force’s

long-standing problems are likely to be resolved in the short-term. More

specifically, we found the following.

• Because of inaccurate pricing information from the Air Force’s supply

management activity group and ineffective internal controls over depot

material costs and usage, the depot maintenance activity group’s actual

material costs per direct labor hour of work accomplished were $12.40

higher than the budgeted amount in fiscal year 1998; $7.13 higher in

fiscal year 1999; and $21.48 (45 percent) higher during the first 6 months

of fiscal year 2000. These increases resulted in overall material costs

that were about $361 million and $307 million higher than the group’s

budget estimate in fiscal years 1998 and 1999, respectively, and

contributed to operating losses. The Air Force is acting to resolve the

higher-than-budgeted material cost problem in several ways, including

(1) stabilizing the supply management activity group’s price-setting

process and (2) having the Air Force Audit Agency review the accuracy

of the proposed prices that the supply management activity group will

charge the depot maintenance activity group for material. The Air Force

is also strengthening controls over material usage.

• An 11.3 percent decline in reported worker productivity that occurred

from fiscal year 1992 through fiscal year 1999 caused a corresponding

increase in labor costs per unit of work accomplished. Additionally,

because budget estimates for fiscal years 1994 through 1999 were

repeatedly based on overly optimistic productivity assumptions, the

workforce did not accomplish as much work as projected. This, in turn,

(1) caused labor costs for the work that was accomplished to be about

$838 million higher than budget estimates and (2) created a higher

backlog of work which, in turn, limited the group’s ability to provide

timely support to customers. The group’s fiscal year 2001 budget

estimate assumes that productivity will improve about 13.4 percent over

the actual productivity level for the first half of fiscal year 2000.

However, our analysis indicates that improvements of this magnitude
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will be difficult to achieve and that productivity shortfalls against goals

are, therefore, likely to continue.

• The depot maintenance activity group budgeted to save an average of

$77 million a year from fiscal years 1996 through 1999 through planned

management reforms. However, the activity group repeatedly revised

the original budgeted savings downward to an average of $30 million a

year—a 61 percent reduction—in subsequent budget estimates, which

were developed the following year based on updated information. Since

projected savings were a factor used to set customer prices, these

revisions, in turn, increased the group’s financial losses. The activity

group now has major initiatives underway that it expects will result in

even higher savings, equal to an average annual amount of $347 million,

about $2.8 billion from fiscal years 2000 through 2007. The Air Force has

recently acted to better estimate savings by involving the air logistics

centers—which are to achieve the savings—in the estimation process.

Because of the magnitude of these savings, it is important that the Air

Force accurately determine the amount of actual savings achieved each

year so that it can effectively adjust the activity group’s subsequent

years’ budgets and prices. However, the Air Force does not have the

systems and processes in place necessary to do so.

We are making recommendations to the Secretary of the Air Force to

improve the depot maintenance activity group’s (1) budget estimates and

(2) management of material costs and usage. In its comments on a draft of

this report, the Air Force concurred with our recommendations and

identified actions it was taking to correct the identified deficiencies. For

example, the Air Force plans to require an analysis of material usage as a

matter of policy and develop material management metrics that will allow

Air Force depot maintenance officials to monitor and determine causes of

material cost variances. The Department of Defense’s comments are

included in appendix I.

Background The Air Force depot maintenance activity group is part of the Air Force

Working Capital Fund, a revolving fund that relies on sales revenue rather

than direct congressional appropriations to finance its operations.

Department of Defense (DOD) policy requires working capital fund activity

groups to (1) establish sales prices that allow them to recover their

expected costs from their customers and (2) operate on a break-even basis

over time—that is, not make a profit nor incur a loss. DOD policy also

requires the activity groups to establish their sales prices prior to the start

of each fiscal year and to apply these predetermined or “stabilized” prices
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to most orders received during the year—regardless of when the work is

actually accomplished or what costs are actually incurred.

The process that activity groups use to develop their stabilized prices

begins as early as 2 years before the prices go into effect, with each activity

group developing workload projections for the budget year. After an

activity group estimates its workload based on customer input, it (1) uses

productivity projections to estimate how many people it will need to

accomplish the work, (2) prepares a budget that identifies the labor,

material, and other expected costs, as well as projected cost savings, and

(3) develops sales prices that, when applied to the projected workload,

should allow it to recover operating costs from its customers.

In order for an activity group to operate on a break-even basis, it is

extremely important that the activity group accurately estimate the work it

will perform and the costs of performing the work. Higher-than-expected

costs or lower-than-expected customer demand for goods and services can

cause activity groups to incur losses. Conversely, lower-than-expected

costs or higher-than-expected customer demand for goods and services can

result in profits. However, with sales prices based on assumptions that are

made as long as 2 years before the prices go into effect, some variance

between expected and actual costs is inevitable.

Major Changes Affecting the

Activity Group’s Operations

As discussed in our December 1999 report, the depot maintenance activity

group has undergone major changes since the early 1990s that have

affected the activity group’s financial operations. More specifically, as

discussed below, these changes significantly affected the scope and mix of

workload to be performed by the depot maintenance activity group and the

productivity of its workforce.

• In response to the declining force structure and the increasing amount

of work that is being contracted out, the Air Force reduced the number

of activity group employees from about 31,000 permanent employees at

the end of fiscal year 1991 to about 21,000 at the end of fiscal year

1999—about a 32-percent reduction. This reduction of employees

affected the experience and skills of workers.

• From fiscal year 1993 through fiscal year 1997, the Air Force converted

its existing three-level depot maintenance operations (organization,

intermediate, and depot) to two levels (organization and depot) for

selected avionics and engine items. This resulted in more engine work

being performed by the depot maintenance activity group. Since the
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engine work was very material intensive, the average material cost per

hour charged by the activity group and the average customer price per

hour both increased.

• From fiscal year 1995 to the present, the Air Force has been in the

process of closing two air logistics centers and transferring their work

to other sources of repair. For example, during fiscal years 1998 and

1999, about one-third of the group’s workload was competed or

realigned. This (1) affected the location and the amount of work

performed by the depots, (2) significantly increased hiring and training

needs at the gaining activities, and (3) affected the productivity of the

workforce.

The Activity Group’s

Financial Reports Are Not

Accurate

We have previously reported that DOD has had long-standing problems in

preparing accurate working capital fund financial reports. In addition, the

DOD Inspector General and/or the Air Force Audit Agency have not been

able to express an opinion on the accuracy of the working capital fund3

financial statements for fiscal years 1993 through 1999. The auditors

reported that the financial information was unreliable and financial

systems and processes, as well as associated internal control structures,

were inadequate to produce reliable financial information. For example,

the Air Force depot maintenance systems lacked a single transactiondriven general ledger for reliable financial reporting, did not follow the

percentage-of-completion method of accounting for revenue, and

continued to account for cost of goods sold and work-in-process at

estimated amounts instead of actual costs.

To help improve the depot maintenance activity group’s financial

management operations by more accurately accounting for costs in

providing goods to customers, the Air Force is in the process of

implementing a new system called the Depot Maintenance Accounting and

Production System. According to the Air Force, this system—which is

scheduled to be implemented by June 2001, will provide accurate cost

visibility at the task level to support financial analysis and cost

3

Prior to fiscal year 1997, the DOD Inspector General was responsible for auditing and

rendering an opinion on the financial statements of the Defense working capital funds,

which were called the Defense Business Operations Fund at that time. The Defense Working

Capital Fund financial statements included the Air Force depot maintenance activity group’s

financial statements. In 1997, the Department of Defense delegated the responsibility for

auditing the Air Force Working Capital Fund financial statements, including the Air Force

depot maintenance activity group’s statements, to the Air Force Audit Agency.
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management. The system will also improve the timeliness, accuracy,

completeness, reliability, and consistency of the financial information.

Objectives, Scope, and

Methodology

The objectives of our review were to determine how the financial

operations of the depot maintenance activity group have been and may

continue to be adversely affected by (1) higher-than-budgeted material

costs, (2) lower-than-budgeted productivity, and (3) the failure to attain

expected savings from reform initiatives. This review is a continuation of

our work on the depot maintenance activity group’s price increases and

financial losses.4

To determine how the financial operations of the depot maintenance

activity group have been and may continue to be adversely affected by

higher-than-budgeted material costs, we obtained and analyzed budget and

accounting documents that provided information on budgeted and actual

material costs from fiscal year 1997 to fiscal year 2000. When variances

occurred between budgeted and actual reported information, we met with

responsible budgeting and accounting officials to ascertain why there were

differences. We also met with officials to determine what actions they were

taking to get a better understanding of why material costs were increasing

and how the Air Force Materiel Command could better control and reduce

material costs.

To determine how the financial operations of the depot maintenance

activity group have been and may continue to be adversely affected by

lower-than-budgeted productivity, we obtained and analyzed budget and

actual data on (1) hours worked, (2) the amount of work accomplished,

(3) worker productivity, and (4) labor and overhead costs. When variances

occurred between budgeted and actual reported information, we met with

responsible officials to ascertain why there were differences and what

actions they were taking to more accurately budget for productivity.

Finally, to determine if the productivity improvement goals used to develop

the fiscal year 2001 budget estimate are realistic, we documented and

evaluated the corrective actions being taken to improve productivity.

To determine how the financial operations of the depot maintenance

activity group have been and may continue to be adversely affected by the

4

Air Force Depot Maintenance: Analysis of Its Financial Operations (GAO/AIMD/NSIAD-00-

38, December 10, 1999).
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failure to attain expected savings from reform initiatives, we obtained and

analyzed budget documents that provided information on savings for fiscal

years 1996 through 1999. We also obtained and analyzed information on

budgeted savings for fiscal year 2000 through fiscal year 2007. When

variances occurred between budgeted and actual reported information, we

met with responsible officials to ascertain (1) why there were differences,

(2) the difficulties they were encountering in determining actual savings,

and (3) what actions they were taking to more accurately budget for future

savings.

We performed our work at the headquarters offices of the Under Secretary

of Defense (Comptroller) and the Secretary of the Air Force, Washington,

D.C.; Air Force Materiel Command, Dayton, Ohio; the Oklahoma City Air

Logistics Center, Tinker Air Force Base, Oklahoma; the Ogden Air Logistics

Center, Hill Air Force Base, Utah; the Sacramento Air Logistics Center,

McClellan Air Force Base, California; the Warner Robins Air Logistics

Center, Robins Air Force Base, Georgia; and the Air National Guard,

Arlington, Virginia. We did not verify the accuracy of the accounting and

budget information used in the tables and charts in this report, all of which

was provided by the Air Force. We conducted our work from November

1999 through May 2000 in accordance with generally accepted government

auditing standards. We requested comments on a draft of this report from

the Secretary of Defense or his/her designee. We have reprinted the

comments in appendix I of this report.

Higher-Than-Budgeted

Material Costs and

Internal Control

Weaknesses Adversely

Affected the Activity

Group’s Financial

Operations

The depot maintenance activity group’s fiscal year 1998 and 1999 material

costs were about $361 million and $307 million higher than its budget

estimate, respectively. Such higher-than-expected costs, in turn, negatively

affected the group’s financial operations. The higher material costs can be

attributed primarily to the activity group paying higher prices than

budgeted for material purchased from the Air Force supply management

activity group. Further, depot maintenance activities were not following

internal control procedures designed to control material, and the activity

group did not have a systematic process for identifying and analyzing

variances between expected and actual material usage.

As shown in both figure 1 and table 1, the activity group’s actual material

costs per direct labor hour of work accomplished (direct product standard
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hours5) increased from $43.62 per hour in fiscal year 1997 to $69.31 per

hour for the first 6 months of fiscal year 2000, or by about 59 percent.

Viewed annually from a budgeting perspective, actual material costs per

direct labor hour of work accomplished were $12.40 higher than the

budgeted amount in fiscal year 1998; $7.13 higher in fiscal year 1999; and

$21.48 (45 percent) higher during the first 6 months of fiscal year 2000.

Figure 1: Depot Maintenance Activity Group’s Budgeted and Actual Material Costs

per Direct Labor Hour of Work Accomplished

5

A direct product standard hour is the amount of acceptable quality work that can be

accomplished in 1 hour by qualified workers, following prescribed methods, working at a

normal pace and experiencing normal fatigue and delays.

 

 

 

 

 

 

 

 1

 

 

 

 

 

 

 

 

 

 

 er direct labor hour 

1 1 1 

Fiscal year

Budget Actual
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Table 1: The Activity Group’s Budgeted and Actual Total Material Costs, Direct Labor Hours, and Material Costs per Direct Labor

Hour for Fiscal Years 1997 Through 2000

Note: Fiscal year 2000 actual data is a straight-line projection of the first 6 months of actual data.

Source: Air Force.

Depot Maintenance

Received Inaccurate

Material Prices From the

Supply Management

Activity Group During the

Budget Process

Air Force depot maintenance officials believe, and our work confirmed,

that the depot maintenance activity group’s recent problems with higherthan-budgeted material costs can be attributed largely to inaccurate

material prices. These prices came from the Air Force supply management

activity group6 and were developed during the budget process. This became

a problem in fiscal year 1998 when the supply group changed its pricesetting methodology.

In June 1998, we reported7 that the new price-setting methodology8 used

for allocating the supply management activity group’s operational cost to

individual inventory items, combined with data reliability problems,

resulted in price changes that varied significantly not only from one item to

the next but also from one month to the next. Altogether, prices changed

Fiscal year 1997 Fiscal year 1998 Fiscal year 1999 Fiscal year 2000

Description Budget Actual Budget Actual Budget Actual Budget Actual

Total material

costs (in millions)

$1,204.5 $1,180.9 $1,210.9 $1,571.7 $1,207.7 $1,514.6 $1,038.9 $1,551.5

Direct labor hours

(in millions)

28.297 27.075 25.317 26.094 22.451 24.861 21.719 22.386

Material costs per

direct labor hour

$42.57 $43.62 $47.83 $60.23 $53.79 $60.92 $47.83 $69.31

6

The supply management activity group is part of the Air Force Working Capital Fund and is

the depot maintenance activity group’s primary source of spare parts.

7

Air Force Supply Management: Analysis of Activity Group’s Financial Reports, Prices, and

Cash Management (GAO/AIMD/NSIAD-98-118, June 8, 1998).

8

In October 1997, the Air Force made two major changes in the supply management activity

group’s cost allocation procedures to better match costs with the prices customers were

being charged. First, the supply group identified the estimated costs associated with

individual supply activities—the five air logistics centers—and allocated each center’s costs

to only those items that it managed. Second, the estimated cost of procuring inventory items

to replace repairable items that can no longer be repaired economically (condemned items)

was recouped by adding a surcharge to the cost of the item being replaced rather than by

adding a surcharge to all repairable items, which was the previous practice.
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seven times during fiscal year 1998, and the net effect of the changes was

that some customers, including the depot maintenance activity group, had

to pay more for material than they budgeted, others paid less. Specifically,

the depot maintenance activity group had to pay an additional $168 million

after Air Force headquarters officials decided to make all of the price

changes retroactive to the beginning of fiscal year 1998.

This same problem reoccurred when the supply management activity group

changed its price-setting methodology again for fiscal year 2000. Because

of this change, the Air Force estimates that the depot maintenance activity

group will have higher-than-budgeted material costs of about $119.1 million

in fiscal year 2000.

Air Force officials realize that the supply management activity group needs

to develop and provide more accurate pricing information and they are

undertaking improvement efforts. Specifically, they plan to “stabilize” the

supply activity group’s price-setting methodology (that is, not change the

methodology for setting prices in future years) in order to enable the Air

Force to develop more consistent historical trend data on supply group

customers’ funding needs, which, in turn, should provide a better basis for

developing customer budgets.

Additionally, in response to recommendations we made in our June 1998

report, the Air Force is taking steps to ensure that the supply activity

group’s price changes and customers’ budget estimates are more reliable.

First, it has begun ensuring that the prices it establishes for individual

items are consistent with the approved composite price change.9 In the

July/August 1999 time frame, the Air Force Audit Agency analyzed the

supply activity group’s fiscal year 2000 prices and, after ensuring that some

erroneous prices were corrected, confirmed that the fiscal year 2000 prices

would result in a composite price change that was consistent with the

approved composite price increase of 0.1 percent.10 The Air Force Audit

9

The supply management activity group’s composite price change is expressed in terms of a

percentage from one year to the next. This change is used to develop customer funding

levels. The depot maintenance activity group is a customer of the supply group and buys

materials from supply.

10The Air Force Audit Agency’s analysis indicated that the composite price increase was 1.57

percent for fiscal year 2000. The Air Force Materiel Command determined that fiscal year

1999 prices were 1.5 percent too low, which resulted in an actual difference of .07 percent

for fiscal year 2000.
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Agency will perform a similar analysis of the supply group’s fiscal year 2001

prices.

Second, the supply activity group is beginning to estimate the impact of

actual price changes on individual customers. Although the actual

composite price increase for fiscal year 2000 was 0.07 percent, an analysis

performed by a contractor on behalf of the supply activity group indicated

that the impact on individual customers ranged from a 151 percent increase

to a 93 percent decrease. For fiscal year 2001, supply group officials plan to

determine the impact of their price changes on individual customers prior

to the start of the fiscal year so that the information can be used by Air

Force headquarters officials to reallocate funds among the activity group’s

Air Force customers, if necessary.

If properly implemented, these actions should provide reasonable

assurance that the supply activity group’s price changes are properly

synchronized with its customers’ budget estimates. However, as the next

section further discusses, additional actions are still needed on the part of

maintenance depots to effectively control material usage and costs.

Depot Maintenance

Activities Are Not

Effectively Controlling

Material Usage

Our reviews and other studies have shown that the depot maintenance

activities were not following internal control procedures designed to

manage material and thus were not effectively controlling material usage.

While actions have recently been taken to rectify this problem, the Air

Force still lacks a mechanism for ensuring their successful

implementation.

In the early 1990s, both we11 and the Air Force Audit Agency reported that

Air Force depot maintenance activities did not have adequate internal

controls to ensure that issued materials were charged to the appropriate

jobs or limited to established job requirements. As a result, materials were

issued improperly to jobs and material usage and related costs for specific

jobs were not correctly reported. Eight years later, a February 1999 study

performed by the Air Force Materiel Command on material standards

identified problems similar to the ones found by us and the Air Force Audit

Agency, as the following examples illustrate.

11 Management letter to the Commander, Air Force Logistics Command (GAO/AFMD-91-

33ML, February 26, 1991).
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• Some material managers either were not receiving or were not analyzing

reports that indicated excessive material usage for individual repair

tasks. As a result, they could not assess why material usage was higher

than expected and, in turn, take effective corrective measures.

• Some material managers were not receiving automated reports that

identified the Bill of Material12 with low accuracy (some information on

the Bill of Material document, such as material needed to repair an item,

is not accurate) and, therefore, had neither identified nor taken

appropriate corrective action to address the causes of the inaccuracies.

Also, some material managers who received the automated reports did

not determine the reason(s) for the inaccuracies.

• When reviews of excessive material usage were conducted, planners, in

many cases, found that material was ordered for the wrong job.

• Required approval for higher-than-expected material usage was not

always obtained.

The Air Force Materiel Command study resulted in 102 recommendations

made to headquarters and each of the centers, including recommendations

that called for policy changes, system changes, new requirements, a new

training course, and stricter enforcement of current policies. According to

an Air Force Materiel Command official, as of April 2000, 80 of the 102

recommendations contained in the study have been implemented. By the

end of the fiscal year, the Air Force expects to implement the final 22.

Air Force Materiel Command logistics officials had originally planned to

have the Air Force Inspector General review the air logistics centers’

compliance with material management policy during biannual unit

compliance inspections. However, the Air Force Materiel Command and

the Inspector General subsequently decided, in conducting those

inspections, to review only critical items affecting safety of flight or

compliance with laws. Since material management did not meet this

criteria, it was removed from the unit compliance inspections and made a

self-inspection annual requirement. Consequently, at this time, there is no

organization external to the air logistics centers monitoring compliance

with the material management requirements. Such independent monitoring

12 A document commonly known as the Bill of Material, or material standard, is a descriptive

and quantitative list of the material and component parts that, based on historical data and

other factors, are expected to be needed during the manufacture, overhaul, or repair of

individual items.
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is important given the compliance problems that have existed at the air

logistics centers since the early 1990s.

Air Force Has Not

Performed an Analysis of

Expected and Actual

Material Usage and

Quantified Its Results

In addition to the problems identified in the 1999 Air Force report, we also

found that the activity group did not have a systematic process for

identifying and analyzing variances between expected and actual material

usage at the depot maintenance activity group level. Such an analysis is

normally used in the manufacturing process to determine whether material

usage has increased and the effect of the increased material usage on

material costs. The analysis could also be used to determine and validate

Air Force officials’ view that increased material usage is caused by external

factors beyond the Air Force Materiel Command’s control, such as aging of

the aircraft and engine inventory.

Air Force officials told us that the air logistics centers used to perform

usage variance analyses; however, the staff who conducted these studies

were cut during downsizing efforts that took place during the early and

mid-1990s. Officials said that the Command and the centers are presently

attempting to hire personnel to perform this type of analysis again.

Air Force Materiel Command officials also stated that they are in the

process of developing a data warehouse to serve as a central depository for

all depot maintenance data, including material data, in order to enhance

material management. By having access to historical and current files in a

single database and ensuring that the data are correct, Air Force Materiel

Command officials should be able to develop performance metrics

necessary to identify problem areas and take appropriate corrective

actions.

Productivity-Related

Problems Have

Adversely Affected the

Activity Group’s

Operations

Productivity-related problems have adversely affected the depot

maintenance activity group’s financial operations and have limited its

ability to provide timely support to its customers. For example, an

11.3 percent decline in reported worker productivity that occurred from

fiscal year 1992 through fiscal year 1999 caused a corresponding increase in

labor costs per unit of work accomplished. Additionally, because actual

productivity from fiscal year 1994 through fiscal year 1999 was consistently

less than budget estimates, the workforce did not accomplish as much

work as expected. In turn, because labor rates were based on these higher

expectations, this resulted in the activity group maintenance depots not
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recouping some of their labor and overhead costs and increased the depots’

backlog of funded work.

The activity group, which overestimated its workforce’s productivity in

every budget since fiscal year 1988, based its fiscal year 2001 budget

estimate on the assumption that the workforce’s overall productivity would

improve about 13.4 percent over its actual productivity level for the first 6

months of fiscal year 2000. However, our work showed that (1) for some

workloads, the ongoing transfer of work from two closing air logistics

centers to three remaining centers will continue to have a negative effect

on productivity during fiscal year 2001 and (2) the activity group’s

workforce-related initiatives are long-term efforts that are unlikely to result

in significant productivity improvements before the end of fiscal year 2001.

As a result, the activity group is unlikely to achieve its fiscal year 2001

productivity improvement goal and the problems identified above are likely

to persist.

Productivity Has

Consistently Been Less

Than Budgeted

To measure the overall productivity of their workforce, Air Force depot

maintenance managers rely on a performance indicator called the Outputper-Paid-Man-Day. This statistic measures the relationship between

production, measured in Direct Product Standard Hours (DPSH),13 and

total labor time available (for both direct labor and overhead personnel).

For example, a budgeted Output-per-Paid-Man-Day value of 4.0 means that

depot maintenance managers expect the workforce to complete 4.0 DPSHs

of work for every 8 hours of payroll time.

Because the Output-per-Paid-Man-Day performance indicator takes into

consideration both direct labor and overhead time, it is affected by changes

in not only direct labor efficiency14 but also by the number and efficiency of

overhead personnel. For example, if the activity group hires 10 overhead

personnel to help ensure better management of material, these additional

personnel would initially cause the Output-per-Paid-Man-Day to decline.

However, if these additional personnel could help ensure that needed

13A DPSH is the amount of acceptable quality work that can be accomplished in 1 hour by a

qualified worker, following prescribed methods, working at a normal pace, and

experiencing normal fatigue and delays.

14Direct labor efficiency is the ratio of the number of DPSHs of work accomplished to the

number of direct labor hours worked. For example, if a mechanic works 10 hours to

accomplish a job that should take 9 hours, then the direct labor efficiency is 90 percent.
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component parts are available when direct labor personnel need them, the

delay time could be reduced, the direct labor efficiency could improve, and

the net effect of hiring the planners could be an increase in Output-perPaid-Man-Day. As shown in figure 2, the activity group workforce’s

productivity has been less than its budgeted productivity for every year

since fiscal year 1988.
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Figure 2: Comparison of the Depot Maintenance Activity Group’s Budgeted and Actual Output-per-Paid-Man-Day for Fiscal Years

1988 Through 2000 and Budgeted for Fiscal Year 2001

Note: Fiscal year 2000 actual data is as of March 31, 2000.

Source: Air Force.

Air Force depot maintenance officials believe that three factors have been

primarily responsible for this pattern of overly optimistic productivity

assumptions. First, they believe that the depot maintenance workforce has

frequently been unable to react quickly and efficiently to unanticipated

 12

 89

 00

 8 

 82

 

 

 2

 0 

 9 9 

 9 

 1 

 1 

 8

 

 99

 8 8 

 0

 91

 9 

 0

 

 

 

 2 

 0

 

 00

 2 

1988 1989 1990 1991 1992 199 199 199 199 199 1998 1999 2000 2001

Fiscal year

Output-per-paid-man-day

Budget Actual
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changes in the amount and type of work requested by its customers.15

Second, unanticipated delays in and problems with the transfer of work

from the two closing centers caused productivity to be less than expected.

Third, the centers have frequently not achieved the “stretch” productivity

improvement goals that have been incorporated into their budget

estimates.

Because the activity group’s budget estimates are based on assumptions

that are made long before the start of the fiscal year, some variance

between budgeted and actual results is inevitable. However, when

assumptions are consistently overly optimistic, it is likely that there are

systemic problems with either the methodology used to develop the

assumptions or with the effectiveness of operations. We identified two

problems with the methodology the activity group uses to develop its

productivity assumptions. First, in establishing productivity improvement

goals, the activity group does not first develop a plan that specifies how,

when, and by whom the improvements will be made. Second, the activity

group establishes its productivity improvement goals without adequately

considering historical data. Thus, little assurance exists that the goals can

feasibly be attained.

The activity group’s fiscal year 2001 productivity improvement goal—to

increase the workforce’s Output-per-Paid-Man-Day from 3.52 during the

first 6 months of fiscal year 2000 to 3.99 in fiscal year 2001—illustrates both

of these problems. Depot maintenance officials believe that the

workforce’s productivity will improve as (1) the two closing air logistics

centers phase out their operations, (2) workloads are consolidated at the

three remaining centers (thereby allowing these centers to achieve

economies of scale), and (3) workers at the remaining centers become

more adept at the new work that has been transferred to them. However,

the activity group does not have a plan that specifies how, when, and by

whom this substantial improvement will be achieved.

Further, our work indicates that an Output-per-Paid-Man-Day of 3.99

presents a difficult challenge. First, as shown in figure 2, the workforce’s

actual Output-per-Paid-Man-Day was never higher than 3.94 during fiscal

years 1988 through 1999, and has not been higher than 3.70 since fiscal year

15This problem is discussed in our report entitled Air Force Depot Maintenance: Improved

Pricing and Financial Management Practices Needed (GAO/AFMD-93-5, November 17,

1992).
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1996. Second, the largest 1-year improvement in productivity during this

period was the 5.7 percent increase that occurred from fiscal year 1990

through fiscal year 1991. Third, depot maintenance officials believe that,

for some workloads, it will not be until fiscal year 2002,16 and possibly

longer, that productivity will no longer be adversely affected by the depot

closures and workload transfers.

Productivity Problems Have

Adversely Affected

Financial Operations and

Customer Support

Our analysis of the activity group’s budgeted and actual operating results

for fiscal years 1994 through 1999 showed that lower-than-budgeted

productivity prevented the workforce from accomplishing as much work as

expected. This, in turn, adversely affected the activity group’s financial

operating results because it (1) caused labor costs for the work that the

workforce accomplished to be about $838 million higher than budget

estimates and (2) prevented the activity group from recovering about

$230 million of fixed overhead costs.17

The workforce’s failure to accomplish as much work as expected is also a

primary reason the activity group has had and is likely to continue having a

large backlog of funded work. DOD policy requires depot maintenance

activities to have some funded work on hand at the end of the fiscal year in

order to ensure a smooth transition from one fiscal year to the next.

However, any amount more than 3 months is considered by DOD to be

excess and an indication that scarce resources are not being used costeffectively and customers are not receiving timely support.

At the end of fiscal year 1999, the activity group’s maintenance depots had a

reported $972.9 million, or 3.27 month, backlog of funded work. Further,

budget documents indicate that the backlog is likely to remain above

DOD’s 3-month criteria through the end of fiscal year 2001, even if

budgeted productivity goals are achieved. In several areas, such as

16The Sacramento and San Antonio Air Logistics centers are scheduled to close by July 2001.

However, some of these centers’ depot maintenance work will be performed by contractors

until (1) the remaining centers develop a repair capability for that type of work and/or (2)

existing contracts expire.

17The activity group exceeded its production goals during fiscal years 1998 and 1999, despite

lower-than-budgeted productivity, because (1) the actual number of regular and overtime

hours were both higher than budget estimates and (2) the activity group hired private

contractors to do some of the work.
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software engineering, the backlog is expected to remain above 6 months of

work.

Causes of the Workforce’s

Productivity Decline

Our discussions with activity group managers indicate that most of the

decline in worker productivity that has occurred since fiscal year 1992 can

be attributed to two factors. The first and most significant factor is that the

workforce experienced almost continuous turbulence during the 1990s—

initially because of downsizing and more recently because of depot

closures and related workload transfers. The second factor is that the

activity group has implemented a repair-on-demand concept, but has made

little progress in developing the flexible workforce needed to operate

efficiently under this initiative. Both factors are discussed in further detail

below.

Continuous Personnel

Turbulence Has Adversely

Affected Worker Productivity

In 1990, in an effort to better plan for future workload changes, Air Force

depot maintenance officials compared their existing repair capability with

their projected workload for fiscal years 1991 through 1995. They

determined that factors, such as a declining force structure, would cause

their workload to decline faster than the workforce could be reduced

through normal attrition. As a result, during fiscal year 1991, Air Force

depot maintenance activities released their temporary and on-call

employees, facilitated early retirements, and released 1,211 permanent

employees through a reduction-in-force.

These actions adversely affected worker productivity in two ways. First,

the release of all temporary and on-call workers reduced the workforce’s

ability to quickly and efficiently react to unanticipated changes in the levels

and types of workload, which, in turn, drove down worker productivity.18

Second, depot maintenance officials stated that the reduction-in-force

created a large retraining requirement which, in turn, decreased the

productivity of many workers. This reduced productivity occurred because

federal personnel regulations allowed employees in positions that were

eliminated to “bump” employees with less tenure even if the “bumped”

employees are better trained for the position.

18This problem is discussed in our report entitled Air Force Depot Maintenance: Improved

Pricing and Financial Management Practices Needed (GAO/AFMD-93-5, November 17,

1992).
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Further, although these actions were supposed to align the size of the

activity group’s workforce with its projected workload through fiscal year

1995, the workload declined even more than expected. As a result, depot

maintenance activities continued to experience personnel turbulence over

the next several years as they reduced the size of their workforce from

31,213 permanent employees at the end of fiscal year 1991 to 26,939 at the

end of fiscal year 1995. Finally, as noted previously, the 1995 decision to

close two of the five air logistics centers exacerbated the activity group’s

personnel turbulence problem.

Implementation of Agile

Logistics Increased the Need for

a Flexible Depot Maintenance

Workforce

Under an umbrella concept initially called Lean Logistics and later renamed

Agile Logistics, the Air Force explored ways to adopt logistical concepts

that have proven to be effective in the private sector. As part of this effort,

Air Force depot maintenance officials began testing a repair-on-demand

concept—a significant change for the Air Force. Previously, repair levels

were negotiated quarterly based on projections of what items would fail or

require scheduled repair. Now, decisions on how many and which items to

repair are made daily based on the most current data available on customer

needs and depots repair capabilities.

The full implementation of the repair-on-demand concept, which began in

June 1997, has greatly increased the need for a flexible workforce that can

quickly and efficiently respond to unanticipated changes in the size and

mix of the workload. However, as of March 2000, temporary workers

accounted for less than 2 percent of the workforce. Further, although some

preliminary actions have been taken to develop multiskilled positions,

several additional actions are needed before actual training can begin.19

Workforce Initiatives Are

Commendable, But Timely

Resolution of Problems Is

Unlikely

Air Force Materiel Command officials have developed a comprehensive

plan to improve the skill level and productivity of the depot maintenance

workforce. Specifically, they have undertaken initiatives to (1) validate and,

if appropriate, improve their workers’ skill levels, (2) enhance the

workforce’s ability to respond efficiently and effectively to workload

fluctuations, and (3) develop the reliable labor standards needed to

effectively monitor and evaluate worker performance. As discussed below,

19This problem is discussed in our report Air Force Depot Maintenance: Management

Changes Would Improve Implementation of Reform Initiatives (GAO/NSIAD-99-63, June 25,

1999).
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these initiatives are long-term efforts whose short-term impact on

productivity is more likely to be negative than positive.

First, the Air Force Materiel Command headquarters is implementing a

“Back-to-Basics” initiative to ensure, among other things, that depot

maintenance technicians are properly trained and are performing their

work in accordance with established policies and procedures. Air Force

officials believe this initiative, which is being implemented because of

concerns raised during a 1999 headquarters review of depot maintenance

operations, will improve the effectiveness of their workforce. However, the

three remaining air logistics centers estimate that they will need 355

additional overhead people to fully implement the initiative. Further, the

initiative will significantly increase training requirements for direct labor

employees. As a result, the initiative’s impact on productivity, at least in the

short-term, will be negative.

Second, the depot maintenance activity group has a strategic objective to

develop a qualified and flexible workforce that is “right-sized” to execute

the depot maintenance mission through fiscal year 2005. To accomplish this

objective, activity group managers plan to (1) develop projections of the

activity group’s workload through fiscal year 2005, (2) use these

projections as the basis for determining how many jobs and what skills will

be needed, (3) implement an “enhanced technical training program” to

cross-train workers so that workers will have multiple skills and, in turn, be

more versatile, and (4) determine what mix of permanent, temporary, term,

and contract field team employees will optimize their ability to cover

planned and unplanned peaks in workload. However, the Air Force does

not expect to complete this plan until September 2000 and thus far little

progress, if any, has been made in hiring temporary workers or developing

a multiskilled workforce.20

Third, the depot maintenance activity group plans to develop engineered

labor standards (estimates for the amount of time required to perform

repair tasks) that more accurately reflect expected repair times. This

initiative, which will provide a more reliable basis for monitoring and

evaluating worker performance, is expected by the Air Force to save

customers about $185.7 million from fiscal year 2000 through fiscal year

20Our report entitled Air Force Depot Maintenance: Management Changes Would Improve

Implementation of Reform Initiatives (GAO/NSIAD-99-63, June 25,1999), discussed the Air

Force’s development of a multiskilled workforce.
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2007 since (1) customer prices are based on labor standards rather than

actual costs and (2) depot maintenance officials’ preliminary analyses

indicate that the estimated amount of time required to perform a task

(labor standard) is more likely to decrease than increase when it is based

on updated engineered estimates.

The Air Force Has

Difficulty Accurately

Estimating Budgeted

Savings

In December 1999 we reported21 that the depot maintenance activity group

incurred financial losses, in part, because its prices have repeatedly been

based on anticipated savings that were not realized. This situation could

become a more significant problem in the future since the activity group

now expects to budget for savings that, on an average annual basis, are

over four times the average annual amount of the savings it budgeted for in

the past. For fiscal years 2000 through 2007, the activity group has major

initiatives underway that the Air Force expects will result in savings equal

to an average annual amount of about $347 million a year, or about

$2.8 billion over the 8-year period.

Because of the magnitude and impact of savings on the depot maintenance

activity group’s financial operations, it is vital that the Air Force be able to

determine the amount of savings actually achieved each year. Knowing the

actual savings achieved is necessary in order to more accurately adjust the

activity group’s subsequent year budgets, and thus customer prices, to help

minimize any losses incurred due to not achieving the budgeted savings.

However, for several reasons—such as the lack of data systems for

tracking actual savings and disagreements on the methodology used to

determine overhead savings achieved—it will be difficult for the Air Force

to determine to what extent the activity group is achieving its expected

savings.

Budgeted Savings Have Not

Materialized in the Past

For fiscal years 1996 through 1999, our work showed that the Air Force has

been overly optimistic in budgeting for savings. Specifically, the Air Force’s

revised budgets for the depot maintenance activity group have always

reduced the amount of anticipated savings that were included in the

activity group’s original budgets when the group’s customer prices were

determined. As shown in table 2, savings originally budgeted for during that

21Air Force Depot Maintenance: Analysis of Its Financial Operations (GAO/AIMD/NSIAD-00-

38, December 10, 1999).
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time totaled $309 million. Based on updated information used to develop

subsequent year budgets, this amount was eventually reduced by

61 percent to $119.1 million.

Table 2: Original and Revised Budget Estimates for the Air Force Depot Maintenance

Activity Group’s Savings for Fiscal Years 1996 Through 1999

Source: Air Force Working Capital Fund Budget Submissions to Congress.

Although the savings were expected to be achieved primarily through

productivity improvements by the Air Force’s air logistics centers,

cognizant officials at the centers we visited (the three that are to remain

open) told us that they had little input to the budgeted savings. Air Force

Materiel Command headquarters officials acknowledged that there was

little involvement by the air logistics centers in developing the savings that

were budgeted for during fiscal years 1996 through 1999. They further

stated that the savings estimates originally budgeted for had to be revised

(reduced) in subsequent year budgets because anticipated productivity

improvements did not materialize.

Major Initiatives Expected

to Achieve Significant

Savings from Fiscal Years

2000 through 2007

The activity group has undertaken several major initiatives that it projects

will result in budgeted savings totaling about $2.8 billion from fiscal year

2000 through fiscal year 2007. The overall objective of these efforts is to

reduce the average price that customers pay the activity group for repair

services by 8 percent by the end of fiscal year 2007. Table 3 describes these

initiatives and the amount of anticipated savings resulting from each. Table

4 identifies the amount of anticipated savings from these initiatives to be

realized by year.

Dollars in millions

Fiscal year

1996

Fiscal year

1997

Fiscal year

1998

Fiscal year

1999

Total

fiscal years

1996-1999

Savings in

the original

budget

$151.3 $54.5 $35.0 $68.2 $309.0

Savings in

the revised

budget

65.3 4.2 10.0 39.6 119.1

Difference 86.0 50.3 25.0 28.6 189.9
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Table 3: Depot Maintenance Activity Group’s Total Anticipated Savings by Major

Initiative for Fiscal Years 2000 Through 2007

a

Savings based on the (1) difference between what it would have cost the depot maintenance activity

group to perform the competed work at the closing air logistics centers had they remained open and

the estimated cost of the workload as bid on and awarded to the centers that are not closing and (2)

overhead savings expected to be generated by lower overhead rates from the increased workload

awarded to the centers that are to remain open (i.e., relatively fixed overhead costs spread over a

larger workload base).

b

Other includes several small initiatives, such as the Air Force Materiel Command headquarters

prioritizing the most important studies and analyses that have the greatest payback to the command as

opposed to initiating a myriad of review teams attempting to solve every problem identified.

Source: Air Force Materiel Command Depot Maintenance Activity Group Fiscal Year 2000 through

2007 Strategic Plan, dated October 1999.

Dollars in millions

Initiative

Anticipated savings

for fiscal years

2000 through 2007

Competition of workload − implementing results of public/private

competitions involving workloads at two closing air logistics

centersa

$2,071.5

Consolidation of noncompeted workload − reduce costs through

increased use of equipment and facilities and redistribution of

overhead expenses over a larger workload base

216.8

Industrial engineering − reduce labor costs through process

engineering and methods improvements

185.7

Material management− improve parts ordering process to

preclude purchasing material in excess of requirements

100.0

Depreciation − turn-in equipment from closing air logistics

centers so that depreciation costs will not be incurred

100.0

Contract management − improve management of the contract

program, such as reducing material provided to contractors

71.9

Otherb 32.3

Total $2,778.2
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Table 4: Depot Maintenance Activity Group’s Anticipated Savings for Fiscal Years

2000 Through 2007

Source: Air Force Materiel Command Depot Maintenance Activity Group Fiscal Year 2000 through

2007 Strategic Plan, dated October 1999.

It is important that the activity group achieve these savings. Savings

estimates impact prices the activity group charges customers each year

once the savings projections are budgeted, and they affect the amount of

funding customers receive in their operating budgets to purchase services

from the activity group. If the budgeted savings are not achieved, the

activity group could incur financial losses.

For several reasons, the Air Force expects its savings budget estimates for

fiscal years 2000 through 2007 to be more accurate than the savings

estimates originally budgeted for in the past. First, the air logistics

centers—which are ultimately responsible for achieving the savings—have

been more involved in developing the estimates. Specifically, the centers

participated in developing the baseline costs, workload bid proposal costs,

and projected overhead savings that could be achieved under the

competition initiative. They were also involved in developing the estimated

savings to be achieved under the nonworkload-related initiatives, such as

the industrial engineering, material management, and contract

management initiatives. Second, the Air Force provided each center with

an opportunity to comment on the initiatives from the perspective of

whether the savings were achievable, the timing was realistic, and if there

was any impact from implementing the initiatives. In written responses to

the Air Force Materiel Command, center officials generally agreed with the

savings initiatives.

Dollars in millions

Fiscal year Amount of budgeted savings

2000 $ 172.8

2001 309.3

2002 383.2

2003 376.9

2004 395.8

2005 386.5

2006 376.6

2007 377.1

Total $2,778.2
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Systems and Processes Are

Not in Place to Determine

Actual Savings

To more accurately set customer prices, the Air Force needs to be able to

determine, with some degree of reasonableness, whether its budgeted

savings for the depot maintenance activity group are actually being

achieved. This will enable the Air Force to better adjust or revise the

amount of planned savings in the activity group’s subsequent years’ budgets

that, in turn, will facilitate more accurate prices. Nevertheless, for several

reasons, the Air Force can not determine actual savings achieved. First, it

lacks a system for tracking the extent to which savings targets were met.

Second, it has not updated the baseline for calculating savings under the

competition initiative. Third, the calculation for determining the amount of

overhead savings has been questioned by auditors.

System Needed to Track Actual

Savings Achieved

Air Force Materiel Command headquarters officials stated that it was their

goal to track actual savings resulting from their initiatives, but that they can

not accomplish this task primarily because the command’s systems do not

have the capability to capture savings data.22 In lieu of a tracking system,

depot maintenance officials at the air logistics centers we visited (the three

that are to remain open) as well as at Air Force Materiel Command

headquarters told us that they will determine whether savings are being

achieved primarily by monitoring budget execution. That is, they will

compare actual financial performance against budget targets. Since

projected savings are included in the activity group’s budget and taken out

up front as part of the budgeting process, the officials believe that

successful execution of the budget targets will indicate that they have

achieved the projected savings.

We agree that monitoring budget execution can serve as a savings

indicator. However, because many factors impact the financial

performance of the depot maintenance activity group, it will be difficult to

examine the specific types of costs that were expected to decline in order

to produce savings. For example, the activity group’s material cost savings

initiative is predicated on ensuring that only parts/material required for

repair are ordered to preclude the purchase of material that is in excess of

requirements. The group could be successful in ordering only required

material—thus accomplishing the goal of this particular savings initiative—

but have to pay more than budgeted for the material because of

unanticipated price increases charged by the supply management activity

22Our report, entitled Air Force Depot Maintenance: Management Changes Would Improve

Implementation of Reform Initiatives (GAO/NSIAD-99-63, June 25, 1999), discussed the Air

Force’s lack of a system for tracking savings.
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group. Without analyzing the various factors that can impact financial

performance, it will be difficult, if not impossible, for the Air Force to

determine how much of the activity group’s successful or unsuccessful

budget execution can be attributed to the savings initiatives.

Air Force Materiel Command officials told us that they are expecting the

implementation of the Depot Maintenance Accounting and Production

System to help them in tracking/determining actual savings achieved. This

new system is expected to (1) provide actual cost visibility at the task level

to facilitate financial analysis and cost management and (2) more

accurately tie costs to the specific activity generating the costs. The Air

Force plans to fully implement the system at the remaining air logistics

centers by June 2001.

Baseline for Calculating Savings

Under the Competition Initiative

Has Not Been Updated

Another obstacle to capturing and determining actual savings is in the area

of the competition initiative, which the Air Force expects to produce about

$2.1 billion (about 75 percent) of the activity group’s anticipated $2.8 billion

in savings from fiscal years 2000 through 2007. This initiative resulted from

the competition among public and private entities for certain workloads

that were performed at two of the Air Force’s five air logistics centers that

are being closed. These workloads were awarded to the three centers that

are to remain open.

Of the $2.1 billion in savings associated with this initiative, $1.5 billion is

based on the difference between the baseline costs (the baseline costs

were derived by determining what it would have cost the Air Force to

perform the work at the two closing logistics centers had they remained

open) and the estimated cost of the workload as bid on and awarded to the

three remaining centers.23 Any changes in the competed workload from the

workload used in the baseline will make it extremely difficult to determine

actual savings achieved. Specifically, if the amount and/or type of work

does not materialize as planned, then the workload’s associated costs will

differ from those used in the baseline and bid proposals for the competed

work, and as such, render the original baseline virtually useless for

measuring savings achieved.

23The remaining $0.6 billion in savings associated with the competition initiative is based on

overhead savings expected to be generated by lower overhead rates resulting from the

increased workload awarded to the remaining centers (i.e., relatively fixed overhead costs

spread over a larger workload base).
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Air Force depot maintenance officials told us that because of all the

workload changes that have occurred thus far, they have no real baseline

for measuring savings that are expected to result from the competition

initiative. The officials acknowledged that the baseline costs should be

revised based on workload changes and the projected savings updated

accordingly. However, they stated that the baseline can not be accurately

revised because they do not have the resources to track all the workload

changes that would enable them to do so.

Calculation of Overhead Savings

Achieved Under the Competition

Initiative Questioned

Disagreement exists internally within the Air Force regarding the

methodology used by the activity group to measure/calculate overhead

savings achieved under the competition initiative involving maintenance of

the C-5 aircraft being performed at the Warner Robins Air Logistics Center.

The Air Force Audit Agency, in its review24 of the overhead savings that the

air logistics center achieved during fiscal year 1998, disagreed with the

$30.3 million in savings the center reported achieving and believed that the

center only achieved $8.4 million in overhead savings.

According to the Air Force Audit Agency, the disagreement involves the

methodology that the Warner Robins Air Logistics Center is using to

calculate overhead savings. When calculating overhead savings attributable

to the C-5 workload, the center includes both production overhead and

general and administrative expenses that are common across all

workloads. The audit agency maintains that the C-5 workload is unique

(that is, it can not be attributable to other work performed at the center)

and therefore, production overhead expenses should be excluded from the

savings calculation. Air Force depot maintenance officials, on the other

hand, believe that it is appropriate to include such expenses because some

production overhead, such as aircraft painting operations, is common

across all of the center’s workloads.

Similarly, the Defense Contract Audit Agency25 took exception to the

overhead savings reported by the logistics center on the C-5 workload in

fiscal year 1999. The center reported that it had overhead savings totaling

24This review was performed as part of a Management Advisory Service review requested by

the Secretary of the Air Force.

25The Defense Contract Audit Agency evaluated the accuracy of the center’s reported

overhead savings at the request of the Defense Contract Management Command to assist it

in evaluating the accuracy of the center’s reported costs incurred in fiscal year 1999 for the

C-5 workload.
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$6.3 million. However, the audit agency calculated that the center had lost

$3 million in fiscal year 1999. When calculating the overhead savings

achieved in fiscal year 1999, the center excluded certain overhead

expenses because it believed that they were beyond the center’s control.

The audit agency recognized that certain adjustments to expenses are

necessary, but could not agree with the center on the merit of excluding the

expenses in question.

Conclusions The Air Force depot maintenance activity group has not developed

accurate material cost, productivity, and savings estimates for developing

its budgets and prices it charges customers. Because the activity group’s

annual budget estimates are based on assumptions that must be made long

before the start of the fiscal year, some variance between budgeted and

actual results is inevitable. However, when assumptions are consistently

overly optimistic, there are systemic problems with the efficiency of the

activity group’s operations and/or the methodology used to develop the

assumptions. As a result, the depot maintenance activity group (1) incurs

financial losses and/or (2) does not accomplish as much work as expected,

which adversely affects the timeliness of the support that it provides to its

customers.

The Air Force has recognized that it needs to improve the depot

maintenance activity group’s budgets and is or has taken a number of

actions to correct the problems. However, to maximize the efficiency and

effectiveness of depot maintenance financial operations, the group must do

a better job of determining its material costs, managing material usage, and

developing more realistic productivity assumptions and savings estimates

used for budgeting purposes. Until the depot maintenance activity group

takes such actions, it will continue to underestimate material costs and

make overly optimistic productivity and savings assumptions.

Recommendations We recommend that the Secretary of the Air Force direct the Commander,

Air Force Materiel Command to do the following.

• Develop a methodology that will allow the supply management activity

group to reliably estimate the impact of price changes on the funding

requirements of individual customers, such as the depot maintenance

activity group, during the budget process.
B-285446

Page 32 GAO/AIMD/NSIAD-00-185 Air Force Depot Maintenance

• Develop a systematic process to identify and analyze variances between

depot maintenance activities’ expected and actual material usage.

• Develop material management metrics that will allow Air Force depot

maintenance officials to monitor and determine the causes of material

cost variances which will, in turn, help reduce material cost. At a

minimum, the metrics should provide information on unplanned

material issues, issues in excess of maximum quantities, the accuracy of

the Bill of Materials, and variances from budget estimates.

• Have an organization external to the air logistics centers, such as the Air

Force Materiel Command Inspector General, Air Force Audit Agency, or

the Directorate of Logistics, Air Force Materiel Command, periodically

inspect the centers’ compliance with Air Force material management

policy.

• Use more realistic productivity assumptions by considering historical

productivity data in developing future depot maintenance budgets and

developing a detailed plan that specifies how, when, and by whom the

productivity improvements will be achieved.

• Develop a mechanism that will enable the depot maintenance activity

group to periodically revise the competed workload baseline cost

estimates by taking into account any changes in the planned workload.

• Use the revised baseline cost estimates and actual operating results as a

basis for updating projected savings and adjusting the activity group’s

future budgets.

• Reach agreement with the Air Force Audit Agency and Defense Contract

Audit Agency on the methodology and factors to be used in calculating

overhead savings attributable to the C-5 aircraft maintenance workload

being performed at the Warner Robins Air Logistics Center.

Agency Comments In its comments on a draft of this report, the Air Force concurred with our

recommendations and identified actions it was taking to correct the

identified deficiencies. For example, the Air Force plans to require an

analysis of material usage as a matter of policy and develop material

management metrics that will allow Air Force depot maintenance officials

to monitor and determine causes of material cost variances. DOD

comments are reprinted in appendix I.

We are sending copies of this report to Senator John Warner, Chairman, and

Senator Carl Levin, Ranking Minority Member, Senate Committee on

Armed Services; Senator Ted Stevens, Chairman, and Senator Daniel K.

Inouye, Ranking Minority Member, Subcommittee on Defense, Senate
B-285446

Page 33 GAO/AIMD/NSIAD-00-185 Air Force Depot Maintenance

Committee on Appropriations; Representative Solomon P. Ortiz, Ranking

Minority Member, Subcommittee on Military Readiness, House Committee

on Armed Services; and Representative Jerry Lewis, Chairman, and

Representative John P. Murtha, Ranking Minority Member, Subcommittee

on Defense, House Committee on Appropriations. We are also sending

copies of this report to the Honorable William S. Cohen, Secretary of

Defense, and the Honorable F. Whitten Peters, Secretary of the Air Force.

Copies will also be made available to others upon request. If you have any

questions about this report, please call Greg Pugnetti, Assistant Director, at

(202) 512-6240. Other key contributors to this report are listed in

appendix II.

Sincerely yours,

Jack L. Brock, Jr.

Director, Governmentwide and Defense Information Systems

Accounting and Information Management Division

David R. Warren

Director, Defense Management Issues

National Security and International Affairs Division
Page 34 GAO/AIMD/NSIAD-00-185 Air Force Depot Maintenance

Appendix I

Comments From the Department of Defense ApApenednxidexiIs
Appendix I

Comments From the Department of Defense

Page 35 GAO/AIMD/NSIAD-00-185 Air Force Depot Maintenance
Appendix I

Comments From the Department of Defense

Page 36 GAO/AIMD/NSIAD-00-185 Air Force Depot Maintenance
Appendix I

Comments From the Department of Defense

Page 37 GAO/AIMD/NSIAD-00-185 Air Force Depot Maintenance
Appendix I

Comments From the Department of Defense

Page 38 GAO/AIMD/NSIAD-00-185 Air Force Depot Maintenance
Appendix I

Comments From the Department of Defense

Page 39 GAO/AIMD/NSIAD-00-185 Air Force Depot Maintenance
Page 40 GAO/AIMD/NSIAD-00-185 Air Force Depot Maintenance

Appendix II

GAO Contacts and Staff Acknowledgments ApendxiI

GAO Contact Greg Pugnetti, (202) 512-6240

Acknowledgments In addition, Cristina Chaplain, Karl J. Gustafson, William A. Hill, Ron L.

Tobias, and Eddie W. Uyekawa made key contributions to this report.

(511675 and 709456) Letr
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