DEFENSE LOGISTICS

Integrated Plans and

Improved

Implementation Needed

to Enhance

Engineering Efforts

Statement of David R. Warren, Director, Defense Management Issues,

National Security and International Affairs Division

United States General Accounting Office

GAO Testimony

Before the House Armed Services Committee,

Subcommittee on Military Readiness

For Release on Delivery

June 27, 2000

2:00 PM EDT

GAO/T-NSIAD-00-206
Page 1 GAO/T-NSIAD-00-206 Defense Logistics

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss the Department of Defense’s (DOD) logistics

reengineering initiatives and the actions we believe are needed to enhance the success of

these initiatives. Logistics is an important and expensive function. The Department is

using about $84 billion of its $280-billion budget this year for logistics support activities.

Despite this expenditure, failing equipment and parts shortages continue to be a

problem. At the same time, the Department would like to modernize its aging fleets of

aircraft, ground combat vehicles, and ships, but does not have the funding it believes is

necessary to accomplish this goal at the pace it believes is necessary. In recent years, a

number of studies have stressed the need to improve the efficiency and effectiveness of

the Department’s logistics processes, systems, and infrastructure to provide improved

support to combat forces and to achieve savings that can be used to modernize weapon

systems. Accordingly, the Department is seeking to reengineer its logistics support

through various initiatives.

As you requested, our testimony today focuses on (1) the Department’s reengineering

efforts, (2) the potential effect of the reengineering efforts on combat forces, and (3) the

factors that could limit the achievement of reengineering goals. Information for this

testimony is from a report we issued on June 23, 2000 dealing with the DOD

reengineering initiatives.1

RESULTS IN BRIEF

The Department of Defense has taken steps towards reengineering its logistics

processes. However, many aspects of the overall plan are incomplete, raising questions

about whether or when the overall goals of improved service and lower costs will be

achieved. Key steps the Department has taken include establishing 30 pilot programs to

test various reengineering concepts and establishing a new office responsible for

coordinating implementation of the reengineering effort and overseeing efforts to link

hundreds of ongoing service-sponsored reengineering initiatives to the overall

reengineering plans. However, DOD has not developed an overarching plan that

integrates individual service efforts into a single Department-wide implementation

strategy. Further, plans to test, evaluate, and fully implement reengineered support

strategies Defense-wide by the end of 2005 face a number of challenges, making it

unlikely that they will be able to provide key information in time to support interim

decision-making deadlines. In some instances, pilot test plans have not been fully

developed; in others, test results may be delayed. Additionally, because many of the 30

pilot programs have multiple objectives, it will be difficult to link results and savings to

specific reengineering concepts. Finally, DOD has not estimated the total costs of

completing logistics reengineering or developed a supporting budget plan. Without an

investment strategy, there may not be sufficient funds to adequately test the

reengineering concepts being piloted and to implement the results on a Department-wide

basis.

1

See Defense Logistics: Actions Needed to Enhance Success of Reengineering Initiatives (GAO/NSIAD-00-

89, June 23, 2000).
Page 2 GAO/T-NSIAD-00-206 Defense Logistics

It is too early to assess the impact that reengineering logistics support will have on

combat forces. Officials representing combat forces have brought up a number of

concerns, including the effects of having large numbers of private contractors on or near

the battlefield, the ability of contractors to meet the surge requirements, the effects of

contracting on the number of positions available to military personnel returning to the

United States from overseas assignments or at-sea deployments, and the loss of funding

flexibility. The Department is in the early phases of developing its Joint Logistics

Warfighter Initiative test, which may be useful in assessing the impacts of various

logistics reengineering efforts on combat forces in an operational environment.

However, the test is scheduled to take place before the reengineering initiatives are fully

implemented, and its usefulness in assessing the impact of the reengineering concepts on

combat forces will therefore be very limited. Consequently, its usefulness in supporting

planned decisions at the end of fiscal year 2002 to expand the use of new logistics

concepts DOD-wide is questionable.

Several factors, if not addressed, could limit the Department’s ability to achieve its

reengineering goals of improved service and lower costs. These include the impact that

use of sole-source, long-term contracts would have on anticipated reengineering savings

and the effects that existing laws and policies would have on the implementation of

reengineering initiatives.

In our current report on this subject, we make recommendations to improve the planning

and implementation of the logistics reengineering effort. More specifically, we

recommend that the Department develop an overarching plan to integrate the

reengineering efforts of all the components, reassess the schedule for various initiatives,

develop a methodology for evaluating savings, and reevaluate the approach for assessing

the use of increased numbers of contractors on the battlefield. The Department

generally agreed with our report and its recommendations.

BACKGROUND

The Department of Defense uses a combination of in-house military and civilian

employees and contractors to provide the vast support operations that are required to

keep military airplanes, ships, and ground vehicles operational for peacetime training

and operations and ready to support contingency operations whenever and wherever

they occur. A breakdown of the estimated fiscal year 2000 logistics system personnel

and costs is presented below.
Page 3 GAO/T-NSIAD-00-206 Defense Logistics

Table 1: Estimated Fiscal Year 2000 Logistics System Personnel and Costs

(dollars in billions)

Function Personnela Costsb

Depot maintenance 61,987 $5.9

Other national-level maintenance c13,378 3.9

Material management 39,068 19.1

Distribution and transportation 16,339 2.6

Operationald maintenance 403,320 16.7

Operationald supply 141,327 5.8

Operationaldtransportation 44,119 1.3

Other operational logistics e158,298 6.0

Other product supportf3,744 0.2

Logistics support not related to weapon systems g363,051 22.3

Total 1,244,631 $83.8

a Includes military active duty and reserve personnel and DOD civilian employees.

b

Includes costs for both DOD and contractor operations.

c

Includes maintenance that is not part of the defense working capital fund (such as ordnance depots and ship

maintenance activities not in a depot).

d Refers to unit level related functions.

e Includes funding and personnel attributable to operational logistics but not categorized exclusively into maintenance,

supply, or transportation.

f

Includes miscellaneous product support not categorized exclusively as maintenance, supply, or transportation (such

as logistics administrative support).

g

Consists of strategic transportation, clothing, subsistence, and medical supplies not directly related to a specific

weapon system.

Source: Logistics Management Institute estimate prepared for DOD.

DOD has completed a number of studies on ways to improve its support processes.

Generally, these studies have focused on increasing reliance on the private sector to

meet the Department’s logistical support needs and making greater use of improved

technologies, new business processes, and commercial transportation.

PROGRESS MADE, BUT UNCERTAINTIES REMAIN ABOUT

PLANS, SCHEDULES, AND THE SUFFICIENCY OF TEST DATA

DOD has taken some steps to reengineer its logistics support activities. For example, it

has outlined key principles and concepts that it wants to test for broader application in

logistics restructuring. However, it has not developed an overall plan to link its broad

reengineering goals to the approximately 400 individual service initiatives that are

already under way to improve the logistics support system. Additionally, the

Department’s reengineering schedule appears overly optimistic, and some pilot programs

may not provide meaningful tests of reengineering concepts.

Two key documents set forth the general principles of DOD’s reengineering process.

The first is the August 1999 Logistics Strategic Plan, which outlines the characteristics of

the new logistics concept and sets 2005 as the timeframe for implementation. The

second is DOD’s April 1998 Report to Congress on Actions to Accelerate Movement to
Page 4 GAO/T-NSIAD-00-206 Defense Logistics

the New Workforce Vision, which provides a broad overview of planned reengineering

efforts and discusses five fundamental reengineering concepts:

• Reengineering product support (logistics support focused on a weapon system or its

support system) by adopting best practices used by private industry.

• Competitively sourcing product support by using competition or business case

analysis to select a source for long-term, total life-cycle2support.

• Modernizing systems by replacing outmoded components with new components that

have increased reliability, maintainability, or supportability.

• Expanding the use of prime vendors and virtual prime vendors through long-term

partnerships with private sector providers to support weapon systems using

techniques such as on-demand manufacturing.

• Establishing weapon system program manager oversight of life-cycle support by

expanding the program manager’s role.

The first four concepts were more fully addressed in a July 1999 DOD report, Product

Support for the 21st Century, and the fifth by the October 1999 report Program Manager

Oversight of Life-Cycle Support. Based on the two reports, DOD established 30 pilot

programs (10 in each service) that will be used to test the five concepts.

Although the services have been directed to develop a plan that links their initiatives to

DOD’s overall vision, it remains unclear whether, when, or how these individual service

plans will be integrated. A March 23, 2000 directive required the military services to

establish logistics reengineering plans by July 1, 2000. The directive requires that the

plans relate the 400 different service-sponsored logistics reengineering initiatives to the

Logistics Strategic Plan objectives. While there is no requirement to develop an overall

DOD plan that integrates the service plans, DOD officials said that the integration will be

accomplished through the Department’s planned new logistics architecture, which is

supposed to provide a blueprint that will guide and control the development and

maintenance of the many related logistics systems. Development of this logistics

architecture is a key goal of a new office established within the Office of the Secretary of

Defense to coordinate the implementation of the reengineering effort.

Uncertainties also exist about the overly optimistic implementation schedule that has

been established for DOD’s reengineering program. For example, the Department plans

to use 30 pilot programs to generate information to develop future models for

reengineering and policy changes, and to fully implement reengineered support

strategies DOD-wide by the end of 2005. However, some pilot program test plans have

not been fully developed, test objectives for others have not been clearly defined or may

subsequently change, and test results of some pilots may be delayed. Additionally, other

challenges that must be overcome include questions about the transfer of government

parts inventories to the private sector and the availability of sufficient funding to fully

implement some of the pilots. As a result, key information that will be needed to assist

in the reengineering process likely will not be available in time to meet decision-making

deadlines. Table 2 shows the number of pilot programs in each service that we have

2

The life cycle of a system includes development, procurement, operation, support, and disposal.
Page 5 GAO/T-NSIAD-00-206 Defense Logistics

determined will have problems providing information to meet the Department’s

reengineering schedule.

Table 2: Number of Pilot Programs Whose Program Plans Are Not Likely to Meet

Logistics Reengineering Timelines

Number of pilots by service

Problem aArmy Air Force Navy Total

Test plans not yet developed 2 1 4 7

Test plans subject to change 6 7 4 17

Test results likely not available at end of

fiscal year 2002 7 6 8 21 a

Problems are not mutually exclusive; consequently, some pilot programs are included in more than one category.

Source: Our analysis.

Additionally, the pilots will have difficulty showing how much savings or improvements

could come from a specific reengineering concept because they will have difficulty

determining the causes of savings: reengineered processes or other reasons (such as

investments in new hardware). For example, the Abrams tank pilot program involves

both changes to the logistics support system and installation of a more reliable and fuelefficient engine. Reengineering plans, however, do not include a methodology to

determine which of the two--the engine or the changes in logistics--would be responsible

for which portion of any future savings. Without the ability to make this distinction,

decisions may be made to expand the use of a concept that produces little or no savings.

Finally, significant up-front investment costs are often required to implement the reform

initiatives, but these costs have not been identified or budgeted. The Department has not

estimated the total costs of completing the logistics reengineering initiatives or

developed a supporting budget plan. Without an investment strategy, there may not be

sufficient funds to adequately test the reengineering concepts being piloted and to

implement the results on a Department-wide basis.

EFFECTS OF REENGINEERING EFFORTS ON

COMBAT FORCES NOT YET KNOWN

It is too early to assess the effect of ongoing reengineering efforts on combat forces

because DOD does not know how the final logistics system will be structured.

Nonetheless, logistics support personnel from the Joint Chiefs of Staff and combat

commands in the United States and Europe have voiced a number of concerns about the

potential effects that some reengineering efforts could have on their operational

capability. These include the presence of increasing numbers of contractor personnel on

the battlefield, the ability of contractors to deal cost-effectively with surge requirements,

the potential reduction of rotational positions to meet training or operational

requirements, and the overall impact of the reengineering effort on product support costs
Page 6 GAO/T-NSIAD-00-206 Defense Logistics

and funding. These issues regarding the reengineering process will need to be addressed

soon, if the initiatives are to be successful:

• Contractors on or near the battlefield. The potential presence of private contractors

near or on the battlefield to order and distribute supplies, maintain items, and provide

technical support has created concern that combat units’ ability to conduct wartime

missions could be weakened if contractors are withdrawn or are unwilling to stay

during hostilities. Further, providing the required support and protection to

contractors on or near a battlefield may require extra personnel and may divert

resources from the wartime mission, just at a time when the services are trying to

reduce their logistical presence in areas close to the battlefield.

• Higher wartime requirements. Reliance on commercial supply chains to support

wartime and surge requirements could be a problem, especially if more than one

theater of operations is involved. Combat officials believe that temporary surges in

demand may be manageable in the commercial sector, where vendors deal with

demand patterns that are generally known. DOD has successfully used prime vendor

arrangements for some consumable items such as food and medical supplies, which

have large networks of suppliers. However, combat officials noted, military parts and

systems have different characteristics than food and medical supplies. They involve

limited numbers of potential suppliers and they often have demand patterns that are

difficult to predict because parts are often unique and have low usage or erratic

demand.

• Control of funding. Combat officials are concerned that they may lose the flexibility

to prioritize funding under a reengineered logistics system that places greater

responsibility and authority in the hands of weapon system program managers.

Although they acknowledge that quality of support is a key goal, officials are also

concerned that shifting control of operations and maintenance funding away from

combat commands to program managers potentially diminishes the commander’s

flexibility to manage unit-funding priorities. For example, under the current process,

a commander can postpone scheduled maintenance or reduce supply levels to free up

funding for higher-priority requirements. Under the reengineered system, the

commander might not be able to do so.

DOD officials state that a planned test using U.S.Central Command forces during

operational exercise in Egypt may be useful in assessing the operational effectiveness of

reengineered logistics systems. The Department is in the early phases of developing its

Joint Logistics Warfighter Initiative test, but the test is scheduled to take place before the

reengineering initiatives are fully implemented, and its usefulness in assessing the impact

of the reengineering concepts on combat forces will therefore be very limited.

Consequently, its usefulness in supporting planned decisions at the end of fiscal year

2002 to expand the use of new logistics concepts DOD-wide is questionable.
Page 7 GAO/T-NSIAD-00-206 Defense Logistics

OTHER ISSUES THAT COULD AFFECT REENGINEERING GOALS

If not addressed, several other factors would limit DOD’s ability to achieve its

reengineering goals. These include (1) the impact on savings from not centrally

managing parts, (2) the impact that the likely use of sole-source, long-term contracts

would have on anticipated savings, (3) and the effects of existing laws and policies on

the implementation of reengineering initiatives.

Impact on Savings from Not Centrally Managing Parts

DOD has not examined whether reengineering efforts may reduce some of the savings

currently obtained from centrally managing items that are used by more than one

system. In a March 1999 letter to the Deputy Undersecretary of Defense (Logistics),

military service and Defense agency commanders indicated that they could consolidate

orders for common items used by different weapon systems, thus decreasing the number

of parts to be stocked and benefiting from economies of scale. Service logistics officials

further expressed concern that if program managers were to make logistics support

decisions on a system-by-system basis, fewer common items would emerge, just at a time

when DOD is trying to increase the commonality of its subsystems and parts.

Impact of Sole-source, Long-term Contracts on Reengineering Savings

Competitive sourcing is another way DOD has been trying to maximize savings. Our

previous work in this area has indicated that competition has reduced costs, regardless

of whether a public entity or private company wins a contract. In some cases, however,

reengineering efforts plan to use sole-source, long-term contracts. Developing strategies

for controlling cost growth in these cases will be a key issue because, as we have

previously reported, it is difficult to control cost growth in a sole-source environment.3

Program managers plan to compare cost and performance of potential government and

private-sector providers to determine whether to award initial long-term, sole-source

contracts within the pilot programs. But relatively few of them envision competition

among multiple private-sector firms, primarily because of a lack of qualified firms.

Impact of Laws and Policies on DOD’s Logistics Reengineering Initiatives

DOD’s efforts to implement product support reengineering concepts must take into

account existing statutory and policy constraints. Service and DOD officials identified

some major statutory provisions and policies that could impact reengineering efforts.

 10 U.S.C. 2464 provides for a “core” logistics capability that is to be identified by the

Secretary of Defense and maintained by DOD. Section 2464 generally requires DOD

to maintain this capability within a government-owned and operated facility. This

provision can limit the ability of the services to contract with the private sector for

the performance of logistics work.

3

Defense Depot Maintenance: Contracting Approaches Should Address Workload Characteristics

(GAO/NSIAD-98-130, June 15, 1998).
Page 8 GAO/T-NSIAD-00-206 Defense Logistics

 10 U.S.C. 2466 prohibits the use of more than 50 percent of funds made available in a

fiscal year for depot-level maintenance and repair for private sector performance.

This provision can limit the amount of depot-level maintenance and repair work that

can be performed by private-sector contractors.

 10 U.S.C. 2469 requires a competition between public and private-sector entities

before certain depot maintenance and repair workloads can be changed from

government performance to performance by a contractor. This provision limits the

ability of the services to transfer depot-level maintenance and repair work to the

private sector by requiring a public-private competition before moving the work. The

competitions, while beneficial, can be time consuming and complex and can require

considerable resources.

 Office of Management and Budget Circular A-76, which describes the executive

branch’s policy for the performance of commercial activities, and which may apply to

logistics activities not covered under 10 U.S.C 2469, requires a comparison of

government and private-sector alternatives to identify the most cost-effective

alternative. The competitive sourcing cost studies required by A-76, like those

required under section 2469, while beneficial, can be time consuming and complex

and can require considerable resources.

Our understanding is that the Department began developing a legislative package during

1999 to seek relief from legislative constraints facing its reengineering efforts. However,

the proposals were not finalized. Instead, Department officials decided to work within

the existing legal and appropriations framework to define more precisely the effect of

the constraints and better document the need for legislative changes. However, as this

Subcommittee is aware, one of the real challenges some the services face as they seek to

increase their reliance on private-sector support is staying within the 50-percent ceiling

on contract depot maintenance support established under 10 U.S.C. 2466. For example,

we have recently reported on challenges faced by the Air Force this year and in the

longer term to operate within that ceiling.4

RECOMMENDATIONS

Finally, our recent report included the following actions that we believe are needed to

enhance the Department’s reengineering efforts.

• To build on and expand DOD’s efforts to reengineer its logistics system, we

recommend that the Secretary of Defense direct the Under Secretary of Defense for

Acquisition and Logistics to develop an overarching plan that integrates the individual

military service and defense agency logistics reengineering plans. Among other

things, the plan should include an investment strategy for funding the reengineering

4

Defense Logistics: Air Force Report on Contractor Support Is Narrowly Focused (GAO/NSIAD-00-115,

Apr. 20, 2000).
Page 9 GAO/T-NSIAD-00-206 Defense Logistics

initiatives and details for how DOD plans to achieve its final logistics system end

state.

• To improve the implementation of DOD’s logistics reengineering, we recommend that

the Secretary of Defense (1) reassess the Department’s schedule for testing,

evaluating, and implementing pilot program logistics reengineering initiatives, (2)

establish a methodology showing how much savings or improvements come from

reengineering concept tests, and (3) reassess the Department’s approach for

addressing the combat command concerns dealing with the presence of increasing

numbers of contractor personnel on the battlefield, the ability of contractors to meet

surge requirements, the potential reduction of rotational slots to meet training

requirements, and the overall impact on product support costs and funding before

proceeding with implementation of product support reengineering.

The Department generally agreed with our report and its recommendations.

Mr. Chairman, this concludes our formal statement. If you or other members of the

Subcommittee have any questions, we will be pleased to answer them.

Contacts and Acknowledgements

For future questions regarding this testimony, please contact David Warren or Julia

Denman at (202) 512-4290. Other individuals making key contributions to this testimony

included John Strong, Larry Junek, Glenn Knoepfle, and John Brosnan.

(709520, 709485)
ORDERS BY INTERNET

For information on how to access GAO reports on the INTERNET, send an e-mail

message with “info” in the body to

Info@www.gao.gov

or visit GAO’s World Wide Web Home Page at

http://www.gao.gov

TO REPORT FRAUD, WASTE, AND ABUSE

IN FEDERAL PROGRAMS

Contact one:

• website: http://www.gao.gov/fraudnet/fraudnet.htm

• e-mail: fraudnet@gao.gov

• 1-800-424-5454 (automated answering system)