Service Supply Chain in the Department of Defense: Opportunities and Challenges

In 2003, the Department of Defense (DoD) spent over $118B in purchasing services. In fact, in each of the last ten years, DOD has spent more dollars on services than on supplies, equipment and goods, which includes weapon systems and other military items. As DOD’s services acquisition volume continues to increase in scope and dollars, the agency must provide greater attention to such issues as proper acquisition planning, adequate requirements definition, establishment of appropriate contracts, and proper contractor oversight. The unique characteristics of services and the increasing importance of services acquisition offer a significant opportunity for conducting research in the management of the service supply chain in DOD. INTRODUCTION DOD’s services acquisition volume has continued to increase in scope and dollars in the past decade. Between FY 1999 to FY 2003, DoD’s spending on services increased by 66%, and in FY 2003, the DoD spent over $118 billion or approximately 57% of total DoD’s procurement dollars on services [13]. In recent years, DOD has spent more on services than on supplies, equipment and goods, even considering the high value of weapon systems and large military items [15]. These services belong to very broad set of activities ranging from grounds maintenance to space launch operations. The major categories include professional, administrative, and management support; construction, repair, and maintenance of facilities and equipment; information technology; research and development, and medical care. As DOD’s services acquisition volume continues to increase in scope and dollars, the agency must keep greater attention to proper acquisition planning, adequate requirements definition, sufficient price evaluation, and proper contractor oversight [11]. In many ways, these are the same issues affecting the acquisition of physical supplies and weapon systems. However, there are important differences between the production, acquisition and delivery of services and manufactured goods. For example, services cannot be inventoried, require customer contact and joint production, and have customer-specific inputs. Moreover, we observe intangibility in varying degrees, which makes it difficult to evaluate the quality and performance of a service operation [14]. The unique characteristics of services and the increasing importance of services acquisition offer a significant opportunity for conducting research in the management of the service supply chain in the Department of Defense. The purpose of this research is therefore to conduct an initial exploratory analysis of DOD services acquisition so as to frame the totality of the DOD’s services acquisition environment. Our research contributes to both the theory and practice of service acquisition in the Federal Government. Theoretical contributions include the development of a conceptual framework for understanding and analyzing the supply chain in services, based on rigorous literature in operations management, logistics, public policy, budgeting and microeconomics. We expect that the knowledge developed herein will lead to more effective and efficient management of the Department of Defense acquisition of services. This exploratory research effort consists of a review of the service acquisition practices in the Department of Defense. It includes visits to a sample of DOD installations involved in the acquisition of services, with interviews of contracting officers, program managers, and other personnel at these installations. The DOD installation visits were planned to cover a sample of Army, Navy, and Air Force installations. Thus far we have visited Travis AFB and the Presidio of Monterey with visits to the Naval bases in San Diego planned in the near future. These DOD installations have outsourced significant operation support services and provide an excellent source for analysis. SERVICE CHARACTERISTICS Service production differs from manufacturing in several ways. In many operations texts, the key issues that are identified include the intangibility of service output, the difficulty of portability, and complexity in the definition and measurement of services (for example, see Fitzsimmons and Fitzsimmons [9]). To these we would also add the observation that services often involve joint production between the buyer and the supplier. These characteristics create certain differences in the production and marketing of services. For example, the joint production aspect means that the productive system is often not buffered from the customer.