Air Force Depot Maintenance: Improved Pricing and Cost Reduction Practices Needed
Published: 2004-06-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Air Force depot maintenance activity group in-house operations generate about $5 billion in annual revenue principally by repairing aircraft, missiles, engines, and other assets. In doing so, the group operates under the working capital fund concept, where customers are to be charged the anticipated costs of providing goods and services to them. The group's average price for in-house work almost doubled between fiscal years 2000 and 2004 from $119.99 per hour to $237.84 per hour. GAO was asked to determine (1) what factors were primarily responsible for the price increase, (2) if the prices charged recovered the reported actual costs of performing the work, and (3) if the Air Force has taken effective steps to improve efficiency and control the activity group's costs.
section_title: What GAO Found
paragraphs: GAO identified five primary factors that showed why the Air Force depot maintenance activity group's average price increased from $119.99 per direct labor hour of work in fiscal year 2000 to $237.84 per hour in fiscal year 2004. An increase in material costs accounted for about 67 percent of the total increase and was by far the most significant factor. The Air Force has identified some of the causes of the higher material costs such as aging aircraft, but has yet to complete an effective and comprehensive analysis of material cost increases. As a result, it (1) cannot quantify the extent to which individual causes contributed to higher costs and (2) does not know if it has identified all of the major causes. GAO's analysis of the other four factors showed that (1) the increase in labor costs was due largely to events beyond the group's control, such as annual salary increases, (2) the increase in business operations costs was due partly to costs related to implementing a new accounting system, (3) a surcharge intended to recoup anticipated losses on work carried over from the previous fiscal year may have been unnecessary, and (4) a surcharge intended to generate additional cash in fiscal year 2004 for the Air Force Working Capital Fund was unnecessary. GAO's analysis showed that due in part to these surcharges (1) the Air Force Working Capital Fund, which includes the depot maintenance and several other activity groups, had a $2.5 billion cash balance as of January 31, 2004 and (2) this balance was more than $1.3 billion higher than the maximum level allowed by DOD policy. Either the Office of the Secretary of Defense or the Congress could use this unneeded cash to satisfy other requirements. DOD officials told us that they are exploring options on what to do with the excess cash. GAO's analysis of the group's financial reports showed that prices charged customers were not set high enough to recover about $1.1 billion of the group's reported costs for fiscal years 2000 through 2003. The activity group is required by DOD policy to set prices to recoup the cost of doing work. However, Air Force officials informed us that the prices were artificially constrained to help ensure that the group's customers would be able to get needed work done with the amount of funds provided to them through the budget process. The Air Force changed its sales price development philosophy to bring prices charged customers in fiscal year 2004 more in line with operating costs. In addition, the Air Force allowed out-of-cycle price increases in fiscal years 2002 and 2003 to alleviate projected losses. Further, the Air Force Materiel Command has not been successful in its efforts to control costs. Although several promising initiatives are underway, the Command has not (1) developed a successful methodology for analyzing the reasons for the rapid material cost increase and (2) effectively utilized an established data repository for sharing cost-saving ideas among the three air logistics centers on process improvements and to demonstrate whether its cost savings initiatives have been successful.

section_title: Letter
paragraphs: The Air Force depot maintenance activity group supports combat readiness  by providing services necessary to keep Air Force units operating  worldwide. The group’s in-house operations generate about $5 billion in  annual revenue principally by repairing and overhauling a wide range of  assets, including fighter aircraft such as the F-15, intercontinental ballistic  missiles such as the Minuteman and Peacekeeper missiles, jet aircraft  engines, electronics, avionics, software, and inventory items for the  military services, other government agencies, and foreign governments.  For example, in fiscal year 2002, the Air Force reported that the depot  maintenance activity group’s three air logistics centers’ in-house operations  performed major modifications on 852 aircraft, overhauled 515 aircraft  engines, and repaired 352,995 inventory items. In doing so, the group  operates under the working capital fund concept, where customers are to  be charged for the anticipated full cost of goods and services. The group  performs its in-house operations primarily at the three air logistics  centers—the Oklahoma City Air Logistics Center, Tinker Air Force Base,  Oklahoma; the Ogden Air Logistics Center, Hill Air Force Base, Utah; and  the Warner Robins Air Logistics Center, Robins Air Force Base, Georgia.
The activity group’s average price for in-house work almost doubled  between fiscal years 2000 and 2004. Specifically, according to the activity  group’s budget documents, the average price per direct labor hour of work  accomplished (composite sales rate) increased from $119.99 per hour for  fiscal year 2000 to $237.84 per hour for fiscal year 2004, or about 98  percent. Because the activity group’s customers are expected to request  about 20.8 million hours of in-house work in fiscal year 2004, this means  that customers will have to pay about $4.9 billion for work that they would  have paid about $2.5 billion in fiscal year 2000.
As requested and agreed to with your office, this report discusses three  issues related to this large price increase. Our objectives were to determine  (1) what factors were primarily responsible for the price increase, (2) if the  prices charged customers during fiscal year 2000 through fiscal year 2003  recovered the reported actual costs of performing the work, and (3) if the  Air Force has taken effective steps to improve efficiency and control the  activity group’s costs. Our review was performed from June 2003 through  April 2004 in accordance with U.S. generally accepted government auditing  standards. Most of the financial information in this report is budget data  obtained from official Air Force budget documents. The accounting data  used in this report was obtained from official Air Force accounting reports.  Although we did not validate the accuracy of the underlying transactions  that made up the summary level data, the budget and accounting  information is used by the Air Force, the Department of Defense (DOD),  and congressional committees to make decisions regarding the amount of  funds customers receive to purchase goods and services from the depot  maintenance activity group. Further details on our scope and methodology  can be found in appendix I. We requested comments on a draft of this  report from the Secretary of Defense or his designee. Written comments  from the Deputy Comptroller for Program Budget are reprinted in appendix  II.
subsections: section_title: Background
paragraphs: 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. 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 group to establish its  sales prices prior to the start of each fiscal year and to apply these  predetermined or “stabilized” prices to most orders received during the  year—regardless of when the work is actually accomplished or what costs  are actually incurred. For the depot maintenance activity group, DOD  policy also requires the group to recoup unbudgeted losses of $10 million  or more in the year in which they occurred. In the case of losses that occur  in the fourth quarter, the losses are to be recovered in the first quarter of  the next fiscal year.
Developing accurate prices is challenging since the process to determine  the prices begins about 2 years in advance of when the work is actually  received and performed. In essence, the activity group’s budget  development has to coincide with the development of its customers’  budgets so that they both use the same set of assumptions. To develop  prices, the activity group estimates (1) labor, material, overhead, and other  costs based on anticipated demand for work as projected by customers,   (2) total direct labor hours for each type of work performed, such as  aircraft, engines, and repairable inventory items, (3) the workforce’s  productivity, and (4) savings due to productivity and other cost avoidance  initiatives. 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 the activity group to incur losses. Conversely, lower-than-expected  costs or higher-than-expected customer demand for goods and services can  result in profits. 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.
subsections: section_title: The Activity Group’s Financial Reports Are Not Accurate
paragraphs: We have previously reported that DOD has had long-standing problems in  preparing accurate working capital fund financial reports. The DOD  Inspector General and/or the Air Force Audit Agency have not been able to  express an opinion on the reliability of the working capital fund’s financial  statements for fiscal years 1993 through 2003. 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. The Air Force  recognized that the existing legacy depot maintenance accounting systems  that were designed in the 1960s and 1970s did not produce usable,  complete, reliable, timely, consistent, and auditable information. According  to the Air Force, among other things, these systems (1) were not  transaction driven, (2) did not capture costs at the task level, and (3) did  not produce accurate financial statements.
To help improve the depot maintenance activity group’s financial  management operations, in January 1998, the Assistant Secretary of the Air  Force for Financial Management approved the implementation of the  Depot Maintenance Accounting and Production System—which includes  an accounting system called the Defense Industrial Financial Management  System (DIFMS) that originally belonged to the Navy—at the depots  located at the air logistics centers. According to the Air Force, this system  is designed to provide the accurate task-level cost data that are needed to  support (1) financial analysis and cost management and (2) the  development of prices that more accurately reflect the cost of providing  goods and services to customers. The Air Force is in the process of  implementing this system and plans to complete the implementation during  fiscal year 2004.
section_title: Factors Causing Prices to Increase
paragraphs: We identified five factors that accounted for about 95 percent of the sales  price increase from $119.99 per direct labor hour in fiscal year 2000 to  $237.84 per hour in fiscal year 2004. By far the most significant of these  factors was material costs, which accounted for about 67 percent of the  total increase. Air Force depot maintenance officials have yet to complete  an effective and comprehensive analysis to determine the underlying  causes of the material cost increases. Our analysis of the other four factors  identified a variety of underlying causes, some of which were beyond the  activity group’s control, such as rising health care costs and maintenance  and modernization of equipment and facilities. However, our analysis of the  two factors that involved surcharges determined that the carryover  surcharge (based on anticipated losses on work carried over from the  previous fiscal year) was probably too high for fiscal year 2004 and may  have been unnecessary, while the fiscal year 2004 cash surcharge was  unnecessary and should not have been added to the depot’s composite  hourly sales price. Details on the five factors follow.
Higher budgeted material costs accounted for about 67 percent of the  total increase in the composite hourly sales price. Air Force depot  maintenance officials provided anecdotal evidence to show that the  higher material costs were caused at least partly by (1) the need to  replace component parts more frequently because of both safety  concerns and the aging of aircraft and engines and (2) increases in the  prices that the depot maintenance activity group must pay its suppliers  for component parts. However, because Air Force depot maintenance  officials have not completed a comprehensive analysis to determine the  underlying causes of why their material costs have increased, they  cannot quantify the impact of the identified causes and are unsure if  they have identified all of the major causes.
Higher budgeted labor costs accounted for about 10 percent of the  increase in the activity group’s composite hourly sales price. Our  analysis showed that the higher labor costs were caused largely by  factors beyond the activity group’s control, such as annual salary  increases for federal employees and rising health care costs.
Higher non-labor, non-material overhead costs, which the Air Force  calls business operations costs, accounted for about 8 percent of the  total increase. Our analysis showed that the primary causes were   (1) costs related to the implementation of a new accounting system and  (2) the fact that the fiscal year 2004 budget provided significant  increases in several areas where expenditures had been constrained for  several years, such as the maintenance and modernization of equipment  and facilities.
An increase in the surcharge included in the composite hourly sales  prices to recoup anticipated losses on work carried over from the  previous fiscal year (carryover surcharge) accounted for about 7  percent of the total increase in the sales price. Our analysis showed that  the fiscal year 2004 carryover surcharge was probably too high and may  have been unnecessary.
An increase in the surcharge included in the composite hourly sales  prices to generate additional cash (cash surcharge) accounted for about  3 percent of the total increase in the sales price. Our analysis also  showed that the fiscal year 2004 cash surcharge was unnecessary  because the Air Force Working Capital Fund’s $2.5 billion cash balance  as of January 31, 2004, was already more than $1.3 billion higher than  the maximum level allowed by DOD policy. Either the Office of the  Secretary of Defense or the Congress could use this unneeded cash to  satisfy other requirements.
Table 1 shows the impact these factors had on the group’s composite sales  price. As table 1 also shows, about 5 percent of the price increase was due  to factors we either did not identify or could not quantify.
subsections: section_title: Spiraling Material Costs Are Primary Cause of Price Increases, but Further Analysis Is Needed to Fully Identify Underlying Causes
paragraphs: As shown in table 1, although many factors contributed to the increase that  occurred in the composite hourly sales price for fiscal years 2000 through  2004, higher budgeted material costs were, by far, the most significant.  Further, our analysis showed that higher budgeted material costs had an  even greater impact on some workloads. For example, the sales price for  the repair of E-3 airborne warning and control system (AWACS) aircraft  increased from $119.69 per hour in fiscal year 2000 to $330.06 per hour in  fiscal year 2004, about 176 percent, and the price for the repair of F108-100  engines used in the KC-135 aircraft increased from $183,240 per engine in  fiscal year 2000 to $1,214,124 per engine in fiscal year 2004, about 563  percent. Figure 1 shows the activity group’s budgeted and reported actual  material costs per direct labor hour of work accomplished (material  expense rate) for fiscal years 2000 through 2004. While Air Force depot  maintenance officials can provide anecdotal evidence on why the activity  group’s overall material costs have increased, they have yet to complete an  effective and comprehensive analysis to determine why material costs have  increased.
Air Force depot maintenance officials believe the activity group’s higher  material costs can be attributed, to a large extent, to increased material  usage that has been caused by (1) the aging of the Air Force’s aircraft and  engine inventory and (2) safety concerns. Further, they can provide  anecdotal evidence to support their views. For example:   Material costs related to the F-15 aircraft, which is more than 30 years  old, have increased significantly over the past several years, in part, due  to its age. For example, the Air Force is in the process of replacing the  aircraft’s structural surfaces with a material—called gridlock—that is  more expensive than the material that was used in the past to make  structural repairs. According to Air Force officials at the air logistics  center making the repairs, the new material is not prone to the problems  that plagued the old material. As a result, the new material should allow  for longer intervals between structural surface repairs and reduce  structural repair costs in the future. For fiscal year 2003, the gridlock  material added $24.5 million to the estimated cost of material to be used  to repair the F-15 and $20.47 to the hourly rate charged customers for  maintenance work on the aircraft.
Due primarily to actions taken in response to safety concerns, the depot  maintenance activity group raised the sales price for the repair of F101- GE-102 high-pressure turbine rotor assemblies from $144,464 in fiscal  year 2003 to $261,872 in fiscal year 2004, an increase of $117,408 or 81  percent. From 1999 through 2002, three F-16 aircraft crashed due to  engine failures caused by metal fatigue on the engine’s high-pressure  turbine rotor. To address this safety problem, the Oklahoma City air  logistics center began replacing the rotors on similar aircraft engines  more frequently and started using more expensive rotors that were  made of a stronger, more heat resistant metal alloy.
Depot maintenance officials have also determined that another major  cause of their higher material costs is price growth. The activity group pays  various suppliers for component parts that it uses to repair aircraft,  engines, and other items. Depot maintenance officials stated that their  analysis showed that the amount they had to pay for repairable component  parts in fiscal year 2003 was about 9 percent higher than the price they had  to pay for the same component parts in fiscal year 2002. Similarly, the  activity group’s fiscal year 2004 budget and, in turn, its fiscal year 2004  prices were based on the assumption that the prices it would have to pay its  suppliers for repairable component parts would increase an additional 14  percent.
Another major cause of the activity group’s higher material costs relates to  the workloads that were transferred from two closing air logistics centers  (Sacramento and San Antonio) to the three remaining centers (Ogden,  Oklahoma City, and Warner Robins) in the late 1990s. Depot maintenance  officials acknowledged that when workloads were moved from the closing  air logistics centers to the remaining centers in the late 1990s, millions of  dollars of material were also transferred. Officials at one center  acknowledged that this material was never recorded in the center’s  accounting records. When the maintenance shops needed component parts  to accomplish the transferred workloads, they used the transferred  material and did not record an expense in their financial records. This  caused their reported material expenses to be understated in fiscal year  2000. However, since most of the transferred material has now been  consumed, they now have to record the new material being purchased as  expenses in their financial records. Consequently, part of what appears to  be higher material costs is a more accurate reflection of actual costs.
subsections: section_title: Efforts to Develop an Effective and Systematic Methodology for Analyzing Material Cost Variances Have Been Ongoing for Several Years
paragraphs: In August 2000, we reported that the Air Force depot maintenance activity  group did not have an effective, systematic process for identifying and  analyzing variances between planned and actual material costs. The report  noted that such an analysis is frequently used for manufacturing processes  to determine if material usage has increased and, if so, to determine the  impact on material costs. The report also pointed out that such an analysis  could be used to validate Air Force officials’ view that increased material  usage is caused by external factors beyond the Air Force Materiel  Command’s control, such as the aging of the Air Force’s aircraft and engine  inventory. The report recommended that the Secretary of the Air Force  direct the Commander, Air Force Materiel Command, to develop a  systematic process to identify and analyze variances between depot  maintenance activities’ planned and actual material usage. In its comments  on our report, the Department of Defense concurred with our  recommendation and stated, among other things, that the Air Force  Materiel Command planned to develop a database that could be used to  analyze material usage.
As summarized below, the Air Force Materiel Command has subsequently  taken numerous actions to gain a better understanding of its material cost  and usage increases.
From September through November 2000, material analysis teams were  established at Air Force Materiel Command headquarters and at each air  logistics center.
In November 2000, Air Force Materiel Command headquarters  developed a material analysis plan that (1) identified some of the  material problems that would be addressed by the material analysis  teams and (2) indicated that one of the key functions of the material  analysis teams would be to link ongoing and planned material studies— thereby helping to reduce duplication of effort and increase  coordination on ongoing studies.
From January 2001 through February 2002, Air Force Materiel  Command conducted a comprehensive analysis of the material cost and  usage increases that occurred between fiscal years 1999 and 2000.  However, for a variety of reasons, the Command concluded that its  analysis of these data was inadequate; for example, because it did not  include all work. Consequently, from March 2002 through November  2003, the Command developed a database to facilitate its material  analyses.
In November 2003, the Air Force Materiel Command initiated an analysis of  the material cost and usage increases that occurred between fiscal years  2002 and 2003. Air Force Materiel Command officials believe, and we agree,  that the revised methodology for analyzing material cost variances should  provide more reliable results than the one they used to analyze the depot  maintenance activity group’s fiscal year 1999 and fiscal year 2000 material  cost and usage data. However, when they completed their preliminary  analysis, they determined that additional work was needed on their  methodology. According to the activity group’s fiscal year 2005 budget  estimate, the revised model should be fully functional in November 2004.
section_title: Labor Cost Contributed to Price Increases
paragraphs: As shown in table 1, higher budgeted labor costs per direct labor hour of  work accomplished (labor expense rate) accounted for $11.86, or about 10  percent, of the total increase that occurred in the activity group’s  composite sales price between fiscal years 2000 and 2004. This increase,  which is shown in table 2, was due to both an increase in the budgeted  average cost of civilian labor and a decline in budgeted productivity.
Although the increase in the labor expense rate was the second most  significant reason for the composite sales price’s increase during this  period, the labor costs’ relative impact on the overall composite sales price  declined significantly during this 5-year period. Specifically, in fiscal year  2000, the budgeted labor expense rate ($53.32) was $5.49 higher than the  budgeted material expense rate ($47.83), but by fiscal year 2004, it was  more than $60 per hour less.
Further, our analysis showed that about 61 percent of the higher labor cost  was due to factors that are largely beyond the activity group’s control, such  as annual cost-of-living increases and increased costs for health benefits  for federal employees. Specifically, our analysis showed that about $7.25 of  the $11.86 increase in the budgeted labor expense rate was due to an  increase in the average cost of civilian labor from about $57,434 per work  year per employee in fiscal year 2000 to about $65,132 in fiscal year 2004.  This increase, in turn, was due to two factors: (1) budget estimates for the  average annual cost of employee compensation (for basic salary and such  variables as holiday and overtime pay) increased by $5,649 per work year  per employee, or about 3 percent per year, and (2) budget estimates for the  average annual cost of employee benefits (employer contributions for such  things as health and life insurance) increased by about $2,049, or about 5  percent per year.
The rest of the increase in the budgeted labor expense rate—about $4.61  per hour—was the result of a 7 percent decline in budget estimates for  worker productivity. Our analysis showed that this decline was not the  result of an actual decline in reported actual worker productivity, but  rather was due to overly optimistic productivity assumptions for fiscal  years 2000 through 2003 and what appears to be an overly pessimistic  productivity assumption for fiscal year 2004.
Specifically, our analysis showed that (1) the activity group’s reported  actual productivity increased about 4 percent between fiscal year 2000 and  fiscal year 2003, but was consistently less than the budget estimate and   (2) the fiscal year 2004 budget estimate was based on the assumption that  the fiscal year 2004 productivity would be 3 percent less than the reported  actual level for fiscal year 2003.
When we asked Air Force Materiel Command officials why the activity  group’s fiscal year 2004 budget estimate was based on the assumption that  the workforce’s productivity would decline, they acknowledged that the  budget assumption was probably too pessimistic. However, they also stated  that they still believe that several initiatives that the Command is  implementing will cause some decline in reported actual productivity  during fiscal year 2004. For example, they indicated that the workforce’s  overall productivity is likely to decline, at least in the short term, because  they plan to add about 167 overhead positions in order to implement a  more effective process improvement strategy, improve the activity group’s  management of its infrastructure, and develop a methodology and tool to  improve financial forecasting.
We attempted to review reported actual productivity data for the first part  of fiscal year 2004 to determine if the fiscal year 2004 budget estimate was  based on an overly pessimistic productivity assumption. However, we were  unable to do so because, as of February 2004, problems related to the  implementation of a new accounting system prevented the activity group  from producing reliable productivity data. This data reliability problem is  discussed later in this report.
section_title: Business Operations Costs Contributed to Price Increase, Especially between Fiscal Years 2003 and 2004
paragraphs: Business operations costs are non-labor, non-material overhead costs for  such things as the repair and modernization of equipment and facilities and  accounting automated data processing services. An increase in business  operations costs accounted for $9.64, or about 8 percent, of the total sales  price increase as shown in table 1. Most ($7.99, or 83 percent) of this  increase occurred between the fiscal year 2003 and fiscal year 2004 budget  estimates. An Air Force Materiel Command official stated that the large  increase in business operations funding for fiscal year 2004 was due largely  to the Air Force’s realization that infrastructure support and other essential  support services had been budgeted too low for several years and needed  to be a higher priority in fiscal year 2004. For example, Air Force  Headquarters reduced business operations cost projections that were  included in the activity group’s initial fiscal year 2003 budget estimate by  about $92 million because of concern about the projected large price  increase and a desire to hold down costs, if possible. This reduction, in  turn, forced the activity group to cut back on certain requirements, such as  the repair and modernization of facilities and equipment. The Air Force  Materiel Command official stated that the fiscal year 2004 budget estimate  considered the years of deferred maintenance and modernization and  allowed for significant increases in these areas.
Another major cause of the large increase in business operations costs  from fiscal year 2000 to 2004 is the activity group’s ongoing conversion of  its legacy accounting systems to the Depot Maintenance Accounting and  Production System. According to Air Force depot maintenance officials,  this conversion is the primary reason why budgeted costs for automated  data processing and software support increased from about $63.6 million in  2000 to about $115.5 million in 2004. Similarly, Air Force depot  maintenance officials stated that the decision to phase out their old legacy  systems is the primary reason why depreciation costs for automated data  systems and equipment increased from about $92.2 million in fiscal year  2000 to about $122.7 million in fiscal year 2004.
section_title: Work Carried Over from Previous Fiscal Year Contributed to Price Increase
paragraphs: During periods of increasing costs, the depot maintenance activity group  generally incurs financial losses on work that is carried over from one  fiscal year to the next. The reason for this is that DOD’s stabilized price  policy requires working capital fund activities to establish sales prices prior  to the start of each fiscal year and to apply these predetermined or  “stabilized” prices to most orders received during the year—regardless of  when the work is accomplished or what costs are actually incurred. In  other words, the activity group generally incurs financial losses on its  “carryover” work because (1) the cost of doing the work generally goes up  from one year to the next and (2) the stabilized price policy prevents the  activity group from increasing its prices to cover the higher costs. If losses  are expected on carryover work, the activity group adds a surcharge to the  price of its new work in order to recoup the losses that are anticipated on  its carryover work. Conversely, in the rare instance where costs are  expected to decrease from one year to the next, a negative surcharge can  be added.
As shown in table 1, about $8.00, or 7 percent, of the increase in the depot  maintenance activity group’s composite hourly sales price can be attributed  to an increase in the carryover surcharge. Our analysis showed that the  fiscal year 2004 carryover surcharge added about $164 million to activity  group customers’ fiscal year 2004 depot maintenance costs. Our analysis  also indicated that the fiscal year 2004 carryover surcharge was probably  too high and may have been unnecessary. Specifically, since most of the  work carried over from fiscal year 2003 should have been accomplished  during the first quarter of fiscal year 2004 and most of the work on fiscal  year 2004 orders (which had the carryover surcharge) should have been  accomplished in subsequent quarters, carryover losses should have  occurred during the first quarter of fiscal year 2004. However, the activity  group reported a profit of about $80 million for the first quarter. When we  discussed this inconsistency with depot maintenance officials, they agreed  that most of the carryover losses should have occurred in the first quarter,  but they also indicated that they did not know if the reported profit   (1) indicated that the carryover surcharge was unnecessary or (2) was  unreliable due to problems related to the implementation of a new  accounting system which, as discussed later in this report, has adversely  affected the reliability of the activity group’s reported accounting data.
section_title: Fiscal Year 2004 Cash Surcharge Will Generate Excess Cash
paragraphs: Working capital funds are required to maintain cash balances that are  sufficient to finance the operations of their activity groups, but are not to  tie up resources. DOD policy requires working capital funds to maintain  cash balances at sufficient levels to cover 7 to 10 days of operational costs  and 6 months of capital disbursements. For the Air Force Working Capital  Fund, which includes several activity groups including depot maintenance  and the U.S. Transportation Command, this equates to a cash balance of  between $924 million and $1,221 million. It is important to note that (1) this  cash requirement applies to the total working capital fund and (2) there is  no requirement for individual activity groups to maintain a specific cash  balance (for example, a cash surplus in one activity group can offset a  deficit in another).
If projections of cash disbursements and collections indicate that cash  balances will drop below prescribed levels, the Air Force Working Capital  Fund can generate additional cash by adding a surcharge to one or more of  its activity groups’ composite sales prices. Additionally, if for some reason  the cash balance becomes too low and there is a possibility of an Antideficiency Act violation, the working capital funds are required to  generate additional cash. One way to raise cash is by advance billing  customers for work not yet performed. Conversely, if the cash balances are  too high, customer prices can be reduced or possibly either the Office of  the Secretary of Defense or the Congress can transfer the unneeded funds  to other appropriations to either reduce budget requests or finance  additional requirements.
About $3.55, or 3 percent, of the increase in the depot maintenance activity  group’s composite hourly sales price can be attributed to an increase in the  cash surcharge. Our work showed that Air Force Headquarters decided to  include a cash surcharge in the depot maintenance activity group’s fiscal  year 2004 sales price. Our work also showed that the depot maintenance  activity group’s fiscal year 2004 cash surcharge is unnecessary and, more  importantly, that the Air Force Working Capital Fund will have a  substantial amount of excess cash on hand at the end of fiscal year 2004  unless either the Office of the Secretary of Defense or the Congress uses  this unneeded cash to satisfy other requirements. As noted previously, DOD  policy guidance requires the Air Force Working Capital Fund to maintain a  cash balance of 7 to 10 days of operational costs and 6 months of capital  disbursements, which equates to $924 million and about $1.2 billion. Our  analysis showed that the Air Force Working Capital Fund’s end-of-month  cash balance was at least $2.2 billion for each of the first 4 months of fiscal  year 2004 and was more than $2.5 billion as of January 31, 2004. The   $2.5 billion amount was more than $1.3 billion higher than the maximum  allowed by DOD policy. Most of the excess cash was generated by the work  performed by the U.S. Transportation Command, whose cash is included in  the Air Force Working Capital Fund.
When we contacted Office of the Secretary of Defense officials in March  2004 about the Air Force Working Capital Fund’s excess cash, in general,  and the depot maintenance activity group’s fiscal year 2004 cash surcharge,  in particular, they stated that they allowed the Air Force to include a cash  surcharge in its depot maintenance activity group’s fiscal year 2004 sales  prices because (1) problems related to ongoing efforts to implement a new  accounting system made the reliability of the activity group’s accounting  data questionable and (2) uncertainty related to ongoing actions to remove  contract depot maintenance operations from the Air Force Working Capital  Fund made it difficult to reliably project future cash collections and  disbursements. However, they also acknowledged that the Air Force  Working Capital Fund has had a substantial amount of excess cash  throughout fiscal year 2004 and stated that they would be exploring  possible uses for the excess cash over the next few months.
section_title: Prices Charged Customers Were Not Set High Enough to Recover Costs
paragraphs: Prices that the depot maintenance activity group charged customers were  not set high enough to recover the group’s reported costs of performing the  work. Air Force officials at the three air logistics centers and the Air Force  Materiel Command informed us that the activity group’s prices were not set  high enough because the Air Force artificially constrained the activity  group’s prices for fiscal years 2000 through 2003 by not including all  anticipated costs in the prices. In part, because the sales prices were set  too low during this period, the activity group reported losing about   $1.1 billion, as shown in table 3.
To help recoup the losses, the activity group billed and collected more than  $1 billion from customers outside the pricing structure. As a result, the  effective prices actually paid by customers were significantly higher during  fiscal years 2000, 2001, and 2002.
The Air Force changed its sales price development philosophy in 2002 in an  effort to bring prices charged customers in fiscal year 2004 more in line  with operating costs. In addition, the Air Force allowed out-of-cycle price  increases in fiscal years 2002 and 2003 to alleviate projected losses. Even  though the activity group made out-of-cycle price increases, the activity  group still reported losses for those two fiscal years.
subsections: section_title: Customer Sales Prices Constrained
paragraphs: Air Force officials told us the prices were constrained to help ensure that  the activity group’s customers would be able to get needed work done with  the amount of funds provided them through the budget process. Our work  at the air logistics centers showed that customer sales prices were in fact  constrained. For example, at one center we found that sales prices for  work on inventory items performed by the avionics shop were constrained  by not including all estimated costs of materials to be used in  accomplishing the work. In developing its fiscal year 2003 customer prices,  this shop estimated that its material costs would be about $160 million.  However, because of the pricing constraints levied by the Air Force, the  avionics shop was only allowed to include about $123 million of material  costs in its prices, a difference of about $37 million. However, constraining  prices is contrary to DOD policy (DOD Financial Management Regulation,  7000.14-R, Volume 2B, Chapter 9) that requires activity groups to set prices  to recover the full cost of providing goods and services to customers so  that the working capital fund activity group would operate on a break-even  basis—that is, not make a profit or incur a loss.
section_title: Air Force Changed Its Sales Price Development Philosophy
paragraphs: During fiscal year 2002, Air Force headquarters reversed its philosophy of  constraining customer sales prices when it was developing the depot  maintenance activity group’s fiscal year 2004 prices to reduce the risk of  future financial losses. In addition, the Air Force allowed the activity group  to impose out-of-cycle customer price increases in fiscal years 2002 and  2003 to lessen projected losses resulting, in part, from its price constraining  philosophy that had been in place when these fiscal year prices were  developed for the budget. Specifically, in June 2002, the Office of the  Assistant Secretary of the Air Force directed the Air Force Materiel  Command to direct each air logistics center to increase the sales (repair)  prices on 20 inventory items that it estimated were going to lose the most  dollars. These price increases were effective beginning July 1, 2002—the  last quarter of fiscal year 2002. Our analysis of data provided by the three  air logistics centers showed that this action increased the activity group’s  revenue by about $23 million, thus avoiding additional losses by this same  amount.
By authority of the same June 2002 directive, the three air logistics centers  were also directed to increase their fiscal year 2003 sales prices to avoid an  estimated $443 million loss that was being projected for fiscal year 2003 at  that time. This out-of-cycle increase resulted in the prices charged  customers increasing from $179.42 an hour to $199.66 an hour,  approximately $20 per hour. The air logistics centers were not provided  guidance regarding how the price increase was to be applied to their  individual workloads. One center applied the increase “across the board” to  all workloads. Another center applied the increase primarily to its aircraft  workload. The third center applied the increase primarily to its aircraft  workload and also increased the sales price for one of its engines. As  shown in table 4, how this increase was implemented had a profound  impact on some of the fiscal year 2003 prices charged customers, resulting  in price increases significantly higher than the average $20 per hour. In  some cases the prices increased by more than 50 percent.
The $20 per hour average sales price increase for fiscal year 2003 was  intended to make the activity group break even at the end of fiscal year  2003 based on projected losses at the time the decision was made to  increase prices. Even though sales prices were increased—significantly in  some cases as shown in table 4—the activity group still reported a financial  loss at the end of the fiscal year. According to an Air Force Materiel  Command official, when the estimated price increase was developed they  did not consider that some of the revenue from the fiscal year 2003 price  increase would be realized in fiscal year 2004 because of work started  and/or accepted in fiscal year 2003 that had to be carried over and  completed in fiscal year 2004.
Further, we found that the amount of the reported loss at the end of fiscal  year 2003 was questionable. Based on our analysis of the financial data and  discussions with activity group officials, the Air Force’s implementation of  the new accounting system, DIFMS, resulted in wide swings in the group’s  reported net operating results during fiscal year 2003. For example, one air  logistics center’s net operating results went from a $1 million loss to a   $94 million loss over a period of 1 month due to the implementation of  DIFMS. Another center reported a profit throughout most of fiscal year  2003, including a reported profit of $137 million at the end of August 2003.  However, the center ended the fiscal year with a reported loss of   $17 million—a $154 million shift in 1 month—due to the implementation of  the new accounting system. Air Force officials told us that implementing  DIFMS was a major effort and were aware of system implementation  problems and were working to resolve them.
section_title: Air Force Depot Maintenance Needs More Systematic and Effective Processes for Controlling Costs
paragraphs: The Air Force lacks systematic and effective processes for controlling  costs. In an effort to better control cost growth, the Air Force Materiel  Command has (1) been trying since 2000 to develop a systematic  methodology to better understand the reasons for the rapidly increasing  material costs and (2) implemented a depot maintenance process  improvement program. Although these efforts represent a positive step in  trying to better understand and control its depot maintenance costs, the  Command has not (1) completed a successful methodology for analyzing  the reasons for the rapid material cost increases and (2) entered data into a  data repository that is to be used to share cost-saving ideas among the  three air logistics centers on process improvements and track the costs and  savings for these improvements. These actions are necessary in order for  management to control the increasing depot maintenance costs.
subsections: section_title: Efforts to Develop an Effective and Systematic Methodology for Analyzing Material Cost Variances Have Been Ongoing for Several Years
paragraphs: In August 2000, we reported that the Air Force depot maintenance activity  group did not have an effective, systematic process for identifying and  analyzing variances between planned and actual material costs. In its  comments on our report, the DOD concurred with our recommendation  and stated, among other things, that the Air Force Materiel Command  planned to develop a database that could be used to analyze material usage.  However, as discussed earlier in this report, the Command still has not  completed the methodology for analyzing material cost increases.
It is imperative that the Air Force Materiel Command complete this  methodology for analyzing material costs since material costs have  increased significantly over the past few years. Specifically, budgeted  material costs for fiscal year 2004 are about $2.8 billion and are expected to  account for about 57 percent of the activity group’s total fiscal year 2004  costs. A second reason is the fact that, as discussed previously, higher  material costs account for about 67 percent of the total sales rate increase  that occurred between fiscal years 2000 and 2004.
section_title: Air Logistics Centers Initiated Process Improvement Initiatives
paragraphs: The Air Force has recognized the need to make its depot maintenance  activities more effective and efficient by incorporating best business  practices that commercial companies used. The three air logistics centers  undertook various process improvement initiatives designed to improve  the efficiency and effectiveness of their operations. However, as discussed  in the next section, the activity group does not have an effective  mechanism for tracking costs and documenting savings that may have  resulted from these initiatives. According to Air Force depot maintenance  documentation, these initiatives are intended to eliminate waste or non- value-added processes for selected business lines, thereby reducing the  number of flow days, improving the usage of available workspace, and  reducing the overtime worked. In implementing these initiatives, Air Force  officials visited over 35 private industry companies to gather information to  improve their processes. For example, officials at the Oklahoma City Air  Logistics Center consulted with Standard Aero (San Antonio), Inc. to  reengineer its constant speed drive repair process. According to the  center’s documentation, this initiative, to date, has reduced flow days by 20,  reduced the part rejection rate by 25 percent, and resulted in an additional  $2.9 million in revenue over pre-2002 levels. When we visited Standard Aero  (San Antonio), Inc. we found that these efficiencies were obtained by  applying a cellular approach to depot maintenance repair work that  differed significantly from the traditional functional approach. Other  process improvement initiatives included the following.
The Oklahoma City Air Logistics Center’s initiative for the KC-135  aircraft cut in half the number of aircraft awaiting scheduled depot  maintenance according to center documentation and officials. Further,  the center reported that this effort reduced the number of flow days  from 421 days in fiscal year 2000 to 221 days in fiscal year 2003 with a  goal to have it down to 178 days by fiscal year 2005. This initiative   (1) included the renovation of nine depot maintenance docks and the  associated support areas and (2) implemented the “continuous flow”  concept that consists of having as many aspects of the job in one area as  possible and arranged so that the work flows from one step to the next  without unnecessary movement to create more effective cells of  productivity. Project officials noted that these changes have enabled the  center to become much more efficient and put the needed aircraft back  into the warfighter’s hands more quickly.
The Ogden Air Logistics Center reported that its central gearbox  initiative—which is one of six projects initiated to improve the  processes it uses to repair brakes, gearboxes, pylons, struts, actuators,  and wheels—has increased both the efficiency and effectiveness of the  gearbox repair process. Specifically, according to the center’s process  improvement manager, the gearbox project has allowed the center to   (1) reduce gearbox’s average shop flow days from 90 days to 52 days,   (2) reduce the average number of gearbox assemblies in work at any  given time from 46 to 21, and (3) reduce the gearbox’s average labor  standard from 236 hours per gear box to 68 hours. The initiative is also  expected to reduce annual direct labor costs by about $5 million,  beginning in fiscal year 2005. The process improvement manager stated  that the Ogden Air Logistics Center achieved the reduction in labor  costs by streamlining processes under the cellular repair concept, which  eliminated bottlenecks in staging areas and cut out wasteful, unneeded  repair steps.
section_title: Air Force Materiel Command Has Not Effectively Implemented Its Data Repository for Process Improvement Initiatives
paragraphs: The Air Force Materiel Command has not effectively implemented its data  repository, which is a key part of its Process Improvement Program.  Because the air logistics centers did not enter all the process improvement  initiative data into the data repository, the Command (1) has been unable to  properly document and implement a shared, standard process  improvement program to continuously measure, analyze, and improve its  depot maintenance processes and (2) does not have an effective  mechanism for tracking costs and documenting savings that could have  resulted from these initiatives.
Recognizing the need for better oversight of its process improvement  efforts, the Air Force Materiel Command issued Instruction 21-137 on  August 20, 2003, which established the policies and procedures for process  improvements within all maintenance divisions at the centers. The  instruction points out that process improvement within the Command is  vital to becoming “World Class Depots providing the world’s best  warfighter support.” It goes on to add that leveraging process improvement  initiatives across the command requires standardized guidance,  integration, and tracking. Accordingly, the instruction established a  standard methodology by which the three centers would accomplish  process improvement and become “World Class.” This was to be done by  documenting and implementing a shared, standard process improvement  program to continuously measure, analyze, and improve the Command  depot maintenance processes. A key component was the establishment of  the Command data repository to enable the Command to track process  improvement results and to share the lessons learned among the centers.  As of October 2003, the data repository contained 108 process  improvement initiatives.
We found three problems with the implementation of this instruction and  the creation of the Command data repository. First, we found that several  large process improvement initiatives were not included in the data  repository. For example, the process improvement projects that make up  the Oklahoma City Air Logistics Center’s initiative to transform the largest  industrial facility in the DOD—its building 3001—into a world class depot  maintenance facility were not included in the Command data repository.  According to Command Depot Maintenance Transformation officials, this  initiative is beyond what they were targeting to document and capture in  the data repository, but they agreed that the individual projects resulting  from this initiative should be included. These officials also acknowledged  that the major projects that currently make up their F-15 Trailblazer  initiative—to evaluate, test, and redefine business processes for repairing  the Air Force’s F-15 aircraft—were not in the data repository. Air Force  Materiel Command officials stated that the projects from these two large  initiatives need to be included in the data repository in order for the  Command to oversee the process improvement initiatives at each of the  centers. The officials added that they plan to add these initiatives to the  data repository as they become better defined. The Command officials also  stated that the data repository has not been as fully used as envisioned and  that not all process improvement initiatives have been entered as required  by the Air Force Materiel Command Instruction 21-137.
Second, while the Air Force Materiel Command created a data repository  of ongoing initiatives to provide needed oversight of its improvement  initiatives, the information in the data repository has not proved useful  because in many cases the centers failed to fill in the data fields for each  initiative. As a result, we found that some of the required data fields were  missing important information needed to centrally manage the process  improvement initiatives. For example, 51 of the 108 initiatives had no title  clearly describing the initiative. Another important required data field to  identify the root causes of the problem to be corrected or improved was  not completed for 54 of the 108 initiatives. Command officials agreed that  the data repository has not been as useful as envisioned because many of  the initiatives entered have not been fully documented since the centers  have not completed the needed or required data fields.
Third, the Air Force Materiel Command Instruction 21-137 also requires  that the process improvement results be recorded and tracked in the  Command data repository including the costs and benefits associated with  each initiative. However, the Command’s input guidance to record process  improvements in the data repository does not require that the data fields  for costs, return on investment, and quantifiable results be completed. This  contradicts the Command Instruction 21-137, which requires this  information. As a result, we found the following:  Cost information to implement the initiative was not recorded in the  data repository for 89 of the 108 initiatives. Of the 19 initiatives  containing some cost information, only 10 initiatives had recorded costs  totaling $6,328,000. The remaining 10 initiatives had recorded costs as  “minimal” or “not applicable.”
Return on investment information—such as dollar savings—was not  recorded in the data repository for 93 of the 108 initiatives. Of the 15  initiatives containing some return on investment information, only two  initiatives had recorded a return on investment totaling $828,000. The  remaining 13 initiatives had recorded return on investment information  with no dollar savings identified or as not applicable.
Quantifiable results information—such as flow days reduced—was not  recorded in the data repository for 64 of the 108 initiatives. We analyzed  the recorded information for the remaining initiatives containing  quantifiable results and found that they did report improvements such  as reducing the number of flow days and man days and improving the  usage of available workspace.
An official at one air logistics center pointed out that in addition to  reporting their improvement initiatives in the Command data repository,  they maintain their projects on two additional local databases. Since none  of these databases can communicate with one another, each database is  separately maintained and updated by the program managers and the  process improvement office. This is difficult to do in a timely manner and  leads to differences among the databases. The center has approved a  process improvement initiative to standardize these databases.  Additionally, a Command depot maintenance transformation official stated  that in preparing for a presentation to the Command’s depot maintenance  management team he had to contact the three air logistics centers directly  to obtain complete project information for his presentation. He emphasized  that this would not have been necessary if the three centers had been  updating the data repository with complete and useful information as  required. Without complete and useful information, the data repository  cannot serve as an effective tool for management to oversee these  initiatives and the Command runs the risk of the centers duplicating efforts  and developing stovepipe processes that hinder the Command’s efforts to  provide world class depot maintenance services.
section_title: Conclusions
paragraphs: The Air Force depot maintenance activity group has not always operated  like a business entity and thus, has not achieved the goals envisioned under  the working capital fund concept—that is, to operate like a business by  developing and using effective methods to control operating costs,  charging customers prices that recover operating costs, and ensuring that  established management tools to measure the results of operational  improvement efforts are used as intended. Specifically, the group has been  unable to develop an analytical methodology to effectively identify the  causes of and take corrective actions, as appropriate, on its continuously  upward spiraling material costs. Further, working capital fund activities are  to establish sales prices that allow them to recover their expected costs  from their customers. However, the activity group intentionally set its sales  prices lower than what was required to recover its operating costs and, as a  result, incurred operating losses. Although several promising improvement  initiatives are underway at the three centers, these efforts are stove piped  and management has been unable to clearly show that the benefits of the  initiatives exceed their costs.
section_title: Matter for Congressional Consideration
paragraphs: The congressional defense committees have shown interest in the amount  of cash in the Defense Working Capital Fund in past years. The Air Force  Working Capital Fund cash balance has exceeded the maximum cash  requirement by over $1.3 billion for each of the first four months of fiscal  year 2004. If DOD does not take action to reduce the cash balance to the 7  to 10 day requirement, the Congress may wish to take action to reduce the  amount of excess cash in the Air Force Working Capital Fund.
section_title: Recommendations for Executive Action
paragraphs: To improve the business operations of the Air Force Working Capital Fund  including cash management and the setting of prices and efforts to control  costs of the depot maintenance activity group, we are making two  recommendations to the Secretary of Defense and four recommendations  to the Secretary of the Air Force.
We recommend that the Secretary of Defense   take action to reduce the amount of excess cash in the Air Force  Working Capital Fund.   direct the Secretary of the Air Force to develop prices that cover the  total costs of providing goods and services to customers and not  constrain prices as has been done in the past.
We recommend that the Secretary of the Air Force direct the Commander,  Air Force Materiel Command to   develop and complete a viable, systematic methodology for analyzing  material cost variances that encompasses both the price paid for  material and material usage that would enable the Air Force Materiel  Command to better understand the underlying causes of the rapidly  increasing material costs and take actions to control material costs, as  appropriate.  hold the air logistics centers’ managers accountable for compliance with  the Command’s mandatory Instruction 21-137 requiring the centers to  enter all initiatives and related data into the data repository completely  and accurately. This should include initiative information on costs,  return on investment, and quantifiable results for all process  improvement initiatives. At a minimum, the Command needs to issue a  memorandum to the air logistics centers reiterating their  responsibilities for compliance with the instruction.  periodically review the data contained in the data repository to   (1) determine whether the data provided by the air logistics centers is  complete and useful and (2) identify ways to consolidate initiatives and  share lessons learned from the initiatives with the three centers.  summarize and determine the actual savings and/or real benefits as  compared to the costs from the improvement initiatives already  contained in the repository.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided written comments on a draft of this report. In its comments,  DOD concurred with the six recommendations in the draft report and is  taking action to implement them. In fact, DOD has already taken action to  help eliminate the excess cash in the Air Force Working Capital Fund by  transferring $1.1 billion of the excess cash to the Army and Navy Operation  and Maintenance appropriation accounts in April 2004. However, the Air  Force Working Capital Fund had about $400 million of excess cash as of the  end of April 2004. Recognizing that cash balances fluctuate from month to  month, we continue to believe that it would be appropriate for the  Congress to monitor the working capital fund cash balances and take  action to reduce the amount of excess cash if the balances continue to be in  excess of amounts necessary. Concerning our recommendation on the Air  Force developing prices that cover the total costs of providing goods and  services to customers, DOD stated that the DOD Comptroller will perform  a more intensive review of the Air Force depot maintenance billing rates to  ensure that the proposed pricing structure is adequate to cover the costs of  operations.
We are sending copies of this report to the Chairmen and Ranking Minority  Members of the Senate Committee on Armed Services; the Subcommittee  on Readiness and Management Support, Senate Committee on Armed  Services; the Subcommittee on Defense, Senate Committee on  Appropriations; the House Committee on Armed Services; the  Subcommittee on Readiness, House Committee on Armed Services; and the  Ranking Minority Member, Subcommittee on Defense, House Committee  on Appropriations. We are also sending copies to the Secretary of Defense,  Secretary of the Air Force, and other interested parties. Copies will be  made available to others upon request. Should you or your staff have any  questions concerning this report, please contact Gregory D. Kutz, Director,  at (202) 512-9505 or kutzg@gao.gov or William M. Solis, Director, at (202)  512-8365 or solisw@gao.gov. An additional contact and key contributors to  this report are listed in appendix III.
section_title: Scope and Methodology
paragraphs: To determine what factors were primarily responsible for causing the  composite sales price to increase from $119.99 per hour in fiscal year 2000  to $237.84 per hour in fiscal year 2004, we obtained and analyzed budget  documents that provided information on cost factors, such as material  costs, overhead costs, and salaries used in developing the prices. We  determined which factors caused the prices to increase the most and  discussed the reasons for the price increases with officials at the Air Force  Materiel Command and the three air logistics centers. In addition, we  obtained information on the impact of the price increases on certain  aircraft and engines such as the F-15 and E-3 aircraft. We also reviewed and  analyzed the Air Force February 2002 report on depot maintenance  material usage and cost analysis study to determine why prices have  increased. Finally, we met with Air Force Materiel Command officials to  determine what actions they were taking to identify the causes for  increasing material costs—a significant factor causing prices to increase— since the Air Force issued its February 2002 report.
To determine if the prices charged customers during fiscal year 2000  through fiscal year 2003 recovered the reported actual costs of performing  the work, we obtained and analyzed budget documents and accounting  data that provided information on budgeted and actual revenue, direct  costs, overhead costs, and net operating losses. When the activity group  reported losses, we met with officials to determine (1) why the prices  charged customers did not recover costs incurred in providing them the  goods and services and (2) how the Air Force recovered these losses.
To determine if the Air Force has taken effective steps to improve  efficiency and control the activity group’s costs, we obtained the  Command’s depot maintenance database that contained 108 initiatives  aimed at improving depot maintenance operations. We analyzed the  database to determine if each initiative had information on the (1) cost to  implement the initiative and (2) the amount of dollar savings associated  with implementing the initiative. Information on cost and savings is critical  to determine if the initiative is cost beneficial. We also analyzed the  database to determine if there was sufficient information that would enable  the air logistics centers to share information with each other on the  initiatives thereby reducing or eliminating redundant efforts. We also met  with officials from Air Force Materiel Command and the air logistics  centers to discuss (1) process improvement initiatives, especially  information on initiative costs, savings, and the sharing of information and  (2) whether all initiatives were included in the database.
We performed our work at the headquarters, Office of the Under Secretary  of Defense (Comptroller) and the Office of the Secretary of the Air Force,  Washington, D.C.; Air Force Materiel Command, Ohio; the Oklahoma City  Air Logistics Center, Tinker Air Force Base, Oklahoma; the Ogden Air  Logistics Center, Hill Air Force Base, Utah; and the Warner Robins Air  Logistics Center, Robins Air Force Base, Georgia. We also visited Standard  Aero (San Antonio) Inc. and discussed with company officials the  Oklahoma City Air Logistics Center’s initiative to reengineer its constant  speed drive repair process. We did not verify the accuracy of the  accounting and budget information used in the tables in this report, all of  which was provided by the Air Force in then-year dollars. We conducted  our work from June 2003 through April 2004 in accordance with U.S.  generally accepted government auditing standards. We requested  comments on a draft of this report from the Secretary of Defense or his  designee. DOD provided written comments, and these comments are  presented in the Agency Comments and Our Evaluation section of this  report and are reprinted in appendix II.
section_title: Comments from the Department of Defense
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: Staff who made key contributions to this report were Francine DelVecchio,  Karl Gustafson, Keith E. McDaniel, Christopher Rice, Harold P. Santarelli,  Ron Tobias, and Eddie Uyekawa.
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section_title: Public Affairs