Depot maintenance is a key part of the total DOD logistics system that supports millions of equipment items, over 52,000 combat vehicles, 351 ships, and over 17,000 aircraft. Depot maintenance is a vast undertaking that requires extensive shop facilities, specialized equipment, and highly skilled technical and engineering personnel to perform major overhauls of weapon systems and equipment, to completely rebuild parts and end items, to modify systems and equipment by applying new or improved components, to manufacture parts unavailable from the private sector, and to program the software that is an integral part of today’s complex weapon systems. This work is done in both military depots and the private sector. DOD facilities and equipment are valued at over $50 billion. A large but unknown amount of government-owned depot plant equipment is used by private contractors—many of them original equipment manufacturers of weapons or major systems and components. Appendix I contains the history of the DOD depot maintenance system. Appendix II provides summary information on our recent prior reports regarding DOD’s depot maintenance program. DOD spends about $13 billion—5 percent of its $250 billion fiscal year 1997 budget—on depot maintenance activities. Over $1 billion of this amount is procurement funding (rather than operation and maintenance funding) for contractor logistics support, interim contractor support, and some software maintenance. With the end of the Cold War and reduction in new defense procurement, commercial contractors would like more of the depot maintenance business. Other factors contribute toward a declining workload base, which must be shared among all potential sources of repair—both public and private. These factors include: (1) a reduction in the number of systems and equipment that need to be repaired and overhauled; (2) efforts by some components to do more repairs in field-level maintenance activities; and (3) the increased reliability, maintainability, and durability of some systems and equipment. Further, the already controversial debate is heating up over how various depot maintenance workloads should be allocated among the military depots, original equipment manufacturers seeking life-cycle management support to increase their shrinking workload base, and third-party repair vendors who would also like a larger share of this multibillion dollar business. In combination with these factors, the debate has been fanned by the implementation of base realignment and closure recommendations, proposals to privatize work in place, and by news of the success achieved by many private sector commercial activities in reducing their operations and support costs through outsourcing noncore activities. DOD’s depot system employs about 76,000 DOD civilian personnel, including laborers, highly trained technicians, engineers and top-level managers. As shown on figure 1, the number of depot maintenance personnel has been reduced by about 71,000 personnel—a 48-percent reduction since 1990. Over the same period of time, the organic depot maintenance workload had a similar decline of about 43 percent, while the total depot maintenance budget declined by a margin of only 12 percent. Appendix III shows the reduction of DOD personnel by service. While DOD has substantially reduced depot maintenance requirements, and the number of depot maintenance personnel has been similarly reduced, DOD has not completed complementary reductions in its depot maintenance infrastructure—despite four rounds of base closures. As a result, DOD has extensive excess capacity in the form of large numbers of under utilized buildings and equipment. Additionally, the private sector has seen its production workload for new systems and equipment decline and has significant excess production capacity. We refer to excess capacity that is derived by determining what is the potential for doing more work after the programmed workload is accomplished, assuming that the production capability will be used to the maximum extent, which would require the availability of additional trained personnel. This same measure was used in the BRAC process to identify the potential for consolidating like workloads to improve capacity utilization and reduce redundancies. However, DOD normally measures excess capacity by an analysis that constrains facility and equipment availability by the availability of trained personnel and the organization of work stations, assuming an 8-hour workday, for 5 days a week. A maximum potential capacity utilization between 75 and 85 percent is generally considered an efficient operating level. Using maximum potential capacity measurements, DOD is predicted to have excess capacity in fiscal year 1999 of about 50 percent. Figure 2 shows excess capacity using both the maximum potential capacity and constrained measurements. The Air Force has the most extensive excess capacity. Appendix IV shows excess capacity in each of the DOD depots using both the maximum potential capacity and constrained measurements. Even after four BRAC rounds, the four services have costly excess capacity within their depot maintenance systems. With the exception of the Navy privatization-in-place efforts, our work shows that the Navy has been the most successful at addressing this issue. However, the Army and the Air Force have not succeeded in making significant reductions in their excess capacity. Further, DOD’s privatization of depots and the Air Force’s plans to implement BRAC decisions have contributed to the excess capacity problem and ultimately will drive up depot maintenance costs. Such cost increases mean that military service customers can buy less depot maintenance with available operation and maintenance dollars. The Navy has closed three of its six aviation depots, consolidating workloads from the closing depots to improve capacity utilization and reduce excess capacity. These actions will significantly increase utilization and reduce excess capacity in the remaining three naval aviation depots. The 1993 BRAC Commission approved the Navy’s recommendation to close aviation depots located in Pensacola, Florida; Alameda, California; and Norfolk, Virginia. The Navy completed the closures in about 3 years versus the 6-year period allowed under the BRAC legislation. And through a combination of workload consolidations, interservicing actions, and outsourcing noncore workloads, the Navy reduced its projected operating rate by about $10 per hour. Based on a forecast of 13 million direct labor hours for fiscal year 1999, this is expected to produce a savings of about $130 million. Our work shows that based on maximum potential capacity and fiscal year 1999 workload forecasts, the three remaining naval aviation depots will have an average excess capacity of 37 percent, substantially lower than the other services. Because the Navy reallocated workloads and specialties among its aviation depots, and reengineered work spaces in the process, Navy officials state that given the availability of depot maintenance personnel, capacity utilization will be about 95 percent. This represents an increase of 36 percent after the workload transition is completed. The Navy has also expeditiously closed four of its eight naval shipyards. The 1991 BRAC Commission recommended closure of the Philadelphia Naval Shipyard, and repair work was terminated in 1995. The 1993 BRAC Commission recommended closure of the Charleston and Mare Island Naval Shipyards, and repair work was terminated in 1995. The 1995 BRAC Commission recommended closure of the Long Beach Naval Shipyard, and repair work was terminated in 1996. As a result, from September 30, 1991, through September 30, 1996, the Navy shipyard production had decreased in direct labor hours by 50 percent, while employees were reduced by about 63 percent. Table 1 shows other measures of the shipyard downsizing over this period. The Navy’s privatization of its Louisville depot was not the most cost-effective choice; the Navy could have saved more through consolidation of workloads and improved use of capacity in remaining industrial activities. The Louisville, Kentucky, Detachment of the Naval Surface Warfare Center, Crane Division, a depot recommended for closure by the 1995 BRAC Commission, supported the overhaul and remanufacture for naval surface ship gun and missile systems. In analyzing the cost of privatizing the Louisville workload in place versus transferring it to another depot, the Navy estimated that the contract alternative would cost more on an annual recurring basis and the one-time cost of transferring the workload to another depot would be prohibitive. However, we found the Navy’s analyses understated the annual savings of transferring the workloads to other underused facilities and overstated the one-time transfer costs. Our analysis shows a one-time cost of $243 million and an annual savings of $59 million by transferring the workload. The annual savings would offset the one-time cost in about 4 years. The Navy’s annual savings estimate recognized that transferring the workloads to underused facilities would reduce the overhead cost for those production units being considered for transfer. However, the per-unit savings were applied only to the workloads transferred and not to existing workloads at receiving locations. As a result of BRAC decisions during the 1988, 1991, and 1993 BRAC rounds, the Army terminated work at three of its eight maintenance depots—Lexington-Blue Grass, Kentucky; Sacramento, California; and Tooele, Utah. The Secretary’s recommendations to the 1995 BRAC Commission proposed realignment and termination of work at two additional depots—Letterkenny in Pennsylvania and Red River in Texas, but the Commission recommended that parts of each depot remain open. Plans for implementing the 1995 BRAC recommendations are still evolving. Nonetheless, based on the actions taken thus far, the Army is not effectively downsizing its depot maintenance infrastructure to reduce costly excess capacity. We reported in September 1996 that tentative plans for allocating some workloads from realigned depots to remaining depots will likely achieve some reduction in excess capacity and savings at two remaining depots. However, tentative plans to privatize workloads in place or retain workloads in facilities that were to be downsized or closed will increase excess capacity in the Army depots, from 42 to 46 percent over the next 3 years.