The Navy ordnance business area, which consists of the Naval Ordnance Center (NOC) headquarters and subordinate activities, such as Naval weapons stations, operates under the revolving fund concept as part of the Navy Working Capital Fund. It provides various services, including ammunition storage and distribution, ordnance engineering, and missile maintenance, to customers who consist primarily of Defense organizations, but also include foreign governments. Revolving fund activities rely on sales revenue rather than direct congressional appropriations to finance their operations and are expected to operate on a break-even basis over time—that is, to neither make a profit nor incur a loss, but to recover all costs. During fiscal year 1996, the Navy ordnance business area reported revenue of about $563 million and costs of about $600 million, for a net operating loss of about $37 million. In accordance with current Department of Defense (DOD) policy, this loss and the $175 million the business area lost during fiscal years 1994 and 1995 will be recouped by adding surcharges to subsequent years’ prices. As discussed in our March 1997 report, higher-than-expected overhead costs were the primary cause of the losses that the business area incurred during fiscal years 1994 through 1996. We also testified on this problem in May 1997, and recommended that the Secretary of the Navy develop a plan to streamline the Naval ordnance business area’s operations and reduce its overhead costs. The Navy has initiated a restructuring of the business area that, according to the Secretary of the Navy, is “akin to placing it in receivership.” The objective of our audit of the Navy ordnance business area was to assess the Navy’s efforts to reduce costs and streamline its operations. Our current audit of the restructuring of the Navy ordnance business area is a continuation of our work on the business area’s price increases and financial losses (GAO/AIMD/NSIAD-97-74, March 14, 1997). In that report we recommended that the Secretary of Defense direct the Secretary of the Navy to develop a plan to streamline the Navy ordnance business operations and reduce its infrastructure costs, including overhead. This plan should (1) concentrate on eliminating unnecessary infrastructure, including overhead, (2) identify specific actions that need to be accomplished, (3) include realistic assumptions about the savings that can be achieved, (4) establish milestones, and (5) clearly delineate responsibilities for performing the tasks in the plan. To evaluate the actions being taken or considered by the NOC to streamline its operations and reduce costs, we (1) used the work that we performed in analyzing the business area’s price increases and financial losses and (2) analyzed budget reports to identify planned actions and discussed the advantages and disadvantages of the planned actions with Navy, OSD, U.S. Transportation Command, and Joint Staff officials. In analyzing the actions, we determined (1) if specific steps and milestones were developed by the NOC to accomplish the actions, (2) whether the initiatives appeared reasonable and could result in improved operations, (3) what dollar savings were estimated to result from the implementation of the actions, (4) whether the actions went far enough in reducing costs and improving operations, and (5) what other actions not being considered by the NOC could result in further cost reductions or streamlined operations. We did not independently verify the financial information provided by the Navy ordnance business area. We performed our work at the Office of the DOD Comptroller and Joint Staff, Washington, D.C.; Offices of the Assistant Secretary of Navy (Financial Management and Comptroller), Naval Sea Systems Command, Naval Air Systems Command, and Headquarters, Defense Finance and Accounting Service, all located in Arlington, Virginia; Headquarters, U.S. Atlantic Fleet, Norfolk, Virginia; Naval Ordnance Center Headquarters, Indian Head, Maryland; Naval Ordnance Center Atlantic Division, Yorktown, Virginia; Naval Ordnance Center Pacific Division, Seal Beach, California; Naval Weapons Station, Yorktown, Virginia; Naval Weapons Station, Charleston, South Carolina; Naval Weapons Station, Earle, New Jersey; Naval Weapons Station, Seal Beach, California; Naval Weapons Station, Concord, California; Naval Weapons Station Detachment, Fallbrook, California; Naval Warfare Assessment Division, Corona, California; and U.S. Transportation Command, Scott Air Force Base, Illinois. Our work was performed from June 1996 through September 1997 in accordance with generally accepted government auditing standards. We requested written comments on a draft of this report. The Under Secretary of Defense (Comptroller) provided us with written comments, which we incorporated where appropriate. These comments are reprinted in appendix I. The Navy has incorporated a goal to reduce annual costs by $151 million into its ordnance business area’s budget estimate and has identified the major actions that will be taken to achieve this goal. Our analysis of available data indicates that the planned actions should result in substantial cost reductions and more streamlined operations. However, we cannot fully evaluate the reasonableness of the cost reduction goal at this time because the Navy does not expect to finalize the cost reduction plan until October 1997. During the fiscal year 1998 budget review process, OSD officials worked with the Navy to formulate a restructuring of the Navy ordnance business area. According to the budget estimate the Navy submitted to the Congress in February 1997, this restructuring will allow the ordnance business area to achieve substantial cost and personnel reductions without adversely affecting ordnance activities’ ability to satisfy their customers’ peacetime and contingency requirements. Specifically, the budget estimate indicated that between fiscal years 1996 and 1999, the business area’s civilian and military fiscal year end strengths will decline by 18 percent and 23 percent, respectively, and its annual costs will decline by $151 million, or 25 percent. The budget also indicated that the business area will increase its fiscal year 1998 prices in order to recover $224 million of prior year losses and achieve a zero accumulated operating result by the end of fiscal year 1998. The Navy’s fiscal year 1998 budget submission also indicated that the planned restructuring of the business area (1) is based on an assessment of whether current missions should be retained in the business area, outsourced to the private sector, or transferred to other organizations and (2) will make fundamental changes in how the business area is organized and conducts its business. Our assessment of the individual actions—most of which are expected to be initiated by October 1997 and completed during fiscal year 1998—shows that the Navy is planning to reduce costs by eliminating or consolidating redundant operations and reducing the number of positions in the business area. These actions, which are listed below, should help to streamline the Navy ordnance operations and reduce costs. Properly sizing the business area’s workforce to accomplish the projected workload by eliminating about 800 positions, or about 18 percent of the total, before the end of October 1997. Enhancing the business area’s ability to respond to unanticipated workload changes by increasing the percentage of temporary workers in the work force from 8 percent to 20 percent. Enhancing the business area’s ability to identify redundant ordnance engineering capability and to streamline its information resource functions by consolidating management responsibility for these areas by October 1, 1997. Reducing overall operating costs by significantly cutting back on operations at the Charleston and Concord Weapons Stations, beginning in October 1997. Eliminating redundant capability and reducing costs by consolidating (1) some weapons station functions, such as safety and workload planning, at fewer locations, (2) inventory management functions at the Inventory Management and Systems Division, and (3) maintenance work on the Standard Missile at the Seal Beach Naval Weapons Station. Reducing overhead contract costs, such as utilities and real property maintenance during fiscal year 1998. Enhancing business area managers’ ability to focus on their core ordnance missions of explosive safety, ordnance distribution, and inventory management by transferring east coast base support missions to the Atlantic Fleet on October 1, 1997. The Navy’s planned restructuring of its ordnance business area will reduce overhead costs and is an important first step toward the elimination of the redundant capability both within the business area and between the business area and other organizations. However, as discussed in the following sections, our analysis indicates that there are opportunities for additional cost reductions by (1) developing and implementing a detailed plan to eliminate redundant ordnance engineering capability, (2) converting military guard positions to civilian status, and (3) implementing two actions that Navy ordnance officials are currently considering. Navy ordnance officials plan to consolidate management responsibility for the business area’s nine separate ordnance engineering activities under a single manager on October 1, 1997. This will allow this manager to have visibility over all of the business area’s engineering resources and should facilitate more effective management of these engineering resources. However, it will not result in any savings unless action is also taken to eliminate the redundant ordnance engineering capability that previous studies have identified both within the ordnance business area and between the business area and other Navy organizations. For example, a 1993 Navy study estimated that 435 work years, or $22 million, could be saved annually by reducing Navy-wide in-service ordnance engineering functions from 20 separate activities to 8 consolidated activities. However, Navy ordnance officials stated that these consolidations were never implemented. They also stated that although they did not know why the consolidations were not implemented, they believe it was because (1) the Navy’s ordnance engineering personnel are managed by the NOC and three different major research and development organizations and (2) the Navy did not require these four organizations to consolidate their ordnance in-service engineering functions.