Army maintenance depots and arsenals were established to support Army fighting units by providing repair and manufacturing capability, in concert with the private sector, to meet peacetime and contingency operational requirements. In recent years, the Army has taken steps to operate these facilities in a more business-like manner, including generating revenues from their output to support their operations. The number of these facilities has been reduced and the size of their workloads and staffs have declined significantly. This reflects the downsizing that began in the late 1980s following the end of the Cold War and the trend toward greater reliance on the private sector to meet many of the Army’s needs. The Army relies on both the public and the private sectors to meet its maintenance, overhaul, repair, and ordnance manufacturing needs. Army depots and arsenals have a long history of service, and they are subject to various legislative provisions that affect the work they do as well as how it is allocated between the public and private sectors. Army maintenance depots were established between 1941 and 1961 to support overhauls, repairs, and upgrades to nearly all of the Army’s ground and air combat systems. Before the depots were established, some maintenance and repair work was performed at the Army’s supply depots and arsenals and some was performed by the private sector. However, before 1941 much of the equipment in use was either repaired in the field or discarded. Depot workload can be classified into two major categories: end items and reparable secondary items. End items are the Army’s ground combat systems, communications systems, and helicopters. Secondary items include various assemblies and subassemblies of major end items, including helicopter rotor blades, circuit cards, pumps, and transmissions. Several depots, particularly Tobyhanna, also do some manufacturing, but generally for small quantities of individual items needed in support of depot overhaul and repair programs. In 1976, 10 depots performed depot maintenance in the continental United States. By 1988 that number had been reduced to eight as a result of downsizing following the Vietnam War. Between 1989 and 1995, Base Realignment and Closure (BRAC) Commission decisions resulted in the closure of three more depots and the ongoing realignment of two others. At the end of fiscal year 1998, the 5 Army depots employed about 11,200 civilians, a 48-percent reduction from the 21,500 in fiscal year 1989. In fiscal year 1998, the depots received revenues of about $1.4 billion. Since the mid-1980s, depots have generally not been able to hire new government civilian employees because of personnel ceilings and, therefore, have used contractor personnel to supplement their workforce as necessary to meet workload requirements. Like the other services, operations of the Army depots are guided by legislative requirements. Section 2464 of title 10 provides for a Department of Defense (DOD)-maintained core logistics capability that is to be government-owned and -operated and that is sufficient to ensure the technical competence and resources necessary for an effective and timely response to a mobilization or other national emergency. Section 2466 prohibits the use of more than 50 percent of the funds made available in a fiscal year for depot-level maintenance and repair to contract for the performance of the work by nonfederal personnel. Section 2460 defines depot-level maintenance and repair. Section 2469 provides that DOD-performed depot-level maintenance and repair workloads valued at $3 million or more cannot be changed to contractor performance without the use of competitive procedures for competitions among public and private sector entities. A related provision in section 2470 provides that depot-level activities are eligible to compete for depot-level maintenance and repair workloads. The Army’s two remaining manufacturing arsenals were established in the 1800s to provide a primary manufacturing source for the military’s guns and other war-fighting equipment. Subsequently, in 1920, the Congress enacted the Arsenal Act, codified in its current form at 10 U.S.C. 4532. It requires that the Army have its supplies made in U.S. factories or arsenals provided they can produce the supplies on an economic basis. It also provides that the Secretary of the Army may abolish an arsenal considered unnecessary. It appears that the act was intended to keep government-owned arsenals from becoming idle and to preserve their existing capabilities to the extent the capabilities are considered necessary for the national defense. The Army implements the act by determining, prior to issuing a solicitation to industry, whether it is more economical to make a particular item using the manufacturing capacity of a U.S. factory or arsenal or to buy the item from a private sector source. Only if the Army decides to acquire the item from the private sector is a solicitation issued. As the domestic arms industry has developed, the Army has acquired from industry a greater portion of the supplies that in earlier years had been furnished by arsenals. Following World War II, the Army operated six major manufacturing arsenals. Since 1977, only two remain in operation.Table 1.1 provides information on the six post-World War II arsenals, including operating periods and major product lines. Today the two arsenals manufacture or remanufacture a variety of weapons and weapon component parts, including towed howitzers, gun mounts, and gun tubes. At the end of fiscal year 1998, the Rock Island and Watervliet facilities employed a total of about 2,430 civilians, a 46-percent reduction from a total of about 4,500 employees at the end of fiscal year 1989. In fiscal year 1998, the two arsenals received about $199 million in revenues. Funding for day-to-day operations of Army depots and arsenals is provided primarily through the Army Working Capital Fund. The services reimburse the working capital fund with revenues earned by the depots and arsenals for completed work based on hourly labor rates that are intended to recover operating costs, including material, labor, and overhead expenses. While Army depots and arsenals are primarily focused on providing the fighting forces with required equipment to support readiness objectives, the industrial fund was intended to optimize productivity and operational efficiencies. Army industrial activities are supposed to operate in a business-like manner, but they are expected to break even and to generate neither profits nor losses. Nonetheless, these military facilities may sometimes find it difficult to follow business like practices. For example, Army requirements may make it necessary to maintain capability to perform certain industrial operations even though it would not seem economical—from a business perspective—to do so. Systems with older technology must be maintained even though acquiring repair parts becomes more difficult and expensive. If military customers need products that are inefficient to produce, the depots and arsenals must produce them anyway. To compensate the depots and arsenals for the cost of maintaining underutilized capacity that might be needed in the future, these activities receive supplemental funding in the operations and maintenance appropriation under an account entitled “underutilized plant capacity.” As shown in table 1.2, funding of this account has been reduced in recent years. Army officials stated that the reduction was made to fund other higher priority programs; however, they stated that in future years, this trend would likely be reversed. The Army Materiel Command (AMC) and its subordinate commands hold semiannual workload conferences to review, analyze, document, and assign work to the five depots. In contrast, the arsenals actively market their capabilities to DOD program management offices to identify potential customers. Despite differences in how they obtain their work, depots and arsenals are alike in how they set rates for their work. The process they use begins about 18 months prior to the start of the fiscal year in which maintenance and manufacturing will be performed. Depot and arsenal managers propose hourly rates to recover operating costs based on the anticipated level of future workload requirements, but rates are ultimately determined at the Department of Army and DOD levels. Rate setting is an iterative process that begins with the industrial activities and the Industrial Operations Command (IOC), a subordinate command under AMC. After they reach agreement, the proposed rates, which are included in consolidated depot and arsenal budgets, are forwarded for review up the chain of command. These commands frequently revise the rates initially requested by IOC based on past performance and other evolving workload and staffing information. When rates are reduced, the industrial activities must find ways to cut costs or increase workload to end the year with the desired financial outcome, which is usually to have a cumulative zero net operating result. However, even if the proposed rates are approved without modification, the performing industrial activity can end the year in better or worse financial shape than originally anticipated, depending on whether or not actual costs and workload are as anticipated. This can necessitate a rate increase in a subsequent year to offset the losses of a prior year, or a rate reduction to offset profits. Depots and arsenals employ direct labor workers who charge time to finite job taskings, earning revenue for the business. In addition, they employ a number of indirect workers, such as shop supervisors and parts expediters, whose time cannot be related to a finite job order but nevertheless support the depot maintenance and arsenal manufacturing process. Likewise, the industrial facilities also employ a variety of general and administrative overhead personnel such as production managers, technical specialists, financial managers, personnel officers, logisticians, contracting officers, computer programmers, and computer operators.While the time spent by these two categories of overhead personnel is difficult to relate to a finite job order, their costs are nevertheless reflected in the overall rates charged by the industrial activities. AMC is responsible for management control and oversight of the Army’s industrial facilities. The Army’s IOC—a subordinate command under AMC—had management responsibility for both arsenals and depots.