Defense Transportation: DOD Has Taken Actions to Incorporate	 
Lessons Learned in Transforming Its Freight Distribution System  
(08-MAY-07, GAO-07-675R).					 
                                                                 
The Department of Defense (DOD) transports second destination	 
freight from over 600 locations to thousands of destinations	 
throughout the continental United States each year at a cost of  
approximately $900 million. In 2001, DOD conducted a prototype	 
program to better understand whether commercial best		 
practices--specifically the use of a third-party logistics	 
provider--could be applied to its freight transportation system  
and reduce costs. The prototype, which included a 1-year base	 
agreement with two 1-year option periods, was conducted at	 
selected Defense Logistics Agency (DLA) and military service	 
shipping locations in the southeastern United States. At the	 
conclusion of the first year, DLA exercised an option to extend  
the prototype at its shipping locations, whereas the military	 
service shipping locations returned to DOD's previous freight	 
shipping system due to dissatisfaction with the prototype's	 
performance. On the basis of the prototype, DOD concluded that a 
third-party logistics provider could successfully integrate with 
DOD transportation processes if the program was designed and	 
implemented correctly to capitalize on the benefits of using a	 
third-party logistics provider while also addressing the	 
performance problems that were experienced with the prototype. In
2004, the Under Secretary of Defense for Acquisition, Technology,
and Logistics initiated the Defense Transportation Coordination  
Initiative (DTCI) to improve the reliability, predictability, and
efficiency of moving materiel within the continental United	 
States through a long-term partnership with a third-party	 
logistics provider. DOD issued a request for proposals in June	 
2006 and plans to award a contract during fiscal year 2007. The  
DTCI contracting vehicle will be an indefinite-delivery,	 
requirements-type contract3 that will pay the contractor on a	 
cost-reimbursable basis for moving freight, a monthly fixed price
for management services, and a semi-annual award fee based on	 
contractor performance. The contract covers commodities that DOD 
refers to as "freight all kinds"4 and excludes a number of	 
shipment types, such as household goods; arms, ammunition, and	 
explosives; and sensitive and classified shipments. Scheduled for
a phased implementation over 3 years, DTCI will encompass 67 DLA 
and military service shipping locations by the end of 2009, with 
the potential to add almost 200 more military service shipping	 
locations. According to DOD, freight costs at the DTCI locations 
are estimated at about $250 million annually. DOD has projected a
savings in freight costs of approximately $60 million in the	 
third year of implementation, after DTCI has become operational  
at all sites. Net savings will be less due to management costs	 
associated with implementing DTCI. DOD views DTCI as an 	 
organizational transformation aimed at leveraging a third-party  
logistics provider's existing commercial business, along with its
best commercial practices, to achieve efficiencies in		 
distribution and associated cost savings. The implementation of  
DTCI represents a shift from the current decentralized		 
transportation management practice of having individual DOD	 
transportation officers manage freight, to the use of a 	 
centralized system in which a single third-party logistics	 
provider coordinates freight transportation for the sites. DTCI  
is also a key DOD initiative to address distribution problems in 
supply chain management, which we have designated as a high-risk 
area in the federal government. In response to Senate Report No. 
109-254 accompanying the National Defense Authorization Act for  
Fiscal Year 2007 and as agreed with Congress, this letter	 
provides information on DOD's plans for implementing DTCI. Our	 
specific objectives were to (1) identify the actions DOD took to 
incorporate lessons learned from the earlier prototype program in
its planning for DTCI and (2) evaluate the steps DOD has taken to
achieve the organizational transformation envisioned under DTCI. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-675R					        
    ACCNO:   A69286						        
  TITLE:     Defense Transportation: DOD Has Taken Actions to	      
Incorporate Lessons Learned in Transforming Its Freight 	 
Distribution System						 
     DATE:   05/08/2007 
  SUBJECT:   Best practices					 
	     Department of Defense contractors			 
	     Federal agency reorganization			 
	     Freight transportation				 
	     Lessons learned					 
	     Logistics						 
	     Program evaluation 				 
	     Program management 				 
	     Transportation planning				 
	     Program implementation				 
	     GAO High Risk Series				 

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GAO-07-675R

   

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United States Government Accountability Office
Washington, DC 20548

May 8, 2007

Congressional Committees

Subject: Defense Transportation: DOD Has Taken Actions to Incorporate
Lessons Learned in Transforming Its Freight Distribution System

The Department of Defense (DOD) transports second destination freight^1
from over 600 locations to thousands of destinations throughout the
continental United States each year at a cost of approximately $900
million. In 2001, DOD conducted a prototype program to better understand
whether commercial best practices--specifically the use of a third-party
logistics provider^2--could be applied to its freight transportation
system and reduce costs. The prototype, which included a 1-year base
agreement with two
1-year option periods, was conducted at selected Defense Logistics Agency
(DLA) and military service shipping locations in the southeastern United
States. At the conclusion of the first year, DLA exercised an option to
extend the prototype at its shipping locations, whereas the military
service shipping locations returned to DOD's previous freight shipping
system due to dissatisfaction with the prototype's performance.

On the basis of the prototype, DOD concluded that a third-party logistics
provider could successfully integrate with DOD transportation processes if
the program was designed and implemented correctly to capitalize on the
benefits of using a third-party logistics provider while also addressing
the performance problems that were experienced with the prototype. In
2004, the Under Secretary of Defense for Acquisition, Technology, and
Logistics initiated the Defense Transportation Coordination Initiative
(DTCI) to improve the reliability, predictability, and efficiency of
moving materiel within the continental United States through a long-term
partnership with a third-party logistics provider. DOD issued a request
for proposals in June 2006 and plans to award a contract during fiscal
year 2007. The DTCI contracting vehicle will be an indefinite-delivery,
requirements-type
contract^3 that will pay the contractor on a cost-reimbursable basis for
moving freight, a monthly fixed price for management services, and a
semi-annual award fee based on contractor performance. The contract covers
commodities that DOD refers to as "freight all kinds"^4 and excludes a
number of shipment types, such as household goods; arms, ammunition, and
explosives; and sensitive and classified shipments. Scheduled for a phased
implementation over 3 years, DTCI will encompass 67 DLA and military
service shipping locations by the end of 2009, with the potential to add
almost 200 more military service shipping locations. According to DOD,
freight costs at the DTCI locations are estimated at about $250 million
annually.^5 DOD has projected a savings in freight costs of approximately
$60 million in the third year of implementation, after DTCI has become
operational at all sites. Net savings will be less due to management costs
associated with implementing DTCI.

^1Second destination transportation is the movement of freight among and
between depots, logistics centers, and field activities. It excludes
freight that is shipped from commercial suppliers to DOD locations.

^2A third-party logistics firm, also known as a 3PL, provides logistics
services to companies for part or all of a company's supply chain
management functions, such as transportation or warehousing.

DOD views DTCI as an organizational transformation aimed at leveraging a
third-party logistics provider's existing commercial business, along with
its best commercial practices, to achieve efficiencies in distribution and
associated cost savings. The implementation of DTCI represents a shift
from the current decentralized transportation management practice of
having individual DOD transportation officers manage freight, to the use
of a centralized system in which a single third-party logistics provider
coordinates freight transportation for the sites. DTCI is also a key DOD
initiative to address distribution problems in supply chain management,
which we have designated as a high-risk area in the federal government.^6

In response to Senate Report No. 109-254 accompanying the National Defense
Authorization Act for Fiscal Year 2007 and as agreed with your office,
this letter provides information on DOD's plans for implementing DTCI. Our
specific objectives were to (1) identify the actions DOD took to
incorporate lessons learned from the earlier prototype program in its
planning for DTCI and (2) evaluate the steps DOD has taken to achieve the
organizational transformation envisioned under DTCI.

The Senate Report also asked us to assess the business case analysis DOD
developed, including the assumptions regarding cost savings that could be
generated by DTCI. The business case analysis was addressed in a
Comptroller General decision^7 on a protest that was filed regarding the
terms of the DTCI request for proposals. In that decision, we denied the
protest and concluded that DOD reasonably determined that consolidating
the management of freight shipments under a third-party logistics provider
would result in substantial cost savings and efficiencies and was
necessary to meet the agency's needs. The Comptroller General's decision
further stated that DOD had concluded the third-party logistics provider
concept could work if designed and implemented correctly. Therefore, we
did not address the business case analysis in this letter.

^3An indefinite-delivery, requirements-type contract provides for filling
all actual purchase requirements of designated Government activities for
supplies or services during a specified contract period, with deliveries
or performance to be scheduled by placing orders with the contractor.
Federal Acquisition Regulation (FAR) Subpart 16.503 (2006).

^4"Freight all kinds" consists of those commodities that carriers offer to
transport at one inclusive rate or charge regardless of their differing
transportation characteristics or their classification rating, except for
excluded freight classifications.

^5This figure, based on historic data, is the estimated total direct
freight costs during the third year of DTCI implementation.

^6In 2005, DOD developed a supply chain management improvement plan to
address problems in this high-risk area and place it on a path toward
removing supply chain management from our high-risk list. The plan lists
10 related initiatives, which include DTCI. For more information on this
high-risk area, see GAO, High-Risk Series: An Update, GAO-07-310
(Washington, D.C.: January 2007).

Scope and Methodology

To identify the lessons learned from the prototype program, we reviewed
several assessments commissioned by DOD that were completed in 2002 and
2005. ^8 We also obtained the views of the military services regarding
both the lessons learned from the prototype and DOD's plans for DTCI. For
reporting purposes, we consolidated lessons learned that covered similar
issues and grouped them into the following categories--role of the
third-party logistics provider, program development and implementation,
information technology systems and integration, performance and
performance metrics, business processes, contracting, and miscellaneous.
We met with DTCI program officials to discuss the actions taken to
incorporate lessons learned from the prototype into DOD's planning for
DTCI. To verify these actions, we obtained key program documents such as
the acquisition plan, communication plan, and contract solicitation, which
included the performance work statement. We considered a lesson learned to
be incorporated when we determined that DOD's planned actions were evident
in these key program documents. Because the provisions of the contract
solicitation, including those that resulted from lessons learned, will be
subject to negotiation and may change following contract award, it was too
early to determine whether DOD fully implemented all the actions planned
in response to lessons learned from the prototype. In reviewing the steps
DOD has taken to achieve the organizational transformation envisioned
under DTCI, we made use of our prior work to identify key practices
organizations use to transform their cultures to become more results
oriented, customer focused, and collaborative in nature. We determined the
extent to which the DTCI program management office had incorporated these
practices into its plans and operations. As part of this effort, we
reviewed DOD's plans for assessing and managing performance after the
contract is awarded. We determined that the data we used were sufficiently
reliable for our purposes. We conducted our work between July and August
2006 and between December 2006 and March 2007^9 in accordance with
generally accepted government auditing standards.

^72B Brokers, et al., B-298651, Nov. 27, 2006, 2006 CPD P178.

^8PricewaterhouseCoopers, Third Party Logistics (3PL) Prototype TEST -
Management Reform Memorandum #15 - Final Report (Aug. 15, 2002); Center
for Transportation Research, National Transportation Research Center, The
University of Tennessee, Third Party Logistics (3PL) Prototype Test
Conducted by MTMC/DLA Business Case Analysis (Sept. 15, 2002); IBM
Business Consulting Services, Addendum Report to Third Party Logistics
(3PL) Prototype Test, Management Reform Memorandum #15, Final Report (July
29, 2005).

Summary

DOD took numerous actions to incorporate lessons learned from the
prototype program in its planning for DTCI. Specifically, we identified 36
lessons learned--including successes and problems--from the prototype, and
determined that DOD had taken actions that were responsive to each of
these. For example, the prototype succeeded in showing the benefits of
using both electronic data interchange^10 between the government's and
contractor's systems and a Web-based tracking system to provide visibility
over shipments, and DOD plans to require the DTCI contractor to use both
of these technologies. However, the prototype also experienced problems in
areas such as program development and implementation, information
technology systems and integration, performance, business processes, and
contracting. DOD, in its planning for DTCI, has made changes in response
to these lessons learned. For example, during the prototype, the military
services had several concerns about performance, such as the contractor's
inconsistency in picking up freight on time, contributing to their
dissatisfaction with that program. To address this lesson learned, the
contract solicitation for DTCI includes on-time pickup as one of several
key indicators to measure contractor performance. The prototype also
showed that a 1-year base contract period was inadequate to secure a level
of commitment or investment from the partners in a third-party logistics
relationship and to develop effective communication processes. In contrast
to the prototype contract, DOD plans to enter into a 3-year base agreement
with a third-party logistics provider for DTCI with the option for two
1-year extensions and the possibility of two additional 1-year award
options--a potential contract period totaling up to 7 years. Furthermore,
the prototype experienced problems because the interfaces between the
contractor's and the government's information technology systems were not
fully operational when the prototype began. For DTCI, DOD has established
a team addressing interface integration, and it plans to conduct robust
testing at each site before DTCI is implemented. The DTCI program
management office has also developed a policy of "safe start," intended to
reduce risk to the government and build confidence in the partnership
between the third-party logistics provider and the government. For
example, according to program officials, in the initial phase of DTCI
implementation, only DLA shipping sites are involved. The military service
sites will not be participating until the contractor has demonstrated full
capability with their system interfaces and training of shipping
installation personnel is completed. While DOD incorporated lessons
learned from the prototype in its planning for DTCI, DOD components
pursuing similar types of acquisitions may be unable to benefit from the
successes and problems experienced during implementation of DTCI because
DOD lacks a plan for disseminating DTCI lessons learned. Effective sharing
of lessons learned is a key tool for institutionalizing change and
facilitating efficient operations. The DTCI program management office has
initiated efforts to gather lessons learned. However, without
dissemination of these lessons learned to the broader DOD acquisition
community, other DOD components pursuing similar types of acquisitions may
lack useful information that could assist their efforts. Therefore, we are
recommending that DOD develop and implement a plan for sharing DTCI
lessons learned across the department. In commenting on a draft of this
correspondence, DOD concurred with our recommendation.

^9We suspended audit work when the protest was filed on the contract
solicitation and resumed our work after the issuance of the protest
decision.

^10Electronic data interchange is the business-to-business electronic
exchange of documents using standard formats that are widely recognized
both nationally and internationally.

To make the fundamental changes in the freight transportation system
envisioned under DTCI, DOD has taken positive steps to initiate best
practices employed by other private and public sector organizations to
transform their cultures so they can become more results oriented,
customer focused, and collaborative in nature. Still, the long-term
success of DTCI remains uncertain given the challenges inherent in
undertaking organizational transformation and because the program is still
in its early stages, with a contract yet to be awarded and the program
scheduled for rollout over a 3-year period. Our prior work has identified
key practices that have been used by large organizations to achieve
transformation. Some of these practices include dedicating an
implementation team to manage the transformation process, establishing a
communication strategy to create shared expectations and report related
progress, and focusing on a key set of principles and priorities. So far,
DTCI has employed these and other best practices in its efforts to move
from the current decentralized transportation management activities to a
centralized system under a single third-party logistics provider. For
example, the DTCI program management office has established a transition
planning team to oversee the transformation of DTCI from acquisition
activity to implemented program, including developing initial plans and
building relationships with all the government stakeholders at sites where
DTCI will be initially implemented. One of the key priorities of the DTCI
program management office has been to establish plans and initiate efforts
for assessing and managing performance after contract award. Specifically,
DOD has built performance indicators into the DTCI contract solicitation,
scheduled periodic program management reviews, initiated a process
improvement team, developed a quality assurance surveillance plan, and
proposed to use award fees as an incentive to promote desired
outcomes--elements aimed at ensuring the delivery of services to meet or
exceed the terms of the contract. For example, DOD plans to conduct
periodic performance management reviews at various points during the
rollout of the program. The first review is scheduled to occur after DTCI
is implemented at the first three sites, and a second review is scheduled
after implementation at the next three sites. Subsequently, the contractor
is expected to conduct program management reviews on a monthly basis.
According to program officials, the reviews will include, among other
things, a comparison of actual costs to projected costs and a review of
various performance indicators. While these planned post-contract award
efforts are promising, the long-term success of DTCI will depend on the
extent to which DOD follows through on institutionalizing the practices it
has initiated to transform its freight transportation system, as well as
the contractor's performance during implementation of the program.

Background

DOD's freight transportation is currently managed by transportation
officers, who are assigned to various components of DOD, such as DLA and
the military services. To arrange for freight movements within the United
States, transportation officers generally use one of two vehicles: a
Tailored Transportation Contract, which is generally awarded to multiple
carriers for large and small-volume shipments based on specific regions,
shipment lanes, and commodities;^11 or tenders, which are generally issued
to carriers for shipments outside the requirements of a Tailored
Transportation Contract, such as ammunition, explosives, or unit moves.^12

When notified of a shipment requirement, the transportation officer may
contact several potential carriers, eventually selecting one and arranging
for the shipment. DOD shippers execute these actions without centralized
planning, coordination, or control. They independently select the mode of
transportation, level of service, and transportation provider. This
decentralized process focuses on satisfying the requirements of local
shippers, rather than on achieving DOD-wide efficiencies or cost savings.

We have previously reported on deficiencies in DOD's management of its
transportation. These deficiencies included a lack of coordination among
the services, which contributed to ineffective oversight programs. In
1993, we reported on strategies that commercial shippers use for managing
their transportation functions and reducing costs. ^13 We identified
opportunities where DOD can make greater use of commercial practices and
encouraged DOD to adopt some of these practices where feasible. In 1999,
we noted that DOD had made progress in reforming its transportation system
through initiatives to reengineer its financial management processes, and
we recommended that DOD assess the costs and benefits of reengineering the
transportation financial management processes through contracting to a
third-party logistics provider.^14

Noting the growing use of third-party logistics providers in the
commercial sector, the Deputy Secretary of Defense approved a study to
assess the feasibility of using third-party logistics providers to meet
some of DOD's continental United States surface freight transportation
requirements. The feasibility study,^15 initiated in 1998, concluded that
using a third-party logistics provider had the potential to generate
transportation cost savings, provide better access to performance data,
improve customer service, and improve shipment data. The study recommended
a prototype study in a small region using a third-party logistics
provider.

^11The Tailored Transportation Contract is an indefinite-delivery,
indefinite-quantity type contract with traffic lanes awarded to multiple
contract carriers where the shipment capacity may not necessarily be
guaranteed and the contract carriers can decline transportation requests.

^12According to DOD, a tender is an unsolicited rate provided by a carrier
that an agency can use to offer freight shipment services to carriers; a
contract based upon a tender is created only when the agency and carrier
agree to the shipment of services and a bill of lading has been issued.

^13GAO, Defense Transportation: Commercial Practices Offer Improvement
Opportunities, GAO/NSIAD-94-26 (Washington, D.C.: Nov. 26, 1993).

^14GAO, Defense Transportation: Process Reengineering Could Be Enhanced by
Performance Measures, GAO/NSIAD-00-7 (Washington, D.C.: Dec. 20, 1999).

Based on that recommendation, the Assistant Deputy Under Secretary of
Defense for Transportation Policy requested the U.S. Transportation
Command and DLA serve as codirectors for the prototype to ensure effective
implementation and thorough analysis of the full range of options a
third-party logistics provider may offer in satisfying DOD freight
movement requirements. To support this prototype, the Military Traffic
Management Command, a subcomponent command of the U.S. Transportation
Command, contracted for a third-party logistics provider to manage freight
transportation and provide related services in support of installation
transportation officers for the movement of freight shipments for selected
commodities outbound from DLA and military service locations in the
southeastern region of the United States--specifically in the states of
Alabama, Georgia, and Florida--to all points in the continental United
States. The prototype began in 2001 and ended in 2004.

DOD concluded from its experiences with the prototype that a third-party
logistics provider (or coordinator) could successfully be integrated with
DOD's shipping processes if the program was designed and implemented
correctly and that the integration of coordination services with freight
transportation could achieve cost savings. In 2004, the DTCI logistics
transformation concept was initiated by the Under Secretary of Defense for
Acquisition, Technology, and Logistics. U.S. Transportation Command,
designated as DOD's single manager of transportation and the department's
distribution process owner, is the lead agency for DTCI and has
established a program management office to manage this effort. In June
2006, DOD issued a request for proposals for a third-party logistics
provider to handle all aspects of freight shipment for certain
commodities.

Under plans for DTCI, the coordinator would eliminate the need for DOD
transportation officers to contact freight carriers for those commodities
covered in the program. The coordinator would be expected, among other
things, to

           o coordinate, manage, and optimize freight shipments from
           notification to delivery;
           o provide in-transit visibility to government systems and
           real-time access to shipment information;
           o facilitate the resolution of loss and damage claims with
           carriers;
           o manage carrier quality and performance; and
           o collaboratively develop, recommend, and implement process
           improvements.

The DTCI contractor is expected to assume responsibility for
transportation services in a phased approach, increasing the number of DOD
sites as implementation progresses. Phase I will include DLA Defense
Distribution Centers, Phase II will include various military service
locations that are located within close proximity of the Defense
Distribution Centers, and Phase III will include additional military
service locations.

^15PricewaterhouseCoopers Draft Report, Third Party Logistics (3PL)
Feasibility Study (Dec. 23, 1999).

DOD Took Numerous Actions to Incorporate Lessons Learned from the
Prototype Program into Plans for DTCI

DOD took numerous actions to incorporate lessons learned from the
prototype program into its planning for DTCI. Specifically, we identified
36 lessons learned--including successes and problems--from the prototype,
and determined that DOD had taken actions that were responsive to each of
these. Some of the lessons learned highlighted benefits derived from using
a third-party logistics provider. For example, one success of the
prototype was its demonstration that a contractor could serve as a single
point of contact for transportation officers, enabling them to initiate a
request for shipment simply by contacting the third-party provider instead
of making multiple calls to potential carriers. Hence, a third-party
logistics provider could reduce the time needed to find a freight carrier,
allowing transportation officers to concentrate on other duties. The
prototype also demonstrated that the systems DOD uses to manage its
shipping could successfully interface with commercial shipping systems
through the use of an electronic data interchange. This paperless process
reduces processing time and minimizes data errors. Prior to the prototype,
the transportation officers in the prototype region relied on telephone,
fax, and e-mail to transmit information. In addition, the prototype
revealed the benefit of using a Web-based tracking system to provide
visibility over shipments. In response to both of these benefits
demonstrated by the prototype, DOD plans to require the DTCI contractor to
use electronic data interchange and to provide DOD with the ability to
track and trace shipments through the use of a Web-based tool. DOD has
also included provisions in the contract solicitation that would require
the contractor to establish a secure connection with DOD systems, as well
as maintain an appropriate level of security in its information technology
systems.

However, the prototype also experienced problems in areas such as program
development and implementation, information technology systems and
integration, performance and performance metrics, business processes, and
contracting. In its planning for DTCI, DOD has made changes in response to
these lessons learned. Some of these lessons learned and DOD's related
actions are highlighted below. Enclosure I provides a more comprehensive
list of lessons learned and related DOD actions.

For example, during the prototype, the military services had several
concerns about performance, such as the contractor's inconsistency in
picking up freight on time, contributing to their dissatisfaction with
that program. To address this lesson learned, the DTCI contract
solicitation includes on-time pickup as one of several key indicators to
measure contractor performance. Another performance-related concern that
one military service expressed was that on numerous occasions, the
contractor in the prototype was unable to provide next-day service. This
concern is addressed in the DTCI performance work statement which provides
for urgent deliveries through the use of expedited service and surge
requirements. Furthermore, the DTCI quality assurance surveillance plan
specifies penalties for failure to achieve the key performance indicators,
which includes not meeting delivery dates.

The prototype also showed that a 1-year base contract period was
inadequate to secure a level of commitment or investment from the partners
in a third-party logistics relationship and to develop effective
communication processes. In contrast to the prototype contract, DOD plans
to enter into a 3-year base period with a third-party logistics provider
for DTCI with the option for two 1-year extensions and the possibility of
two additional 1-year award term options--a potential contract period
totaling up to 7 years.^16 Furthermore, the prototype experienced problems
because the interfaces between the contractor's and the government's
information technology systems were not fully operational when the
prototype began. For DTCI, DOD has established a team addressing interface
integration, and it plans to conduct robust testing at each site before
DTCI is implemented. The DTCI program management office has also developed
a policy of "safe start," intended to reduce risk to the government and
build confidence in the partnership between the coordinator and the
government. For example, according to program officials, in the initial
phase of DTCI implementation, only DLA shipping sites are involved. The
military service sites will not be participating until the contractor has
demonstrated full capability with their system interfaces and training of
shipping installation personnel is completed.

Another lesson learned from the prototype was the value of having a
third-party logistics provider help develop the request for proposals. To
assist in the development of the DTCI request for proposals, DOD hired a
logistics management consultant and its subcontractor--a commercial
third-party logistics provider. Both the consultant and its subcontractor
signed organizational conflict of interest agreements and agreed not to
compete under the DTCI solicitation. DOD also provided several
opportunities for industry involvement, including discussions with
industry representatives early in the development of requirements and
later on to share comments and concerns on the draft solicitation.

Finally, the contract requirements in the prototype program limited the
contractor's ability to optimize shipment consolidations and make process
improvements. The contract structure also limited the incentives for the
contractor to assess DOD's logistics systems and offer suggestions to
improve service and lower cost. In contrast, DTCI is designed to provide
more flexibility to the contractor in order to encourage efficiencies in
distribution and associated cost savings. The solicitation establishes a
cost savings goal based on the contractor's ability to consolidate and
optimize freight shipments and the contractor is expected to show
significant annual progress toward that goal. In addition, the DTCI
solicitation provides historical workload data to include spikes due to
seasonal demands for the offerors to base their proposed rates and has a
"Not-To-Exceed" structure for all DTCI shipment route rates, therefore
balancing risk to the contractor and providing greater flexibility to
satisfy requirements.

^16The DTCI award term option plan describes the specific criteria and
procedures used to assess the contractor's performance and to determine
the amount of additional performance periods, if any, the contractor may
earn.

While DOD incorporated lessons learned from the prototype in its planning
for DTCI, other DOD components, including the military services and
agencies, may be unable to benefit from the successes and problems
experienced during implementation of DTCI because DOD lacks a plan for
disseminating DTCI lessons learned throughout DOD. As GAO has previously
noted, effective sharing of lessons learned is a key tool for
institutionalizing change and facilitating efficient operations. During
our review, we identified a number of steps DOD has taken to transform the
freight transportation system under DTCI. These steps, discussed later in
this letter, could result in lessons learned about the successes and
problems experienced during this organizational transformation. Further,
the DTCI program management office has initiated efforts to gather lessons
learned during implementation For example, the DTCI program management
office has drafted a charter to establish a process improvement team to
serve as a forum to collect and implement lessons learned by gathering,
reviewing, and approving proposed process improvements, authorizing
rollout of process improvement plans, and acting as an advocate within DOD
for changes to improve DTCI. However, without dissemination of these
lessons learned to the broader DOD acquisition community, other DOD
components pursuing similar types of acquisitions may lack useful
information that could assist their efforts. For example, DOD components
seeking to apply commercial practices to their logistics or other service
functions may not be aware of, or have access to, DTCI lessons learned.
The Under Secretary of Defense for Acquisition, Technology, and Logistics,
as the principle advisor to the Secretary of Defense for all matters
relating to DOD acquisition, maintains a knowledge-sharing Web site
operated in conjunction with the Defense Acquisition University. This Web
site could be one vehicle for disseminating the DTCI lessons learned.

DOD Has Initiated Practices Needed for Organizational Transformation

To make the fundamental changes in the freight transportation system
envisioned under DTCI, DOD has taken positive steps to initiate best
practices that have been used by private and public sector organizations
to transform their cultures so they can become more results oriented,
customer focused, and collaborative in nature. Still, the long-term
success of DTCI remains uncertain given the challenges inherent in
organizational transformational efforts and because the program is still
in its early stages, with a contract yet to be awarded and the program
scheduled for rollout over a 3-year period.

Our prior work has identified key practices that large private and public
sector organizations have used to achieve transformation.^17 Some of these
practices include dedicating an implementation team to manage the
transformation process, establishing a communications strategy to create
shared expectations and report related progress, and focusing on a key set
of principles and priorities. So far, DTCI has employed these and other
best practices in its efforts to move from its current decentralized
transportation management activities to a centralized system under a
single third-party logistics provider.

^17GAO, Results-Oriented Cultures: Implementation Steps to Assist Mergers
and Organizational Transformations, GAO-03-669 (Washington, D.C.: July 2,
2003).

For example, the DTCI program management office has established a
transition planning team to oversee the transformation of DTCI from
acquisition activity to implemented program, including developing initial
plans and building relationships with all the government stakeholders at
sites where DTCI will be initially implemented. As GAO has previously
reported, a strong and stable implementation team that is responsible for
day-to-day management of the transformation is important to ensure that
the program receives the focused, full-time attention needed to be
sustained and successful. DTCI's transition planning team, which includes
guidance from a change management expert, has already conducted several
site visits to bring stakeholders on board with the changes DTCI will
bring about compared to DOD's current freight distribution practices. In
doing so, the team has started preparing notebooks, called "battle books,"
to be used as a reference point for site unique requirements and to
familiarize team members traveling to each DTCI site for implementation
purposes. Each battle book will eventually incorporate site visit notes,
"as is" and "to be" process charts denoting potential process changes, key
personnel, blueprints of warehousing and shipping facilities, minutes from
video and teleconferences, photos, local maps, and action items. In
addition, DTCI's transition planning team is responsible for drafting
plans covering the areas of transition, change management, and training,
as well as a plan of action and milestones. Once a contractor is on board,
the team intends to assist in the integration process, address issues
unique to certain sites, perform "rehearsal of concept" drills, and
document lessons learned from each site implementation.

Based on our review, we found that implementing an effective
communications strategy is a key priority for the DTCI program management
office. During organizational transformations, communicating information
early and often helps to build an understanding of the purpose of planned
changes and builds trust among stakeholders. For example, the DTCI program
management office has worked towards gaining buy-in and collaboration
through a steady flow of communication with stakeholders. In doing so, the
DTCI program management office has made information-sharing a priority
through several avenues. For example, the program manager and office
division chiefs participate in biweekly teleconferences with all military
service representatives and other key DOD stakeholders, during which
participants discuss program updates, scheduling, and other concerns,
among other things. Two-way exchange that allows for feedback from
stakeholders is central to forming the effective internal and external
partnerships that are vital to the success of any organization. Further,
the DTCI program manager has briefed senior leaders at various venues such
as the Distribution Process Owner Executive Council, the Defense Business
Board, and the Surface Deployment and Distribution Command Symposium.

DOD has initiated efforts indicating that it is focused on a key set of
principles and priorities at the outset of the transformation. For
example, the DTCI program management office has embedded customer
satisfaction as a core value. Embedding core values is one way an
organization can show that it is focused on a key set of principles and
priorities by defining the attributes that are intrinsically important to
what the organization does and how it will do it. The implementation of
DTCI will affect a large number of stakeholders. According to the DTCI
program management office, the greatest internal effect will be on the
transportation officers, who will be changing the way they do their work.
To adapt to this change, DTCI's transition planning team has had to manage
the expectations of stakeholders, including explaining to transportation
officers that the third-party logistics provider will perform some--but
not all--of the transportation officers' current functions while their
responsibilities will expand into other areas such as process improvement,
distribution analysis, and customer relations management. Furthermore, the
contractor will be expected to monitor and measure customer satisfaction
on an ongoing basis to ensure that any problems reported by customers,
including government stakeholders, are addressed upon receipt and resolved
as quickly as possible. Finally, according to the contract solicitation,
the contractor will be responsible for staffing, managing, and providing
resources for customer support 24 hours a day, 7 days a week.

Another key priority of the DTCI program management office has been to
establish plans and initiate efforts for assessing and managing
performance after contract award. Our prior work has shown that assessing
and managing contractor performance is important to ensure that the
business arrangement is properly executed. Specifically, DOD has built
performance indicators into the DTCI contract solicitation, scheduled
periodic program management reviews, initiated a process improvement team,
developed a quality assurance surveillance plan, and proposed to use award
fees as an incentive to promote desired outcomes--elements aimed at
encouraging the delivery of services to meet or exceed the terms of the
contract. While these planned post-contract award efforts are promising,
the long-term success of DTCI will depend on the extent to which DOD
follows through on institutionalizing the practices it has initiated to
transform its freight transportation system, as well as the contractor's
performance during implementation of the program.

Some of the key performance indicators that the contractor is expected to
track include on-time pickup and delivery, processing time for loss and
damage claims, information technology system availability, and small
business subcontracting goals. We observed that these indicators are
directly related to meeting the desired program goals such as increasing
efficiencies and reducing cycle time--the time from request for movement
to delivery. According to the contract solicitation, the performance
threshold for on-time pickup and delivery is 96 percent for the first 2
years, increasing to 97 percent by the third year; and the performance
threshold for processing of claims and system availability is 99 percent.
The performance threshold for meeting small business subcontracting goals
is 20 percent of all subcontract dollars during the first year, increasing
to 25 percent by the third year.

Furthermore, DOD plans to conduct periodic program management reviews at
various points during the rollout of the program. Specifically, after DTCI
is implemented at the first three sites--Defense Distribution Center in
Barstow, California; Defense Distribution Center in Corpus Christi, Texas;
and Defense Distribution Center in Puget Sound, Washington--the
contractor, in collaboration with the DTCI program management office and
stakeholders, is expected to conduct a thorough review, over a 30-day
period, of those sites to determine necessary adjustment to schedules,
identify areas of improvement, and develop methods to ease implementation
at future locations. A second review, again over a 30-day period, is
scheduled after implementation at the next three sites--currently planned
for Defense Distribution Center in San Diego, California; Defense
Distribution Center in Red River, Texas; and Defense Distribution Center
in San Joaquin, California. Subsequently, the contractor is expected to
conduct program management reviews on a monthly basis. During the monthly
program management reviews, a review and discussion of the government
assessment and the contractor's self-assessment for the previous month is
planned. The government intends to review metrics and performance data
supplied by the contractor as well as present the government's own
findings on contractor performance. According to program officials, the
reviews will also include a comparison of actual costs to projected costs
and a review of various performance indicators.

Also, as mentioned previously, the DTCI program management office is
establishing a process improvement team. This team plans to meet on a
monthly basis, in conjunction with monthly program management reviews, and
capture all process improvement requests through a DTCI Web site into a
process improvement database repository. The process improvement requests
may be prioritized by the originator of the request and that priority
should be based on potential resource savings to be realized if the change
is implemented. All process improvement requests will be presented before
the team, and the team will vote on whether to implement them. Some of the
questions that will need to be addressed with each process improvement
request include: actions that precipitated the submission of the request,
which stakeholders will benefit and be required to work the change, the
cost in time and resources, the return on investment, and whether the
proposed improvement conflicts with the performance work statement
requirements.

To assess performance, the quality assurance surveillance plan lays the
foundation for evaluating contractor performance while implementing the
DTCI performance work statement. The plan defines the performance
objectives and thresholds, the procedures for evaluating performance and
resolving issues, and the process to be followed to reduce contractor
payment for nonperformance of services. In addition to enterprisewide
performance objectives and thresholds, the contractor will be held to
site-specific objectives and thresholds for on-time delivery and pickup.
This plan also states that the contractor, at the commencement of
shipping, will need to compile data to review performance, conduct trend
analysis, and identify potential process improvements. For example, the
quality assurance personnel representing the government shipper will
review DTCI's shipments and make comparisons between the scheduled pickup
date and time with the actual shipment information to determine the
contractor's performance level in relation to the performance threshold.
During the first phase of implementation, this evaluation is expected to
be conducted on a quarterly basis with report findings presented to the
DTCI program management office. In turn, the DTCI program management
office will share the information with the contractor to help focus
management attention on performance areas below contractual standards.

To motivate the contractor's performance, DOD has established an award fee
plan to provide a financial incentive to the contractor to achieve program
outcomes beyond the contract requirements. In examining DOD's plans for
including award fees in the DTCI contract, we found that the award fee
factors are linked to the outcomes outlined in the program's performance
work statement. In developing the DTCI award fee plan, the DTCI program
management office identified four areas as evaluation
criteria--implementation, information management, transportation
coordination services, and small business participation. Within each of
these areas, there are three levels of performance--satisfactory, very
good, and exceptional--under which the DTCI contractor's performance will
be evaluated.

Conclusions

By incorporating the lessons learned from the prototype into its plans for
DTCI, DOD is continuing to make progress in improving its transportation
management. DOD also has recognized the challenges of making fundamental
changes to its current decentralized freight distribution system and has
adopted key practices that--with appropriate follow through during program
implementation--should enable this organizational transformation to occur.
Just as DOD has applied the lessons learned from its own past experiences
with the prototype, the lessons that DOD learns from implementing DTCI and
transforming the freight transportation system could be useful to other
DOD components that plan to undertake similar types of acquisition and
organizational transformation efforts. However, without disseminating
lessons learned from DTCI's implementation, the knowledge of successes and
problems derived from the implementation of DTCI will be of limited use
beyond the program.

Recommendations

To provide for effective dissemination of lessons learned from the
implementation of DTCI, we recommend the Secretary of Defense direct the
Under Secretary of Defense for Acquisition, Technology, and Logistics, in
conjunction with the Commander, U.S. Transportation Command, to develop
and implement a plan for sharing DTCI lessons learned across the
department.

Agency Comments and Our Evaluation

In its written comments on a draft of this correspondence, DOD concurred
with our recommendation. DOD stated that it will include DTCI lessons
learned in an existing Web site maintained by the Defense Acquisition
University. We believe this action, if implemented, will be responsive to
our recommendation. DOD also provided technical comments that we
incorporated as appropriate. DOD's comments are reprinted in enclosure II
of this correspondence.

                                    - - - -

We are sending copies of this report to the appropriate congressional
committees. We are also sending copies to the Secretary of Defense; the
Deputy Secretary of Defense; the Under Secretary of Defense for
Acquisition, Technology, and Logistics; the Commander of the U.S.
Transportation Command; the Director of the Defense Logistics Agency; the
Secretaries of the Army, Navy, and Air Force; and the Commandant of the
Marine Corps. This report will also be available at no charge on our Web
site at http://www.gao.gov .

Should you or your staff have any questions concerning this report, please
contact me at (202) 512-8365 or [email protected] . Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. Key contributors to this report were Carleen
Bennett, Susan Ditto, Chanee Gaskin, Dawn Godfrey, Tom Gosling, Curtis
Groves, Art James, Kevin Keith, and Marie Mak.

William M. Solis
Director, Defense Capabilities and Management

List of Congressional Committees

The Honorable Carl Levin
Chairman
The Honorable John McCain
Ranking Member
Committee on Armed Services
United States Senate

The Honorable Daniel Inouye
Chairman
The Honorable Ted Stevens
Ranking Member
Subcommittee on Defense
Committee on Appropriations
United States Senate

The Honorable Ike Skelton
Chairman
The Honorable Duncan Hunter
Ranking Member
Committee on Armed Services
House of Representatives

The Honorable John P. Murtha
Chairman
The Honorable C.W. Bill Young
Ranking Member
Subcommittee on Defense
Committee on Appropriations
House of Representatives

Enclosure I

    Actions Taken by DOD to Incorporate Lessons Learned from the Third-Party
Logistics (3PL) Prototype Program into Its Plans for the Defense Transportation
                         Coordination Initiative (DTCI)

Lesson learned from the 3PL                                                
prototype                          DOD actions in planning for DTCI        

                                Role of the 3PL
								
The 3PL prototype provided         Under plans for DTCI, the 3PL will be   
"one-stop-shopping" for the        the single point of contact to complete 
coordination of freight            all transportation services. Instead of 
transportation services, enabling  directly dealing with freight carriers, 
DOD transportation officers to     DOD transportation officers will        
spend less time tendering          contact the 3PL, which will serve as    
shipments to carriers and more     the intermediary to arrange for freight 
time planning their shipments and  transportation.                         
carrying out other duties.                                                 

Based on the 3PL prototype         Under plans for DTCI, carrier           
contractor's perspective, DOD will management will reside solely with the  
need to delegate more authority to contractor. According to the            
the 3PL, placing the 3PL in a      performance work statement, the         
stronger position to negotiate and contractor shall establish, maintain,   
execute with the carriers. In      and manage all necessary subcontracts   
successful 3PL relationships,      with carriers that move freight under   
there is a partnership between the this contract.                          
client and 3PL where the 3PL is an                                         
extension of the client in working                                         
with carriers, and actions it                                              
takes are done in the best                                                 
interests of the client.                                                   

There should be a continuous       The DTCI program management office has  
exchange of information between    made information a priority of the      
DOD and the contractor. The 3PL    program through several avenues. The    
needs to have a thorough           solicitation requires the winning       
understanding of the contract to   contractor to hold a postaward          
operate more effectively. In any   conference within 7 days after contract 
3PL environment, a spirit of       award, engage transportation            
partnership is critical for        association leaders and industry        
operations as well as for smooth   partners for the purpose of sharing     
flow of information.               information, conduct monthly program    
                                      management reviews, and participate as  
                                      a member of the DTCI Process            
                                      Improvement Team.                       

The 3PL prototype was too          The plans for DTCI cover all Defense    
restrictive to make best use of a  Logistics Agency sites and 49           
3PL's capabilities. The program,   additional service sites across the     
for example, was restricted to a   continental United States. While        
small number of sites in the       shipments will be restricted to freight 
southeastern United States and     all kinds, program officials believe    
included a limited volume of       that the freight volume will be         
commodities. The 3PL prototype     sufficient to take advantage of the     
also limited functions that use    3PL's capabilities. The DTCI is         
3PL management, such as inbound    structured for a 3PL to manage outbound 
and outbound transportation,       freight transportation, freight         
warehousing, and bill paying.      payment, and carrier management. DOD    
                                      made a decision not to include the      
                                      warehousing function as this would have 
                                      required A-76 studies to implement.     

                     Program development and implementation

Stakeholder buy-in and             The DTCI program management office has  
collaboration is needed for        initiated several actions to gain and   
successful implementation. All     maintain buy-in from stakeholders. The  
stakeholders must support the      DTCI program manager and division       
program, and the support must come chiefs host a biweekly teleconference   
from the highest level in the      with all the service representatives    
organization's hierarchy.          and any other key service stakeholders, 
                                      along with sending out weekly e-mail    
                                      updates. The DTCI program management    
                                      office has made several service site    
                                      and headquarters visits. The DTCI       
                                      program manager briefs at senior leader 
                                      distribution governance meetings. The   
                                      DTCI transition planning team holds     
                                      planning meetings to ensure stakeholder 
                                      collaboration.                          

Successful program development and During program development, the DTCI    
implementation requires a thorough program management office worked with   
understanding of what 3PLs can do. stakeholder organizations, including    
Experienced 3PL representatives    the Defense Distribution Centers, the   
should be included in the project  military services, and the Surface      
team. The 3PL prototype employed   Deployment and Distribution Command.    
an integrated process team         The effort was also supported by a      
consisting of transportation       management consultant and a commercial  
experts from DOD, the commercial   3PL. Private sector companies were      
sector, and representatives from   engaged though industry days, requests  
stakeholder organizations.         for information, and individual         
                                      face-to-face meetings. For the          
                                      implementation phase, the DTCI program  
                                      management office intends to form an    
                                      integrated government/contractor        
                                      partnership for site implementation.    

Site visits should be conducted    DOD's schedule calls for a gradual      
with DOD and contractor personnel  rollout, which it refers to as a "safe  
before start-up to ensure that all start" approach. Coordination has been  
sites understand the process and   completed with all the stakeholders in  
are ready to begin shipping. If    determining the rollout plan. Initial   
face-to-face site visits are not   sites will be DLA Defense Distribution  
possible, a conference call should Centers with high-volume shipping       
be conducted to review any         activity. The DTCI program management   
requirements and issues specific   office has established a transition     
to the shipping site.              planning team that has visited          
                                      implementation sites to provide         
                                      information about DTCI processes and    
                                      benefits. The team will visit or        
                                      conduct video teleconferences with all  
                                      sites prior to implementation at each   
                                      site. According to program officials,   
                                      these visits will also help identify    
                                      site unique requirements in order to    
                                      tailor implementation efforts at each   
                                      location.                               

The first shipment should not be   The DTCI solicitation specifies the     
released until all systems and     contractor shall establish information  
processes have been tested and are systems communications integration      
functioning properly. A poorly     prior to initiating shipments. The      
executed start-up can jeopardize   contractor will prepare a test plan     
the success of the program. Both   that must be approved by the DTCI       
parties (the government and the    program management office. The final    
contractor) should ensure that     DTCI joint test plan is due no later    
their systems and processes are    than 30 days after contract award. To   
ready before initiating the first  accommodate any site-specific           
shipment.                          differences, the contractor shall       
                                      deliver site-specific test plan         
                                      addendums no later than 30 calendar     
                                      days prior to implementation at each    
                                      DTCI shipping location.                 

Training of DOD transportation     According to the DTCI performance work  
officers should have been          statement, shipper training will be     
conducted in multiple sessions     provided on-site during Phase I and     
rather than completed all at once. on-site or regionally during Phases II  
The transportation officers were   and III. Training will be conducted     
expected to learn several new      between 1 and 4 weeks before site       
processes and systems to operate   implementation. The contractor is       
within the 3PL prototype. A phased expected to work with DOD to establish  
training approach would help       an on-going training curriculum for     
transportation officers go through government personnel that will be kept  
the transition more effectively    up-to-date to reflect current operating 
without being flooded with         procedures.                             
information and training.                                                  

There should be on-site 3PL        Under DTCI plans for Phase I of         
representatives based at selected  implementation, 3PL personnel will be   
shipping sites. The criteria for   on-site for at least the first 60 days. 
having on-site 3PL support would   For Phases II and III, regional support 
be large shipping volume or unique is required. The solicitation also      
shipping requirements that need    requires permanent on-site personnel at 
special attention. The one DLA     some locations.                         
depot out of four that had an                                              
on-site representative from the                                            
3PL prototype firm was extremely                                           
pleased with the support and                                               
service it received. Benefits                                              
included claims processing and a                                           
reduced time and effort for                                                
placing shipping orders.                                                   

                 Information technology systems and integration

Use the 3PL's systems and          A goal of DTCI is to learn from the     
procedures to the maximum extent,  best commercial practices of the 3PL.   
including information systems.     This entails maximizing the use of the  
                                      3PL's procedures and information        
                                      systems. During the training of DOD     
                                      transportation officers, emphasis will  
                                      be placed learning all the applicable   
                                      capabilities of the coordinator's       
                                      information systems to facilitate the   
                                      incorporation of those systems into     
                                      their daily operations. The DTCI        
                                      program management office also intends  
                                      to use its process improvement team to  
                                      share and incorporate useful processes  
                                      throughout the enterprise.              

The 3PL's Web-based tracking       The DTCI contract solicitation requires 
system allowed shippers to track   the 3PL to provide a track and trace    
their shipments. Where             capability of materiel in-transit       
operationally and economically     through the contractor's Web-based      
feasible, the contractor's systems system and through transmission to the  
should be used to process shipment government's shipper systems. According 
requests and track shipments. DOD  to the program office, this capability  
personnel should be trained on how will enable DOD customers to track      
to use the system.                 shipments through the contractor's Web  
                                      site, their service/agency shipping     
                                      system, or the Global Transportation    
                                      Network. While operational needs        
                                      require DLA and service shippers to     
                                      prefer the use of their existing        
                                      tracking shipment systems when          
                                      available, the coordinator's shipment   
                                      system will be used whenever those      
                                      systems are not available. Also, the    
                                      coordinator's system may become the     
                                      preferred method for tracking shipments 
                                      due to constraints in the government    
                                      system. Use of these tools will be      
                                      thoroughly covered in the training of   
                                      DOD transportation officers.            

During the 3PL prototype, a        Web-based reporting and the automated   
Web-based reporting tool was used  capture of data for reporting is a      
to generate monthly Contracting    requirement in the DTCI solicitation.   
Officer Representative Reports,                                            
monthly Customer Satisfaction                                              
Reports, and Service Exception                                             
Reports. The use of this tool                                              
should be continued.                                                       

Electronic data interchange        DOD transportation officers at DTCI     
provides the capability to         sites will be able to electronically    
transmit shipment requests and     submit their shipment requests to the   
receive shipping information. In   3PL. The DTCI performance work          
the past, the government has       statement defines the use of the        
relied on telephone, fax, and      electronic data interchange interfaces. 
e-mail to transmit this                                                    
information. The use of electronic                                         
data interchange will speed up                                             
this process and reduce the chance                                         
of data errors.                                                            

During the early phases of the 3PL The DTCI program management office      
prototype, DOD personnel           established an information technology   
experienced problems using the     integration team to address system      
information technology systems     integration issues. The team has        
because of the department's        developed an action plan and meets      
restrictive security firewalls.    monthly with systems personnel. In      
This problem was subsequently      addition, according to the DTCI         
resolved. A core systems technical performance work statement, thorough    
team should have been dedicated    testing of the systems and interfaces   
during the development stage of    is required prior to initiating         
the 3PL prototype. Early           shipments. DTCI's information           
involvement of systems personnel   technology integration team will work   
in the development team would have closely with the selected contractor to 
avoided, or greatly reduced, the   ensure the necessary data links have    
amount of time and effort required been connected and verified before site 
to resolve systems-related issues. activation.                             
In future 3PL arrangements,                                                
allocate sufficient time and                                               
resources for thorough testing of                                          
the systems and interfaces before                                          
going live.                                                                

                      Performance and performance metrics

While the 3PL prototype probably   Key performance indicators including    
improved customer service by       on-time delivery, on-time pickup, and   
reducing transit times and         others have been built into the DTCI    
achieving more reliable on-time    performance work statement. In          
delivery, such improvements could  addition, DOD plans to track and        
not be validated through metrics.  document cost savings achieved under    
Lowering costs was also not a      DTCI.                                   
stated goal of the 3PL prototype.                                          

Obtain agreement regarding the     The DTCI program management office      
data and methodology to be used to assembled a team of subject matter      
develop metrics before moving the  experts from key DOD stakeholders to    
first shipment. In the 3PL         collaborate on the development and      
prototype, reporting discrepancies fielding of the performance work        
could have been avoided or         statement. Performance indicators were  
minimized if both parties met      identified that make up the basis of    
early in the project, and agreed   the metrics that will be collected and  
to the data source and             evaluated during the life cycle of the  
methodology.                       program. The quality assurance          
                                      surveillance plan (and Contracting      
                                      Officer's Representative document)      
                                      describes the process by which the      
                                      contractor's performance will be        
                                      evaluated.                              

One military service noted that    DTCI has provided exclusions within the 
certain high-priority aircraft     performance work statement that address 
spare parts were currently         the concerns of the military service    
transported using small-package    and other stakeholders. Small-package   
express carriers and expressed     shipments have been excluded from the   
concern that consolidating these   DTCI program.                           
shipments under the 3PL could                                              
result in longer transit times.                                            

Definitions of service levels      The DTCI solicitation is written as a   
should be clearly defined and      performance contract. The solicitation  
understood by both the             has defined expedited service and surge 
transportation officers and the    requirements. The DTCI performance work 
3PL contractor to avoid confusion. statement is structured to allow urgent 
DLA and the military services      deliveries using a "Mandatory Delivery  
require different types of         Date." The 3PL prototype was a firm     
transportation service. DLA        fixed-price contract that limited the   
requires regular (daily), volume   contractor's ability to provide         
oriented service. Military         delivery if the service exceeded the    
services require urgent service    allowed price.                          
for critical spare parts with                                              
periodic unit moves involving                                              
numerous truckload moves. During                                           
the 3PL prototype, since the                                               
military services' requirement for                                         
urgent service was not fully                                               
satisfied, the military services'                                          
transportation officers perceived                                          
that their workload actually                                               
increased rather than decreased.                                           

According to some military         The DTCI performance work statement     
services, smaller, low-volume      requires the contractor to provide an   
sites did not receive acceptable   acceptable service to all shipping      
levels of service under the 3PL    locations, regardless of volume.        
prototype.                                                                 

One military service expressed     In the DTCI performance work statement, 
some concern regarding performance there are key performance indicators    
and operational issues in the 3PL  for on-time delivery and the quality    
prototype that included late       assurance surveillance plan specifies   
freight deliveries and hazardous   penalties for failure to achieve. The   
shipments offered to nonqualified  DTCI performance work statement         
carriers.                          describes the contractor requirements   
                                      for offering freight to the carriers.   

                               Business processes

DOD's claims process for lost and  Although the transportation discrepancy 
damaged goods was ineffective and  report system will continue to be used  
confusing to users, and many       under DOD's plans for DTCI, the         
claims were probably not filed     contractor will be required to accept,  
because of frustration with the    process, and resolve claims within a    
transportation discrepancy report  specified time period.                  
system. The 3PL prototype improved                                         
the claims process by making the                                           
use of transportation discrepancy                                          
report system optional when filing                                         
claims.                                                                    

One military service noted         The DTCI performance work statement     
problems that occurred during the  states that the contractor's            
3PL prototype with the 3PL's       information systems must be able to     
interface with PowerTrack (method  interface with PowerTrack.              
of payment to contractor for                                               
freight movements).                                                        

In the 3PL prototype, the 3PL      All shippers in DTCI have the           
process was not designed for       capability to order shipments using one 
shippers that do not have the      of the government's electronics         
capability to order their own      systems. In addition, the performance   
transportation services.           work statement requires the contractor  
                                      to provide its own Web-based system as  
                                      a backup capability.                    

                                  Contracting

The 3PL prototype showed that      DOD's contract solicitation for DTCI is 
acquisition of 3PL services could  FAR-based.                              
be acquired through a Federal                                              
Acquisition Regulation (FAR)-based                                         
contract, in accordance with DOD                                           
policy.                                                                    

The contracting process needs to   Market research was conducted for DTCI  
be flexible to test or implement a to benefit from commercial 3PL          
3PL. The contracting team must:    experience. DTCI program management     
have experience with 3PLs, use     office advisors supporting the DTCI     
commercial or 3PL contracting      acquisition have 3PL experience and     
processes, relinquish some control include a leading commercial 3PL firm.  
of the processes, and not be       Further, the DTCI requirements have     
overburdened with excessive        been developed in a performance-based   
workload to be innovative and      manner, encouraging the offerors to     
responsive.                        submit their own approaches to meeting  
                                      the DTCI objectives by employing their  
                                      own proven commercial best practices.   

Proposed contract modifications    U.S. Transportation Command is building 
should be resolved and implemented a robust capability within the DTCI     
quickly. It is impossible to       program management office to manage     
anticipate and include every       postaward contract activities and       
requirement in the initial         respond quickly to any contractual      
contract. But when a situation     issues.                                 
occurs that requires a contract                                            
change, both parties should                                                
resolve the issue and implement                                            
the change to the contract in an                                           
expeditious manner.                                                        

The contract's structure should    While "gain sharing" may be used for    
allow the 3PL to identify cost     commercial 3PL arrangements, it is not  
savings and create incentives to   an option available to DTCI under FAR.  
share those savings with DOD. To   The contract solicitation has cost      
achieve cost savings and           savings goals identified throughout the 
additional service improvements,   life of the contract and metrics for    
the 3PL prototype would have to be measuring the coordinator's progress    
expanded to permit a 3PL to take   toward those goals. The                 
advantage of its abilities to      cost-reimbursable provisions of the     
improve overall logistics          contract solicitation allow the         
processes, like reducing           government to retain savings achieved   
inventories, and saving on total   from the contractor's optimization and  
costs while improving service.     consolidation efforts.                  

Use 3PLs to help write the request The DTCI program management office used 
for proposals.                     a 3PL to help develop the request for   
                                      proposals requirements. In addition to  
                                      having commercial 3PL expertise in      
                                      developing the solicitation, the        
                                      contracting officer led extensive       
                                      market research to include industry     
                                      interaction and collaboration on draft  
                                      requirements.                           

Commit to a 6-month contracting    The DTCI program evolved over a 2-year  
process.                           period. The program was initiated in    
                                      2004, and the final solicitation was    
                                      distributed in the summer of 2006. As   
                                      of early 2007, the source selection     
                                      process was ongoing.                    

Use a down-select process, then    U.S. Transportation Command is          
write a contract.                  evaluating proposals and intends to     
                                      award a contract after conducting       
                                      discussions, both written and oral,     
                                      with offerors whose proposals have been 
                                      determined to be within the competitive 
                                      range.                                  

Select a World-Class 3PL that has  The 3PL's ability to implement DTCI     
done an implementation as large as will be considered during the source    
the one pursued by DOD.            selection process.                      

A 1-year timeframe is inadequate   The DTCI solicitation provides for a    
to demand commitment or investment 3-year base period with two 1-year      
from the partners and to develop   options and two 1-year award term       
effective communications           options, for a total potential contract 
processes. 3PLs want a minimum of  period of 7 years.                      
3 years to enter into a 3PL                                                
relationship with a shipper. They                                          
prefer 5 years with a 5-year                                               
option. 3PLs can invest in                                                 
equipment, processes, and                                                  
personnel and expect a return on                                           
investment with a longer contract                                          
timeframe.                                                                 

Allow for seasonal pricing in the  According to program officials, the     
contract to give the 3PL greater   DTCI solicitation balances risk to the  
flexibility in securing capacity   contractor by providing significant     
during periods of heavy demand.    historical workload data to include     
The spring and summer months are   spikes due to seasonal demands for the  
"produce season" in the            offerors to base their proposed rates.  
southeastern United States (the    In addition, proposed rates will be     
geographic region where the 3PL    priced on a Not-To-Exceed basis, with   
prototype was implemented). During actual costs reimbursed on a direct     
these months, truck capacity is at cost basis allowing for some degree of  
a premium as most are being used   fluctuation (within the Not-To-Exceed   
to transport produce. Since the    limit) caused by foreseen seasonal      
3PL was locked into the contracted demands and other factors. The          
rates, it had difficulty in        Not-To-Exceed rates will cover seasonal 
obtaining carriers to move some    pricing fluctuations.                   
DOD freight at these rates.                                                
Commercial best practices usually                                          
allow for seasonal pricing to                                              
compensate for this spike in                                               
demand and supply of trucks in the                                         
market.                                                                    

                                 Miscellaneous

Address personnel reductions and   According to program officials, DTCI is 
reassignments that may result from designed to be "personnel neutral,"     
implementation of the program and  with no cost savings projected as a     
changes made from process          result of personnel reductions. The     
improvements.                      change management plan and              
                                      communications plan are structured to   
                                      carry this message forward from the     
                                      DTCI program management office.         

Military services expressed        The DTCI program management office has  
concern regarding management and   advised the services to plan for these  
award fees under DTCI coming from  costs in their fiscal year 2008 to      
their service budgets.             fiscal year 2013 Program Objective      
                                      Memorandum (POM). The DTCI program      
                                      management office also noted that in    
                                      future years, these costs should be     
                                      offset by reduced transportation costs. 

Source: GAO analysis.

Enclosure II

                    Comments from the Department of Defense

(350880)

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