Defense Logistics: Actions Needed to Enhance Success of Reengineering
Initiatives (Letter Report, 06/23/2000, GAO/NSIAD-00-89).

Pursuant to a legislative requirement, GAO reviewed, the Department of
Defense's (DOD) logistics of reengineering initiatives, focusing on: (1)
what actions are underway and how complete the Department's plans for
reengineering are; (2) what the potential effect of the reengineering
effort is on combat forces; and (3) what factors could limit the
achievement of reengineering goals.

GAO noted that: (1) DOD has taken significant steps towards
reengineering its logistics processes; (2) however, many aspects of the
overall plan are incomplete, raising questions about whether the overall
goals of improved service and lower costs will be achieved; (3) key
steps DOD has taken include establishing a special office responsible
for coordinating implementation of the reengineering effort and
overseeing efforts to link hundreds of ongoing service-sponsored
logistics reengineering initiatives to DOD's overall reengineering
plans; (4) DOD has also established 30 pilot programs to test various
reengineering concepts; (5) however, it has not developed an overarching
plan that integrates individual service efforts into a single DOD-wide
implementation strategy; (6) plans to test, evaluate, and fully
implement reengineered support strategies DOD-wide by the end of 2005
face a number of challenges, making it unlikely that the pilot programs
will be able to provide key information in time to support interim
decision-making deadlines; (7) pilot test plans have not been fully
developed, in others, test results may be delayed; (8) because, many of
the 30 pilot programs have multiple objectives, it will be difficult to
link results and savings to specific reengineering concepts; (9) DOD has
not estimated the total costs of completing logistics reengineering or
developed a supporting budget plan; (10) without such an investment
strategy, there may not be sufficient funds to adequately test the
reengineering concepts being piloted and to implement the results on a
DOD-wide basis; (11) it is too early to assess the impact of
reengineering logistics support on combat forces; (12) officials
representing combat forces have brought up a number of concerns,
including the effects of having large numbers of private contractors, on
or near the battlefield to provide logistics support, the ability of
contractors to meet the surge in demand resulting from intensifying
military operations, and the effects of outsourcing on the number of
positions available to military personnel returning to the United States
from overseas assignments or at-sea deployments; (13) DOD is in the
early phases of developing its Joint Logistics Warfighter Initiative
test that may be useful in assessing the impact of various logistics
reengineering efforts on combat forces in an operational environment;
and (14) several factors, if not addressed, could limit DOD's ability to
achieve its reengineering goals of improved service and lower costs.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-89
     TITLE:  Defense Logistics: Actions Needed to Enhance Success of
	     Reengineering Initiatives
      DATE:  06/23/2000
   SUBJECT:  Defense budgets
	     Defense cost control
	     Logistics
	     Combat readiness
	     Privatization
	     Reengineering (management)
	     Strategic planning
	     Department of Defense contractors
	     Program management
	     Technology transfer
IDENTIFIER:  DOD Financial Management Improvement Plan
	     DOD Strategic Logistics Plan
	     LPD-17 Amphibious Ship
	     Apache Helicopter
	     Abrams Tank
	     H-60 Helicopter
	     DOD Joint Logistics Warfighter Initiative Test

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Testimony.                                               **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO/NSIAD-00-89

Appendix I: Recent Department of Defense Studies on Logistics Restructuring

28

Appendix II: DOD Weapon System Pilots and Associated Product
Support Strategies

31

Appendix III: Comments From the Department of Defense

33

Appendix IV: GAO Contacts and Staff Acknowledgments

37

39

Table 1: Estimated Fiscal Year 2000 Logistics System Personnel
and Costs 7

Table 2: Number of Pilot Programs Whose Plans Are Not Likely to
Meet Logistics Reengineering Time Lines 13

Figure 1: Key Reengineering Milestones 11

DOD Department of Defense

National Security and
International Affairs Division

B-284598

June 23, 2000

Congressional Committees

The Department of Defense estimates that in fiscal year 2000, it will use
about one-third of its $280-billion budget (about $84 billion) for logistics
support activities. Logistics activities include weapon system maintenance,
supply management, engineering, storage, distribution, and transportation of
military goods. In recent years, a number of studies have stressed the need
to improve the efficiency and effectiveness of the Department's logistics
processes, systems, and infrastructure to provide improved support to combat
forces and to achieve savings that can be used to modernize weapon systems.
Accordingly, the Department is seeking to reengineer1 its logistics support.

Central to the Department's overall approach, which is being guided by the
Office of the Secretary of Defense, is a move toward a system that places
greater reliance on the private sector and uses improved logistics processes
and capabilities. The Department's August 1999 Logistics Strategic Plan
outlines its approach to logistics reengineering and includes a time frame
for implementation. The plan states that by the end of fiscal year 2005, the
Department's logistics process will be a highly efficient, integrated system
that provides required support to combat forces. A key element of the
reengineering strategy is 30 pilot weapon system programs (10 in each
service) that will be used to test the use of best commercial practices2 and
give increased responsibility and authority to program managers of weapon
systems, with the expectation of reducing total ownership costs over the
life of the weapon systems. The Department's goal is to use lessons learned
from the pilots to implement successful reengineering concepts
Department-wide. At the same time, the services and the defense agencies
have about 400 ongoing individual

initiatives to improve logistics support.3

Section 364 of the National Defense Authorization Act for Fiscal Year 20004
requires us to review the Department's logistics reengineering initiatives,
focusing in particular on whether the effort would provide adequate supplies
to military units and installations should it be necessary for the
Department to execute the National Military Strategy prescribed by the
Chairman of the Joint Chiefs of Staff.5 As discussed with your offices, we
will be responding to this mandate with a series of reports.6 For this
report, we assessed (1) what actions are underway and how complete the
Department's plans for reengineering are, (2) what the potential effect of
the reengineering effort is on combat forces, and (3) what factors could
limit the achievement of reengineering goals.

The Department of Defense has taken significant steps toward reengineering
its logistics processes. However, many aspects of the overall plan are
incomplete, raising questions about whether the overall goals of improved
service and lower costs will be achieved. Key steps the Department has taken
include establishing a special office responsible for coordinating
implementation of the reengineering effort and overseeing efforts to link
hundreds of ongoing service-sponsored logistics reengineering initiatives to
the Department's overall reengineering plans. The Department has also
established 30 pilot programs to test various reengineering concepts.
However, it has not developed an overarching plan that integrates individual
service efforts into a single Department-wide implementation strategy.
Further, plans to test, evaluate, and fully implement reengineered support
strategies Defense-wide by the end of 2005 face a number of challenges,
making it unlikely that the pilot programs will be able to provide key
information in time to support interim decision-making deadlines. In some
instances, pilot test plans have not been fully developed, in others, test
results may be delayed. Additionally, because many of the 30 pilot programs
have multiple objectives, it will be difficult to link results and savings
to specific reengineering concepts. Finally, the Department has not
estimated the total costs of completing logistics reengineering or developed
a supporting budget plan. Without such an investment strategy, there may not
be sufficient funds to adequately test the reengineering concepts being
piloted and to implement the results on a Department-wide basis.

It is too early to assess the impact of reengineering logistics support on
combat forces. Officials representing combat forces have brought up a number
of concerns, including the effects of having large numbers of private
contractors on or near the battlefield to provide logistics support, the
ability of contractors to meet the surge in demand resulting from
intensifying military operations, and the effects of outsourcing on the
number of positions available to military personnel returning to the United
States from overseas assignments or at-sea deployments. The Department is in
the early phases of developing its Joint Logistics Warfighter Initiative
test that may be useful in assessing the impact of various logistics
reengineering efforts on combat forces in an operational environment.
However, the test is scheduled to take place before the reengineering
initiatives are fully implemented, and its usefulness will therefore be very
limited in assessing the impact of the reengineering concepts on combat
forces.

Several factors, if not addressed, could limit the Department's ability to
achieve its reengineering goals of improved service and lower costs. These
include the effect of not centrally managing parts, the impact that
sole-source, long-term contracts would have on anticipated reengineering
savings, and how to manage reengineering logistics within the bounds of
existing laws and policies.

This report makes recommendations to improve the planning and implementation
of the logistics reengineering effort. The Department generally agreed with
the report and its recommendations.

The Department of Defense (DOD) owns and operates a vast array of weapon
systems and equipment, including airplanes, ships, and tanks. Military units
perform some maintenance and repairs on these items, while the Department
relies on its own maintenance depots and private-sector facilities to
perform major overhauls and upgrades. New spare and repair parts are
procured from the private sector and distributed through the Department's
centrally managed supply system. Equipment components are repaired by both
DOD repair facilities and by the private sector. The defense infrastructure
also includes a centralized transportation system that moves equipment and
parts both within the continental United States and overseas using military
and private-sector movers and shippers.

We have previously reported that the Department's accounting systems do not
routinely capture the total costs of its logistics support activities,7 and
differing estimates of these costs exist within the Department. However, a
special assessment initiated by the Under Secretary of Defense for
Acquisition and Technology in 1999 to better define these costs indicated
that DOD will spend about $84 billion on logistics in fiscal year 2000, as
shown in table 1.

 Dollars in billions
 Function                                         Personnela  Costsb
 Depot maintenance                                61,987      $5.9
 Other national-level maintenancec                13,378      3.9
 Material management                              39,068      19.1
 Distribution and transportation                  16,339      2.6
 Operationald maintenance                         403,320     16.7
 Operationald supply                              141,327     5.8
 Operationald transportation                      44,119      1.3
 Other operational logisticse                     158,298     6.0
 Other product supportf                           3,744       0.2
 Logistics support not related to weapon systemsg 363,051     22.3
 Total                                            1,244,631   $83.8

aIncludes military active duty and reserve personnel and DOD civilian
employees.

bIncludes costs for both DOD and contractor operations.

cIncludes maintenance that is not part of the defense working capital fund
(such as ordnance depots and ship maintenance activities not in a depot).

dRefers to unit level functions.

eIncludes funding and personnel attributable to operational logistics but
not categorized exclusively into maintenance, supply, or transportation.

fIncludes miscellaneous product support not categorized exclusively as
maintenance, supply, or transportation (such as logistics administrative
support).

gConsists of strategic transportation, clothing, subsistence, and medical
supplies not directly related to a specific weapon system.

Source: Logistics Management Institute estimate prepared for DOD.

DOD has completed a number of studies on ways to improve its support
processes. Generally, these studies have focused on increasing reliance on
the private sector to meet the Department's logistical support needs, as
well as making greater use of improved technologies, new business processes,
and commercial transportation. The studies have laid the groundwork for the
Department's current reengineering efforts discussed in this report. (The
objectives of each study are described in app. I.)

Reengineering Effort Can Be Improved

DOD has taken some steps to reengineer its logistics support activities. It
has outlined important principles and concepts that it wants to test for
broader application in logistics restructuring. It has also established an
office with specific responsibility for overseeing the process and is
beginning to develop a new logistics architecture--a blueprint that is
intended to guide and control the development and maintenance of the many
related logistics systems. However, it has not developed an overall plan to
link its broad reengineering goals to the approximately
400 individual service initiatives that are already under way to improve the
logistics support system. Although the services have been directed to
develop a plan that links their initiatives to DOD's overall vision, it
remains unclear how these individual service plans will be integrated into
the overarching architecture. Further, many of the 30 pilot programs set up
to test the logistics reengineering concepts face a number of challenges and
likely will not be able to generate sufficient information in time to
support key decision-making milestones. Therefore, the planned DOD-wide
logistics reengineering completion date of 2005 is questionable. In some
instances, questions exist about whether selected pilot projects will
provide meaningful tests of reengineering concepts because the projects are
more oriented to meeting objectives other than those associated with
logistics reengineering.

Office Has Been Established

Two key documents set forth the general principles of the reengineering
process. The first is DOD's August 1999 Logistics Strategic Plan, which
outlines the characteristics of the new logistics concept and a time frame
for implementation. The plan states that by the end of fiscal year 2005,
DOD's logistics process will be a highly efficient, integrated system that
provides required support to combat forces. The second document is DOD's
April 1998 Report to Congress on Actions to Accelerate Movement to the New
Workforce Vision, which provides a broad overview of planned reengineering
efforts. The report discusses five fundamental reengineering concepts:

ï¿½ Reengineering product support (logistics support focused on a weapon
system or its support system) by adopting the best practices used by private
industry to achieve superior performance.

ï¿½ Competitively sourcing product support by using competition (either a
public/private competition or a competition among private-sector sources) or
business case analysis8 to select a source for long-term total life-cycle9
support.

ï¿½ Modernizing systems by replacing outmoded components with new components
that have increased reliability, maintainability, or supportability.

ï¿½ Expanding the use of prime vendors and virtual prime vendors10 through
long-term partnerships with private-sector providers to support weapon
systems using techniques such as on-demand manufacturing.

ï¿½ Establishing weapon systems program manager oversight of life-cycle
support by expanding the manager's role in the support phase of a system's
life span.

The first four concepts were more fully addressed by the July 1999 report,
Product Support for the 21st Century, and the fifth by the October 1999
report, Program Manager Oversight of Life-Cycle Support.11 On the basis of
the two reports, DOD adopted 30 pilot programs (10 in each service) that
will be used to test the 5 concepts. Conducting a pilot program for the
purpose of reengineering logistics support involves (1) selecting systems
that represent the variety of equipment in the DOD inventory, (2) deciding
which concepts might apply to the selected pilots, (3) designing tests of
the concepts for the selected pilots and establishing milestones and ways to
measure results, (4) performing the tests and accumulating resulting data,
and (5) analyzing the test results to determine which approaches accomplish
the objective of reducing logistics support costs and improving the level of
support to combat forces.

In October 1999, DOD established the Office of the Assistant Deputy Under
Secretary of Defense for Logistics Architecture to oversee the Department's
logistics reengineering efforts, including those involving the 30 pilot
programs, and to build on the hundreds of major reengineering efforts that
are under way in the services and Defense agencies. The Office is
responsible for designing a logistics system for business processes,
physical infrastructure, and information technologies, as well as defining
the services' responsibilities within the new logistics architecture.

The Office has begun work on an integrated logistics architecture that is
intended to facilitate the implementation of reengineered logistics support
processes and procedures by the end of fiscal year 2005. In the same way
that a building's plans must show its features, its systems and their
functions, the relationships between components, and the construction of
these components, the logistics architecture must show the features,
relationships, makeup, and functions of different logistics components. In
April 2000, the Office selected two contractors to develop competing
logistics architecture designs. The Office plans to begin evaluating the
contractors' proposals in June 2000 as an initial step toward developing a
logistics architecture design. Subsequently, an implementation plan will be
developed to facilitate implementing the new logistics design across the
Department by the end of fiscal year 2005. Figure 1 shows the projected
milestones for key reengineering efforts.

Note: Each year indicates the beginning of the fiscal year.

Source: Our analysis.

In an effort to achieve consistency among the reengineering initiatives
under way in the services and the Department's overall strategy, the
Department, in a March 23, 2000 directive, required the military services to
establish logistics reengineering plans by July 1, 2000. The directive
requires that the plans relate the 400 different service-sponsored logistics
reengineering initiatives to the DOD Logistics Strategic Plan objectives and
include performance measures for reporting progress and meeting milestones.
The directive also requires the Under Secretary of Defense (Acquisition,
Technology, and Logistics) to review the military service and Defense agency
logistics reengineering plans annually. However, there is no requirement to
develop an overall plan that integrates the service plans, and the absence
of such an overall framework places the ultimate success of the effort at
risk.

The absence of an overall plan lessens the potential of the different
initiatives now being developed by the services and Defense agencies and of
the Department's 30 pilot programs to pursue complementary objectives. For
example, 2 of the 30 pilot programs, both major Marine Corps weapon
systems,12 are pursuing product support reengineering plans developed by the
weapon system program managers, which may be incompatible with the logistics
support concept being developed by the Marine Corps Materiel Command. Under
the reengineering plans developed by the Marine Corps program managers, the
weapon systems manufacturer or its subcontractors would provide most
logistics support for the two systems. However, under the Marine Corps
Materiel Command's reengineering concept, parts and components that are
critical to a weapon system's ability to perform its mission would be
supported by the DOD logistics infrastructure. Without an overarching plan
that clearly establishes priorities and procedures, it will be impossible to
ensure that service-sponsored initiatives are compatible with the
Department's overall restructuring plans. In the absence of such a plan, the
Department faces the increased risk that initiatives in some cases may
duplicate each other and in other cases may have contradictory aims that
work against each other. Further, without an integration plan, DOD cannot
evaluate and prioritize competing initiatives; consequently, some funding
for initiatives may not be spent in the most efficient way.

DOD plans to use the 30 pilot programs to generate information to develop
future models for reengineering and policy changes and to fully implement
reengineered support strategies Department-wide by the end of 2005. However,
the Department's plans to generate such information face a number of
challenges. Some pilot program test plans have not been fully developed,
test objectives for others have not been clearly defined or may subsequently
change, and test results of some pilots may be delayed. Likewise, the
Department faces other challenges, such as transferring government parts
inventories to the private sector or having sufficient funding to fully
implement some pilots. As a result, key information that will be needed to
assist in the reengineering process likely will not be available in time to
meet decision-making deadlines.

The 30 pilot programs are being run to test various reengineering concepts
such as use of best commercial practices and prime vendor support
(see app. II for the list of pilots and their associated product support
strategies). The pilots will be used in three phases of the reengineering
effort. In the first phase, which is expected to end in mid-fiscal year
2000, the Office of the Logistics Architect and the services are expected to
refine the strategies for addressing the reengineering concepts noted
earlier and develop plans and strategies for the specific pilot programs.
The second phase, which began in early fiscal year 2000, involves
implementing the various pilot program strategies and testing the
effectiveness of the reengineering concepts. This phase is expected to end
when test results are obtained at the end of fiscal year 2002. The third
phase will start at the beginning of fiscal year 2003 and will involve
transferring results of the successfully piloted reengineering concepts to
other DOD systems. DOD estimates that the third phase will be completed by
the end of fiscal year 2005.

DOD will likely face a number of challenges in meeting its current milestone
to begin implementing reengineering concepts Department-wide at the end of
fiscal year 2002. Our work shows that some pilot program test plans have not
been fully developed because the programs only recently have been selected
as pilots and have not had sufficient time to develop their plans. Further,
other pilot programs have test objectives that have not been clearly defined
or may change. Finally, test results of other pilot programs may not be
available because pilot tests will not be completed before the end of fiscal
year 2002. Table 2 identifies the number of pilot programs in each service
that will have problems providing information to meet the Department's
reengineering schedule.

                                           Number of pilots, by
                                           service
 Problema                                  Army   Air Force   Navy   Total
 Test plans not yet developed              2      1           4      7
 Test plans subject to change              6      7           4      17
 Test results likely not available at end
 of fiscal year 2002 to support DOD-wide   7      6           8      21
 reengineering

aProblems are not mutually exclusive; consequently, some pilot programs are
included in more than one category.

Source: Our analysis.

Six of the original 30 pilot programs (2 Army and 4 Navy) have been dropped,
and implementation plans for replacement projects had not been fully
developed as of March 31, 2000. Additionally, most program managers
generally described their plans as tentative in nature and subject to
change. For example, plans for seven of the Air Force's pilot programs,
while generally expected to address the reengineering concepts identified by
the Department, have not been finalized, although the plans were originally
expected to be completed in November 1999. Further, while the pilot programs
are supposed to produce sufficient evaluative data on reengineering concepts
by the end of fiscal year 2002, many of them will not produce such data
until 2003 or later, well after full implementation is slated to begin. For
example, the Navy's LPD-17 transport ship pilot program includes testing the
concept of contractor logistics support after the ship is delivered and
placed into service. However, the first LPD-17 ship is scheduled for
delivery in September 2003, approximately 1 year after the end of the pilot
program test period.

Eight of the pilot programs, including the Army's Apache and the Navy's
H-60 helicopter program, are considering a contractor-managed approach in
which a single contractor would have total responsibility for system
performance, including, repair, maintenance, inventory management, and
configuration control. However, before this approach can be implemented, the
issue of how to transfer government-owned inventory to private contractors
will have to be resolved because current regulations make such transfers
very unattractive to the private sector. Current policies do not allow DOD
to sell an item for less than what it originally paid, but according to a
DOD comptroller official, contractors have been reluctant to purchase DOD
inventory because they believe that some inventory items are overvalued. Our
work shows that the Army's Apache and the Navy's
H-60 program offices have suggested alternative methods for transferring
control of government-owned inventory to the control of contractors without
the contractors purchasing the items at full cost. To address the problem,
the DOD comptroller is working with the services and the effected pilot
programs to develop a solution. However, to date, no agreed solution has
been reached within DOD to resolve the issue. This problem, which applies to
most weapon systems now in use, may affect the Department's ability to
pursue a contractor-managed systems approach.

Our prior work has shown that significant up-front investment costs are
often required to implement reform initiatives; these costs may be offset
over time as savings begin to accrue. However, DOD has not developed an
investment strategy for the reengineering effort to include preparing an
estimate of total costs and developing a budget plan to fund the investment
needed to support the planned reengineering efforts. In addition, our
financial audits have continued to highlight limitations in the Department's
ability to identify and track costs and associated savings. Program managers
have noted that little new funding has been provided to invest specifically
in the pilot efforts, and it is unclear how much funding will be available.
Program managers also stated that they needed control of operational and
support funding to effectively test some reengineering concepts.

According to Army and Navy service logistics officials, implementing
reengineering concepts as rapidly as is now expected could require sizable
conversion costs that are difficult to cover within existing budgets. For
example, the Army's Abrams tank pilot program estimates that it will require
about $4 billion to fully implement the program's pilot concepts. This
amount includes funds for overhauling existing engines and tanks, purchasing
new and more fuel-efficient engines, awarding a performance-based logistics
support contract, establishing a contractor-operated repair facility for
tank components, and designing and acquiring built-in testing devices for
the tank fleet. Most program officials stated that their pilot programs will
not be able to conduct needed tests effectively, efficiently, and on
schedule without such up-front investments. These officials expressed doubts
that their pilot programs will receive sufficient funds to test the planned
initiatives.

Additionally, an October 1999 DOD report13 indicated that all 10 of the
Army's pilot projects and 9 of the Navy's 10 pilot programs will require
that some operation and support14 funding be transferred from combat
commands to program managers.15 Program officials stated that they need
control of operation and support funding to effectively develop prime vendor
relationships, provide new technology, and achieve the competitive sourcing
envisioned by the pilot programs. The report also indicated that all three
military departments were seeking authority to reinvest some of the cost
savings achieved through reengineering efforts into their weapon system
programs (cost savings are usually deducted from a program's acquisition
budget). Program officials see reinvestment as an incentive to undertake
these efforts.

Reengineering Concepts

On the basis of our discussions with pilot program managers and review of
program plans and test schedules, we determined that the test results of
most pilot programs may not be able to demonstrate a clear link to specific
reengineering concepts because the pilot programs were based on plans
initially designed to reduce costs, not to reengineer logistics.16 For
example, the Navy's Standoff Land Attack Missile pilot focuses on reducing
program acquisition costs, mostly by increasing production rates. The Navy's
Smart Carrier pilot plan focuses on reducing operating and support costs
through improved technology and work processes to reduce manpower
requirements. Smart Carrier pilot program officials told us they would
consider revising the pilot program plan to address reengineering concepts
in the future but had made no firm decision about the concepts to be tested.
It is unclear how these initiatives would directly support logistics
reengineering concepts.

Further, the pilots will have difficulty showing how much savings or
improvement could come from a specific reengineering concept because in some
cases, they will have difficulty determining the causes of
savings--reengineered processes or other actions such as investments in new
hardware. For example, the Abrams tank pilot program involves both changes
to the logistics support system and installation of a more reliable and
fuel-efficient engine. Reengineering plans, however, do not include a
methodology that allows program officials to determine which of the two--the
engine or the changes in logistics--would be responsible for which portion
of any future savings. In another example, the Air Force's F-16 pilot
program involves major upgrades to the aircraft's electronics system. These
upgrades involve reliability, maintainability, and technology improvements
and a reengineered process for managing new components. However, the
reengineering effort does not have a methodology for distinguishing savings
that come from reengineering logistics processes versus savings that occur
as a result of investments in new components.

It is too early to assess the effect of ongoing reengineering efforts on
combat forces because DOD does not know how the final logistics system will
be structured. However, military officials associated with various combat
organizations have raised some issues about the reengineering process that
will need to be addressed soon if the initiatives are to be successful.
Logistics support personnel from the Joint Chiefs of Staff and combat
commands in the United States and Europe voiced a number of concerns about
the potential effects that some reengineering efforts could have on their
operational capability. These concerns involved the presence of increasing
numbers of contractor personnel on or near the battlefield, the ability of
contractors to meet "surge requirements", the potential reduction of
rotational positions to meet training requirements, and the overall impact
on product support costs and funding. To address these concerns, DOD has
begun developing a test that may be useful in assessing the effects of
logistics reengineering efforts in an operational environment. However, this
test may not yield results for use in key DOD-wide reengineering decisions
planned at the end of fiscal year 2002.

Some initiatives (such as the Army's Apache Prime Vendor and the
Tube-launched Optically-controlled Wire-guided Improved Target Acquisition
System) may use private contractors on or near the battlefield to order and
distribute supplies, maintain items, and provide technical support. Combat
command officials raised the following concerns about increasing the use of
contractors on or near the battlefield:

ï¿½ Combat units' ability to conduct wartime missions could be weakened if
contractors are withdrawn or are unwilling to stay on or near the
battlefield during hostilities.

ï¿½ Providing the required support and protection to contractors on or near a
battlefield may require extra personnel and may divert resources from the
wartime mission at a time when the services are trying to reduce their
logistical presence in areas close to the battlefield.

ï¿½ Contractors that are included in battlefield plans would also have to be
included in the deployment planning process; otherwise, combat forces may be
required to take extraordinary actions at the time of deployment to send
needed contractors to the battlefield.

ï¿½ Someone on the battlefield would have to be assigned responsibility for
managing and exercising control over battlefield contractors because with
some deployed contractors being managed by a contracting officer stateside,
the battlefield command structure may become tangled, frustrating the
battlefield commanders' ability to perform.

Combat personnel also indicated that a relatively small number of
contractors on the battlefield might be manageable but that large numbers
would definitely accentuate these issues. They could not specify this
threshold in terms of numbers.

Although the logistics reengineering effort clearly aims at greater reliance
on supply chains controlled by private contractors, combat officials raised
concerns about the ability of such a support system to deliver the
additional quantities of critical items that are needed to meet what are
known as wartime "surge requirements."

DOD has traditionally relied on stockpiles of government-owned and managed
inventories and repair facilities to meet day-to-day operating requirements
and on supplemental quantities of critical items and excess repair capacity
to meet surge requirements during extended contingency operations. Some
reengineering pilots rely on commercial entities to provide these supplies
and repairs, but combat officials think surge requirements could be a
problem, especially if more than one theater of operation is involved. It is
unclear at this point to what extent DOD would require contractors to
maintain surge capability and whether this capability would be included in
contracts and the resulting effects on costs.

Combat officials believe that temporary surges in demand may be
manageable--if not predictable--in the commercial sector, where vendors deal
with demand patterns that are generally known. They noted that DOD
successfully uses prime vendor arrangements for some consumable items such
as food and medical supplies, which have large networks of suppliers.
However, they also noted that military parts and systems have different
characteristics. They involve limited numbers of potential suppliers and
demand patterns that are difficult to predict because parts are often unique
and have low usage or erratic demand.

Having more private contractors perform military functions could reduce the
number of available assignments for military personnel to rotate to in the
United States when returning from overseas or at-sea assignments. Combat
command officials fear that this could increase overseas or at-sea tour
lengths and exacerbate morale problems. For example, in responding to the
March 1999 draft of DOD's Product Support for the 21st Century report, the
Navy's Atlantic Fleet Command stated that initiatives that would contract
out military positions ashore would need to be managed carefully to avoid
affecting sea-to-shore rotations and associated opportunities for skill
development.17 Navy officials from U.S. Naval Forces Europe have stated that
the loss of support-related shore positions would require sailors to spend
more time afloat, increasing concerns about quality of life and retention.
The officials are also worried that the collateral duties of shore positions
that are contracted out might have to be shouldered by remaining personnel,
increasing the length of their workday. In reviewing a draft of this report,
DOD officials said they are aware of this issue and are sensitive to combat
officials' concern about the effect contracting logistics functions would
have on personnel returning from overseas or at-sea tours.

Combat officials are concerned that they may lose the flexibility to
prioritize funding under a reengineered logistics system that places greater
responsibility and authority in the hands of DOD weapon system program
managers. Although they acknowledge that quality of support is a key goal,
officials are also concerned about the effects that different fund
management controls may have on total costs. Some product support
reengineering initiatives contemplate shifting control of operations and
maintenance funding away from combat commands to program managers,
potentially diminishing the commanders' flexibility to manage unit funding
priorities. Under the current process, for example, a commander can postpone
scheduled maintenance or reduce supply levels to free up funding for higher
priority requirements. Under the reengineered system, the commander might
not be able to do so.

DOD is in the early stages of developing the Joint Logistics Warfighter
Initiative to test the effect of logistics reengineering efforts on combat
forces. The initiative will use U.S. Central Command forces during
operational exercises in Egypt in fiscal year 2002. During this exercise,
customer wait time data will be collected and analyzed to identify problems
in providing logistics support to combat forces and to propose corrective
actions. According to Office of the Secretary of Defense officials, this
test will indirectly evaluate the operational effectiveness of reengineered
logistics systems. The Joint Logistics Warfighter Initiative test is
expected to determine the effects of the Department's pilot program
reengineering initiatives on customer wait times. However, as discussed
above, it is not clear to what extent pilot program logistics restructuring
will have evolved at that point. The 2002 demonstration can only test
changes that will have already been implemented long enough for their
effects to be assessed. Consequently, the results of the Joint Logistics
Warfighter test may not provide results indicating the impact of pilot
program reengineering changes before key reengineering implementation
decisions are made at the end of fiscal year 2002.

Several factors, if not addressed, could limit the Department's ability to
achieve its reengineering goals of improved service and lower costs. These
include (1) the effect not centrally managing parts would have on savings;
(2) the impact using sole-source, long-term contracts would have on
anticipated reengineering savings; and (3) how to manage reengineering
logistics within the bounds of existing laws and policies.

DOD has not examined whether reengineering efforts may reduce some of the
savings now obtained by centrally managing items used by more than one
system. For example, a major U.S. automobile manufacturer reportedly saves
over $1.8 billion a year by increasing the use of common parts across
different product lines to achieve efficiencies (such as eliminating design
duplication or consolidating purchases for more efficient buying practices).
Similarly, in a March 1999 letter to the Deputy Under Secretary of Defense
(Logistics), military service and Defense agency commanders indicated that
they would consolidate orders for common items used by different weapon
systems, thus decreasing the number of parts to be stocked and benefiting
from the same economies of scale. Service logistics officials further
indicated that they were concerned that if program managers made logistics
support decisions on a system-by-system basis, fewer common items would
emerge, just at a time when DOD is trying to increase the commonality of its
subsystems and parts.

Competitive sourcing is another way DOD has been trying to maximize savings.
Our previous work in this area has indicated that competition has reduced
costs, regardless of whether a public entity or private company wins a
competition. In some cases, however, reengineering efforts plan to use
sole-source, long-term contracts. Developing strategies for controlling cost
growth in these cases will be a key issue because, as we have previously
reported, it is difficult to control cost growth in a sole-source
environment.18 Program managers plan to compare cost and performance of
potential government and private-sector providers to determine whether to
award initial long-term, sole-source contracts within the pilot programs.
But relatively few of them envision competition among multiple
private-sector firms, often because of a lack of qualified firms.

DOD's efforts to implement product support reengineering concepts must take
into account existing statutory and policy constraints. In order to fully
implement the envisioned changes, DOD will need to change policies that
might encumber the implementation of reengineering and take into account
existing laws. Service and DOD officials identified some major statutory
provisions and policies that could likely impact reengineering efforts:

ï¿½ 10 U.S.C. 2464 provides for a "core" logistics capability that is to be
identified by the Secretary of Defense and maintained by DOD once
identified. Section 2464 generally requires DOD to maintain this capability
within a government-owned and operated facility. This provision can limit
the ability of the services to contract with the private sector for
performance of logistics work.

ï¿½ 10 U.S.C. 2466 prohibits the use of more than 50 percent of funds made
available in a fiscal year for depot-level maintenance and repair for
private-sector performance. This provision can limit the amount of
depot-level maintenance and repair work that can be performed by
private-sector contractors.

ï¿½ 10 U.S.C. 2469 requires a competition between public and private-sector
entities before certain depot maintenance and repair workloads can be
changed from government performance to performance by a contractor. This
provision limits the ability of the services to transfer depot-level
maintenance and repair work to the private sector by requiring a
public/private competition before moving the work. The competitions, while
beneficial, can be time-consuming and complex and may require considerable
resources.

ï¿½ Office of Management and Budget Circular A-76, which describes the
executive branch's policy for the performance of commercial activities, and
which may apply to logistics activities not covered under 10 U.S.C. 2469,
requires a comparison of government and private-sector performance to
identify the most cost-effective alternative. The competitive sourcing cost
studies required by A-76, like those required under section 2469, while
beneficial, can be time consuming and complex and may require considerable
resources.

ï¿½ Pilot program proposals to segregate funds by weapon systems to optimize
implementation of the reengineered product support concepts will require
changes to existing funding policies within the Department, according to
service officials.

In 1999, DOD officials began developing a legislative package requesting
relief from legislative constraints facing the Department's reengineering
efforts. However, the proposals were not finalized; instead, Department
officials decided to work within the existing legal and appropriations
framework to define more precisely the impact of the constraints and better
document the need for legislative changes.

The Department is in the process of taking actions to reengineer its
logistics support system. The process intends to place greater reliance on
the private sector to provide more effective and less costly support to
combat forces by taking advantage of improved technologies, new business
processes, and commercial transportation. However, planning and
reengineering process implementation weaknesses put the success of this
effort at risk.

Although the Department has developed its long-range vision and goals for
reengineering, it does not have a plan or an investment strategy that
integrate the individual plans of the services and Defense agencies. As a
result, the Department faces an increased risk that initiatives may not be
compatible with each other or may have differing objectives. Without an
integration plan, DOD cannot evaluate and prioritize the initiatives;
consequently, some funding for initiatives may be wasted. Without an
investment strategy, there may not be sufficient funds to adequately test
the reengineering concepts being piloted and to implement the results on a
Department-wide basis. Finally, until details are known on how the final
logistics system will be structured, DOD cannot assess the effect of
reengineering efforts on logistics support to combat forces.

DOD will not have key information available from its pilot programs before
it expects to make key implementation decisions in 2002. The test that is
supposed to evaluate the results of the pilot programs will take place
before the reengineering changes themselves are implemented. Consequently,
the schedule for testing, evaluating, and implementing initiatives beginning
in fiscal year 2003 is questionable, and DOD may make important decisions
without all the information it needs. Furthermore, DOD will have difficulty
determining how much savings a specific reengineering concept could generate
because it does not have a methodology for making this sort of evaluation.
And unless the concerns of combat commanders are fully addressed, DOD cannot
be sure that reengineering concepts, which may be practical for peacetime
operations, will function efficiently and effectively in a combat
environment.

To build on and expand DOD's efforts to reengineer its logistics system, we
recommend that the Secretary of Defense direct the Under Secretary of
Defense for Acquisition and Logistics to develop an overarching plan that
integrates the individual military service and Defense agency logistics
reengineering plans. Among other things, the plan should include an
investment strategy for funding the reengineering initiatives and details of
how DOD plans to achieve its final logistics system end-state.

To improve the implementation of DOD's logistics reengineering, we recommend
that before proceeding with implementation of product support reengineering,
the Secretary of Defense (1) reassess the schedule for testing, evaluating,
and implementing pilot program logistics reengineering initiatives; (2)
establish a methodology showing how much savings or improvements come from
reengineering concept tests; and
(3) reassess the approach to addressing combat command concerns about the
presence of increasing numbers of contractor personnel on the battlefield,
the ability of contractors to meet surge requirements, the potential
reduction of rotational slots to meet training requirements, and the overall
impact on product support costs and funding.

We received written comments from the Department of Defense, which are
reprinted in appendix III. The Department generally agreed with our report
and recommendations and stated that significant steps remain to be taken to
reengineer Defense's logistics processes. DOD also provided technical
comments that we incorporated in the report as appropriate.

In agreeing with our first recommendation, DOD stated that it has several
actions underway or planned to integrate service and Defense agency
reengineering plans. DOD said it plans to review service reengineering plans
for consistency with DOD's Logistics Strategic Planning objectives and use
its new logistics architecture to tie various service initiatives into an
overarching plan.

DOD partially agreed with our second recommendation. However, the
Department's response left unclear what, if any, actions it plans to take.
It stated that the Department's schedule for the pilot programs is pragmatic
and allows the services time to develop and test various strategies and
mitigate risks. However, as stated in our report, 21 of the 30 pilot
programs will not likely have test results available at the end of fiscal
year 2002, when DOD expects to begin expanding the use of successful
reengineering efforts to other weapon systems. We believe our recommendation
on the need for reassessing the Department's schedule for testing,
evaluating, and implementing program logistics reengineering initiatives is
still valid.

DOD also stated that it does not want to prescribe a methodology to assess
the extent to which savings or improvements result from reengineering
initiatives. Rather, DOD believes the use of metrics such as customer
service, readiness, performance, and total ownership cost reduction are
sufficient. We agree that such metrics can provide useful information.
However, they are not a sufficient measure of savings or improvements
because they cannot distinguish the impact of various initiatives from other
changes DOD is making to weapon systems. We continue to believe that
additional action is needed regarding the establishment of a methodology for
tying improvements and savings to specific reengineering efforts.

To assess DOD's logistics reengineering initiatives, we met with
headquarters officials in the Office of the Secretary of Defense and the
Joint Staff. We also met with Army officials at U.S. Army Materiel Command,
U.S. Army Training and Doctrine Command, U.S. Army Forces Command, and U.S.
Army European Command; Navy officials at Naval Air Systems Command, Naval
Sea Systems Command, Naval Supply Systems Command and Atlantic Fleet
Command, and U.S. Naval Forces Europe; Air Force officials at the Air Force
Materiel Command, Air Mobility Command, Air Combat Command, and U.S. Air
Forces Europe; and Marine Corps officials at Marine Corps Systems Command,
Marine Corps Materiel Command, Marine Corps Combat Development Command, and
Marine Corps Forces Europe.

To assess DOD's plans and the adequacy of information for developing the
overall reengineering strategy, we reviewed ongoing and proposed
initiatives, including 30 pilot programs (10 each from the Army, the Air
Force, and the Navy) used to test logistics reengineering concepts. We met
with program management officials responsible for each of the pilot programs
to obtain a general understanding of pilot goals, milestones, and status as
of February 2000. We then compared the anticipated pilot program results
with Office of the Secretary of Defense statements regarding goals and
objectives for reengineering logistics. We also relied on our prior work in
this area, and as well as on prior reports and studies describing past DOD
experiences and efforts in logistics reengineering techniques that rely more
heavily on private-sector support. We also discussed the status of key
logistics reengineering initiatives and challenges with responsible Office
of the Secretary of Defense and reengineering team members.

To assess the potential effect of the reengineering effort on combat forces,
we discussed the concepts with representatives from operational commands,
joint commands, and training and doctrine commands. Through discussions with
product support reengineering managers, we assessed the degree of combat
force input into DOD product support reengineering initiatives. We also
discussed combat commands' positions on the use of contractors to support
in-theater operations and any unresolved issues related to the use of
in-theater contractors.

To assess any other issues that could affect the achievement of
reengineering goals, we reviewed our prior work in this area and prior DOD
reports and studies discussing experiences in logistics reengineering. We
also discussed legal issues with our Office of General Counsel and relied on
the Office to assess the impact of various laws on DOD's reengineering
efforts. Finally, while discussing the status of key logistics reengineering
initiatives with responsible Office of the Secretary of Defense and
reengineering team members, we requested that the officials identify any
other issues that might affect DOD's reengineering efforts.

We conducted our review from September 1999 through April 2000 in accordance
with generally accepted government auditing standards.

We are sending copies of this report to the appropriate congressional
committees; the Honorable William Cohen, Secretary of Defense; the Honorable
Louis Caldera, Secretary of the Army; the Honorable F. W. Peters, Secretary
of the Air Force; the Honorable Richard Danzig, Secretary of the Navy;
General James L. Jones, Commandant of the Marine Corps; and Lieutenant
General Henry T. Glisson, Commander, Defense Logistics Agency. We will also
make copies available to others upon request. Please contact me on (202)
512-8412 if you or your staff have any questions concerning this report. Key
contributors are listed in appendix IV.

David R. Warren, Director
Defense Management Issues

List of Congressional Committees

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

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

The Honorable Floyd Spence
Chairman
The Honorable Ike Skelton
Ranking Minority Member
Committee on Armed Services
House of Representatives

The Honorable Jerry Lewis
Chairman
The Honorable John Murtha
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
House of Representatives

Recent Department of Defense Studies on Logistics Restructuring

Directions for Defense. The May 1995 report of the Commission on Roles and
Missions of the Armed Forces recommended that the Department of Defense
(DOD) privatize most existing depot maintenance work and all logistics
support for new and future weapon systems. In his August 24, 1995, letter to
Congress, the Secretary of Defense agreed with the Commission's
recommendations but expressed a need for DOD to retain limited capability to
meet essential wartime surge demands, promote competition, and sustain
institutional expertise.

Joint Vision 2010--America's Military: Preparing for Tomorrow. The 1996
report outlined a direction to the services for developing capabilities
within a joint framework of doctrine and programs and called for integration
among services. The report presented a concept called Focused Logistics,
which DOD expects will enable forces to be more mobile, versatile, and
projectable from anywhere in the world, with the expectation that the
military will be supported in a matter of hours or days, rather than weeks.
DOD expects to achieve Focused Logistics through a fusion of information,
logistics, and transportation and a transition from the vertical
organizations of the past. The new concept will include having DOD work
jointly with the private sector to take advantage of best business
practices.

The 1997 Quadrennial Defense Review called on DOD to reduce its support
infrastructure and streamline its business practices. It proposed that DOD
(1) make further reductions in civilian and military personnel associated
with the infrastructure; (2) request authority for two additional rounds of
base closures; (3) improve the efficiency and performance of support
functions by adopting innovative management and business practices,
including reengineering, downsizing, and commercializing operations; and (4)
consider outsourcing more non-combat related DOD support functions, inviting
commercial companies to compete with the public sector to undertake certain
support functions.

The 1997 Defense Reform Initiative (DRI) called on DOD to reduce its support
infrastructure and streamline its business practices. It was built around
four major reform efforts, or pillars: (1) reengineering Defense business
and support functions, primarily by adopting and applying best practices
from the commercial sector; (2) reorganizing and reducing the size of DOD
headquarters elements and Defense agencies, including the Office of the
Secretary of Defense; (3) expanding the use of competitive sources to open
DOD's commercial activities to competition from the private sector; and (4)
conducting two additional rounds of base realignments and closures and
eliminating other facilities that are no longer needed or drain resources.
In April 1999, we reported that it was too early to assess the effectiveness
of the DRI in the long term.19 We did, however, identify several areas where
DOD could build on its initial efforts and give even greater impetus to its
goals of achieving the desired "revolution in business affairs." Additional
efforts could include (1) incorporating other major ongoing reforms in the
DRI to develop a more comprehensive and integrated strategy for reforming
Defense business and support activities; (2) delineating more clearly the
funding requirements needed to achieve major reforms; and (3) enhancing the
Department's ability to measure DRI results, particularly through financial
management and related reforms.

Actions to Accelerate the Movement to the New Workforce Vision, delivered to
Congress by the Secretary of Defense in April 1998, provided the
Department's plan to streamline its acquisition organizations, workforce,
and infrastructure. The report stated that the maintenance of inventories
would undergo dramatic change, as contractors would retain most inventories
except for those in the hands of operational forces, while government-held
wholesale inventory would largely disappear. The Secretary added that his
was a vision of smaller and fewer organizations focused on managing
suppliers rather than supplies and on the total costs of ownership to
provide and support the high--quality goods and services that combat forces
need.

The 1999 Logistics Strategic Plan states that by the end of fiscal year
2005, the joint logistics process will be a highly efficient, integrated
system that will ensure the required support to combat forces. The plan
states that DOD's logistics mission is to provide responsive and
cost-effective support to ensure readiness and sustainability for the total
force across the spectrum of military operations. As currently envisioned,
the reengineered logistics support system will (1) be a fully integrated
supply chain of products and services that meets the needs of combat forces
efficiently;
(2) replace large inventories with significantly more reliable weapon
systems, shortened processing cycles, more agile manufacturing, tailored
maintenance support, and accurate schedules of deliveries for products and
services; (3) use the concept of best value (most quality received at a
reasonable cost versus the lowest cost) to determine how products and
services will be provided; (4) use a joint-service logistics command, which
will have control of assets and capabilities, information to set support
priorities, and the means to direct the distribution of resources across the
services during combat operations; (5) use commercial products and
capabilities as the principal source of commodity and service support while
maintaining core functions20 within the department; and (6) provide
widespread access to information by integrating data used by private
industry and DOD.

DOD Weapon System Pilots and Associated Product Support Strategies

 Service                                 Product support strategies
 Army pilots − fielded systems
                                         Establish virtual prime vendor for
                                         support of Apache aircraft and
                                         sub-systems
 AH-64 Apache Helicopter
                                         Modernize system with new
                                         components to upgrade system
                                         capability
                                         Contractor logistics support on
                                         sub-systems

                                         Public/private partnering for
                                         overhauling tanks

 M-1 Abrams Tank                         Use contractor-provided parts kits
                                         for engine overhauls

                                         Acquire a more fuel-efficient and
                                         reliable tank engine under a
                                         long-term performance-based
                                         contract
                                         Reduce personnel costs by
                                         integrating responsibilities for
                                         developing new/upgraded systems
 Fire Support Command and Control        and sustainment of in-use systems

                                         Reduce parts costs through use of
                                         contractor logistics support
                                         Partnering between the program
                                         office and the Defense Logistics
                                         Agency to reduce surcharges to the
                                         program
 Heavy Expanded Mobility Tactical Truck
                                         Upgrade the truck with existing
                                         commercial technologies to improve
                                         reliability and extend service
                                         life
                                         Establish a partnership between
                                         the program office and the Army
                                         Material Command

 CH-47 Chinook Helicopter                Focus on system costs by using a
                                         functionally based approach

                                         Concentrate on reducing
                                         non-hardware cost drivers such as
                                         training
                                         Reduce sustainment costs through
 Guardrail Common Sensor                 use of performance-based
                                         contractor logistics support for
                                         Guardrail-unique items
 Army pilots − new systems
                                         Integrated life-cycle support
                                         system to support user
                                         requirements and lower cost of
 Crusader                                ownership through use of
                                         continuous technology improvements

                                         Long-range plan to competitively
                                         source life-cycle support
                                         Prime contractor will have total
                                         system support responsibility

 HIMARS Multiple Launch Rocket System    Partnering between prime
                                         contractor and the Army depots

                                         Use of long-term contracts
                                         Conduct a strategy support study
 RAH-66 Commanche Helicopter             in 2001 to determine what
                                         strategies to pursue
                                         Contractor logistic support for
 Tube-launched Optically-controlled      the life of the system that
 Wire-guided Improved Target Acquisition requires a 90 percent system
 System                                  operating level as a performance
                                         requirement
 Navy pilots − fielded systems
                                         Technology insertion, reengineered
 Smart Carrier                           work practices, and design
                                         modifications to reduce workload
                                         and hence manpower requirements
                                         Defense Logistics Agency virtual
                                         prime vendor contract for parts to
 EA-6B Prowler                           support J-52 engine depot level
                                         repairs at Naval Aviation Depot,
                                         Jacksonville
                                         Virtual prime vendor support for
                                         H-60 parts and material to all
 H-60 Helicopter                         levels of maintenance, as well as
                                         upgrading and re-manufacturing
                                         programs
                                         Technology insertion, reduced
 Common Ships                            cumbersome work practices, and
                                         reengineered maintenance to reduce
                                         manpower requirements
                                         Technology insertion and virtual
 Aviation Support Equipment              prime vendor support for
                                         consolidated automated support
                                         systems
                                         Reduce system acquisition costs by
 Stand-off Land Attack Missile           accelerating buy-out of missile
                                         requirement
                                         Technology insertion and virtual
 Smart Ships                             prime vendor support for
                                         integrated ship controls
 Navy pilots − new systems
 Advance Amphibious Assault Vehicle      Contractor logistics support
 LPD-17 Transport Ship                   Contractor logistics support
 Medium Tactical Vehicle Replacement     Contractor logistics support
 Air Force pilots − fielded
 systems
                                         Program office enters into
                                         agreements with suppliers and
                                         reviews performance against
                                         agreement specifications
 F-16 Fighter Falcon
                                         Use of a contractor for
                                         sustainment of selected avionics
                                         items, with the contractor having
                                         total system performance
                                         responsibility
                                         Program office enters into written
                                         agreements with DOD supply sources
                                         defining responsibilities and
                                         metrics for performance

                                         Contractor developing approaches
                                         to address diminishing
                                         manufacturing sources and
 B-1 Lancer                              resulting parts obsolescence

                                         Consolidate 19 sole-source
                                         contracts into 1 to achieve
                                         integration efficiencies

                                         Meld the contractor and the Air
                                         Force deficiency reporting systems
                                         into one system
                                         Conduct a comprehensive
                                         supply-chain management study to
                                         isolate and identify cost drivers
                                         for further action

                                         Modernize the aircraft's avionics
 C-5 Galaxy                              while using a contractor to
                                         provide performance-based support
                                         for the new avionics items

                                         Program office enters into written
                                         agreements with DOD repair and
                                         supply sources
                                         Contractor will have total system
                                         support responsibility
 F-117A Nighthawk
                                         Contractor incentivized to
                                         modernize through spares by
                                         sharing any resulting savings
                                         Use of performance-based contract
                                         to reduce repair times

                                         Develop agreements with parts
 C/KC-135 Stratolifter/Stratotanker      suppliers to provide a guaranteed
                                         level of spare parts

                                         Reviewing expensive spare parts to
                                         identify improvements or
                                         replacements
                                         Contractor provides logistics
                                         sustainment for the mission
                                         computer upgrade

                                         Partnership with NATO to jointly
                                         develop test program sets for the
 Airborne Warning and Control System     radar system improvement program
                                         Contractor maintains the technical
                                         data for the system

                                         Analyze partnering opportunities
                                         for wholesale depot and supply
                                         operations
                                         Contractor is given total system
 Joint Surveillance and Target Attack    support responsibility using a
 Radar System                            6-year contract, with 22-year
                                         award term incentive
                                         Contractor logistics support
 C-17 Globemaster III                    called "flexible sustainment"
                                         prior to the source-of-repair
                                         decision in 2003
                                         Logistics support will be
 Cheyenne Mountain Complex Integrated    integrated under one contractor
 Space Command and Control Program       that will be given total system
                                         performance responsibility
 Air Force pilots − new systems

 Space Based Infrared System             Contractor will be given total
                                         system performance responsibility

Comments From the Department of Defense

GAO Contacts and Staff Acknowledgments

Barry Holman (202) 512-5581
Julia Denman (202) 512-4290

In addition to those named above, Glenn Knoepfle, David Epstein,
Larry Junek, John Strong, Pam Valentine, and John Brosnan made key
contributions to this report.

GAO Related Products

Depot Logistics: Air Force Report on Contractor Support is Narrowly Focused
(GAO/NSIAD-00-115 , Apr. 20, 2000).

Depot Maintenance: Air Force Faces Challenges in Managing to 50-50 Ceiling
(GAO/T-NSIAD-00-112 , Mar. 3, 2000).

Depot Maintenance: Future Year Estimates of Public and Private Workloads Are
Likely to Change (GAO/NSIAD-00-69 , Mar. 1, 2000).

Depot Maintenance: Workload Allocation Reporting Improved, but Lingering
Problems Remain (GAO/NSIAD-99-154 , July 13, 1999).

Army Logistics: Uncertainties Surrounding Proposed Support Plan for Apache
Helicopter (GAO/NSIAD-99-140 , May 25, 1999).

Navy Ship Maintenance: Allocation of Ship Maintenance Work in the Norfolk,
Virginia, Area (GAO/NSIAD-99-54, Feb. 24, 1999).

Army Industrial Facilities: Workforce Requirements and Related Issues
Affecting Depots and Arsenals (GAO/NSIAD-99-31 , Nov. 30, 1999).

Defense Depot Maintenance: Public and Private Sector Workload Distribution
Reporting Can Be Further Improved (GAO/NSIAD-98-175,
July 23, 1998).

Defense Depot Maintenance: Use of Public-Private Partnership Arrangements
(GAO/NSIAD-98-91 , May 7, 1998).

Defense Depot Maintenance: DOD Shifting More Workload for New Weapon Systems
to the Private Sector (GAO/NSIAD-98-8 , Mar. 31, 1998).

DOD Depot Maintenance: Information on Public and Private Sector Workload
Allocations (GAO/NSIAD-98-41, Jan. 20, 1998).

Defense Depot Maintenance: Challenges Facing DOD in Managing Working Capital
Funds (GAO/T-NSIAD/AIMD-97-152 , May 7, 1997).

Depot Maintenance: Uncertainties and Challenges DOD Faces in Restructuring
Its Depot Maintenance Program (GAO/T-NSIAD-97-111 ,
Mar. 18, 1997, and GAO/T-NSIAD-112 , Apr. 10, 1997).

Navy Ordnance: Analysis of Business Area Price Increases and Financial
Losses (GAO/AIMD/NSIAD-97-74 , Mar. 14, 1997).

Defense Outsourcing: Challenges Facing DOD as It Attempts to Save Billions
in Infrastructure Costs (GAO/T-NSIAD-97-110 , Mar. 12, 1997).

High-Risk Series: Defense Infrastructure (GAO/HR-97-7 , Feb. 1997).

Defense Depot Maintenance: DOD's Policy Report Leaves Future Role of Depot
System Uncertain (GAO/NSIAD-96-165, May 21, 1996).

Defense Depot Maintenance: More Comprehensive and Consistent Workload Data
Needed for Decisionmakers (GAO/NSIAD-96-166 , May 21, 1996).

Defense Depot Maintenance: Privatization and the Debate Over the
Public-Private Mix (GAO/T-NSIAD-96-146 , Apr. 16, 1996, and
GAO/T-NSIAD-96-148 , Apr. 17, 1996).

Closing Maintenance Depots: Savings, Personnel, and Workload Redistribution
Issues (GAO/NSIAD-96-29 , Mar. 4, 1996).

Depot Maintenance: Issues in Allocating Workload Between the Public and
Private Sectors (GAO/T-NSIAD-94-161 , Apr. 12, 1994).

Depot Maintenance: Issues in Management and Restructuring to Support a
Downsized Military (GAO/T-NSIAD-93-13 , May 6, 1993).

(709485)

Table 1: Estimated Fiscal Year 2000 Logistics System Personnel
and Costs 7

Table 2: Number of Pilot Programs Whose Plans Are Not Likely to
Meet Logistics Reengineering Time Lines 13

Figure 1: Key Reengineering Milestones 11
  

1. The Department and the military services refer to changes in logistics
systems as reengineering, restructuring, transforming, etc. For consistency,
we use the term reengineering throughout this report.

2. Best commercial practices are techniques used by private industry to
achieve superior performance. They include activities such as outsourcing
and electronic commerce.

3. The 1999 Defense Reform Initiative update used this figure to identify
major logistics actions under way.

4. P. L. 106-65.

5. The National Military Strategy requires that the Department be able to
respond to the full spectrum of crises, from small-scale contingencies to
major wars.

6. Additional reviews are under way to address other issues in the mandate,
including spare parts shortages, war reserve planning, and prepositioned
stocks. These reports will be completed at a later date.

7. Department of Defense: Progress in Financial Management Reform
(GAO/T-AIMD/NSIAD-00-163 , May 9, 2000).

8. In the absence of competition, the services will use a business case
analysis, which involves a comparison of the costs and benefits of the
current logistics support process with the estimated costs and benefits of
the proposed alternative approaches.

9. The life-cycle of a system includes development, production, operational
support, and disposal.

10. A prime vendor is a private firm that provides commercial products using
commercial pricing and established distribution arrangements. A virtual
prime vendor is a private firm that performs integrated supply chain
management, a broad set of functions involving the movement, maintenance,
technology improvement, or configuration management of products. The concept
has been widely applied for consumable goods and is now being adopted for
reparable items.

11. The October 1999 Program Manager Oversight of Life-Cycle Support report
was released as a study group report, not as an implementation report for
DOD's April 1998 Report to Congress on Actions to Accelerate Movement to the
New Workforce Vision.

12. The Advanced Amphibious Assault Vehicle and the Medium Tactical Vehicle.

13. Program Manager Oversight of Life-Cycle Support, Report of the
Department of Defense Program Manager Oversight of Life-Cycle Support Study
Group (Section 912c, Oct.1999).

14. Operations and support includes fuel, repair parts, maintenance,
contract and support services, and personnel.

15. Combat commands generally control operations and support funds, while
program offices generally control acquisition funds.

16. In January of 1999, the Defense System Affordability Council directed
the services to develop plans to reduce operating and support costs of
weapon systems by 20 percent by 2005. These plans were in place at the time
weapon systems were selected as pilot programs and in some cases were used
in lieu of separate product support reengineering plans.

17. Defense Outsourcing: Impact on Navy Sea-Shore Rotations
(GAO/NSIAD-98-107 , Apr. 27, 1998).

18. Defense Depot Maintenance: Contracting Approaches Should Address
Workload Characteristics (GAO/NSIAD-98-130 , June 15, 1998).

19. Defense Reform Initiative: Organization, Status, and Challenges
(GAO/NSIAD-99-87 ,
Apr. 21, 1999).

20. The study defines core functions as military capabilities that are
unavailable in the commercial marketplace or tasks that DOD clearly performs
in a manner superior to the private sector to satisfy inherently
governmental responsibilities.
*** End of document. ***