Defense Infrastructure: Savings From Cataloging Consolidation Are
Uncertain (Letter Report, 03/06/98, GAO/NSIAD-98-71).

Pursuant to a congressional request, GAO reviewed the Department of
Defense's (DOD) decision to centralize and consolidate DOD cataloging
operations in Battle Creek, Michigan, focusing on: (1) the likelihood
that DOD's decision will result in the estimated personnel reductions
and savings; (2) challenges DOD may face when implementing the
consolidation effort; and (3) proposals made by two employee groups that
state that DOD could achieve even greater personnel reductions and
savings by centralizing and consolidating cataloging operations in other
locations.

GAO noted that: (1) it is uncertain that the estimated personnel
reductions and savings will occur; (2) DOD's estimates are based on
several assumptions that either will not necessarily occur or have
changed since DOD made the estimates; (3) DOD based the estimates, for
example, on an assumption of what a standardized cataloging process may
look like but has not settled on an actual design of the centralized and
consolidated system; (4) detailed studies to document existing
cataloging processes are still ongoing and will be important for
determining how cataloging processes can be separated from other
materiel management functions; (5) DOD also assumed that an ongoing
system development project to develop a standardized cataloging system
would be successful and thus did not consider any system development
costs in estimating savings; (6) however, DOD has since halted work on
that system, and costs to develop a new one are uncertain; (7) DOD faces
significant challenges in implementing the consolidation; (8) prior DOD
cataloging consolidation efforts incurred problems that will need to be
taken into consideration in developing detailed implementation plans for
consolidation; (9) separating cataloging from other service provisioning
and materiel management functions may be difficult and could negatively
affect cataloging operations during the transition; (10) DOD may lose
much of its cataloging experience because of the reluctance of
experienced catalogers to relocate; (11) a Defense Logistics Agency
(DLA) official stated that DLA has begun developing plans that address
these risks and that no cataloging functions will be transferred to
Battle Creek until these plans are complete; (12) planning for the new
standardized cataloging process and the necessary standardized
cataloging system will not be completed until after catalogers are moved
to Battle Creek; (13) DOD also plans, in conjunction with the move, to
reduce the number of catalogers to levels envisioned only after process
reengineering and consolidation of cataloging have occurred; (14) DOD
officials believe the move will increase the likelihood of catalogers
adapting to the as yet unplanned new processes and systems; (15)
however, senior officials responsible for service cataloging operations
have expressed concerns about the risks inherent in proceeding without
detailed plans to guide the consolidation; and (16) until a standardized
cataloging process is developed, it is not possible to determine the
reasonableness of the employee groups' proposals concerning further
staff reductions.

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

 REPORTNUM:  NSIAD-98-71
     TITLE:  Defense Infrastructure: Savings From Cataloging 
             Consolidation Are Uncertain
      DATE:  03/06/98
   SUBJECT:  Federal agency reorganization
             Centralization
             Defense cost control
             Military downsizing
             Defense economic analysis
             Inventory control systems
             Military inventories
             Reductions in force
IDENTIFIER:  DOD Provisioning Cataloging Technical Support System
             Battle Creek (MI)
             
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Cover
================================================================ COVER


Report to Congressional Requesters

March 1998

DEFENSE INFRASTRUCTURE - SAVINGS
FROM CATALOGING CONSOLIDATION ARE
UNCERTAIN

GAO/NSIAD-98-71

Defense Infrastructure

(709292)


Abbreviations
=============================================================== ABBREV

  DLA - Defense Logistics Agency
  DOD - Department of Defense
  PCTSS - Provisioning and Cataloging Technical Support System

Letter
=============================================================== LETTER


B-278308

March 6, 1998

The Honorable Robert Borski
The Honorable David L.  Hobson
House of Representatives

On March 25, 1997, the Department of Defense (DOD) announced its
decision to centralize and, ultimately, consolidate DOD cataloging
operations in Battle Creek, Michigan.  According to DOD,
"centralizing" cataloging operations entails transferring existing
military service and defense agency cataloging operations to Battle
Creek, and "consolidating" entails organizing them under one command
using standardized cataloging processes and systems.  Battle Creek
was selected by a DOD Steering Committee and Working Group following
an assessment of five candidate sites.\1 DOD estimates that, by
centralizing and consolidating operations, it will be able to reduce
the number of full-time equivalent civilian employees performing
cataloging functions from 907 to 753 and save $7.1 million (in fiscal
year 1996 dollars) annually. 

As you requested, this report addresses (1) the likelihood that DOD's
decision will result in the estimated personnel reductions and
savings, (2) challenges DOD may face when implementing the
consolidation effort, and (3) proposals made by two employee groups
that state that DOD could achieve even greater personnel reductions
and savings by centralizing and consolidating cataloging operations
in other locations (instead of in Battle Creek, Michigan). 


--------------------
\1 DOD's site selection criteria considered cost of operation and
quality of life. 


   BACKGROUND
------------------------------------------------------------ Letter :1

"Cataloging" is the process of naming, describing, classifying, and
numbering items that are repetitively purchased, stocked, and
distributed by DOD.  The purpose of cataloging is to enable customers
to acquire the appropriate item and prevent duplicate items from
entering the supply system.  DOD officials estimate that
approximately 2,000 to 2,200 employees are involved in cataloging.\2
DOD reports that its catalog currently consists of seven million
items and the military services and defense agencies reportedly spend
$72.8 million annually (in fiscal year 1996 dollars) to maintain it. 
Each military service and defense agency separately catalogs those
items it manages.  Cataloging is primarily performed at the 14
military service and defense agency locations listed in table 1.\3



                                Table 1
                
                Main Military Service and Defense Agency
                            Cataloging Sites


Army Logistics Support Activity           Army Aviation and Missile
Huntsville, Ala.                          Command
                                          Huntsville, Ala.

Army Tank and Automotive Command          Army Communications
Warren, Mich.                             Electronics Command
                                          Fort Monmouth, N.J.

Army Chemical Armament Logistics Agency   Marine Corps Logistics Base
Rock Island, Ill.                         Albany, Ga.

Navy Inventory Control Point              Navy Inventory Control
Philadelphia, Pa.                         Point
                                          Mechanicsburg, Pa.

Air Force Cataloging and Standardization  Defense Industrial Supply
Center                                    Center
Battle Creek, Mich.                       Philadelphia, Pa.


Defense Supply Center Columbus            Defense Supply Center
Columbus, Ohio                            Richmond
                                          Richmond, Va.

Defense Personnel Support Center          Defense Logistics Services
Philadelphia, Pa.                         Center
                                          Battle Creek, Mich.
----------------------------------------------------------------------
DOD's most recent effort to centralize and consolidate cataloging
operations came about as a result of the report by the 1995
Commission on Roles and Missions of the Armed Forces,\4 which
recommended reducing the cost of DOD's support infrastructure through
increased outsourcing and better management.  Materiel management was
specifically identified as an area for outsourcing and, within this
area, the commission recommended outsourcing cataloging. 

Following the Commission's report, each of the services looked at
materiel management to identify potential candidate programs for
outsourcing and similarly concluded that cataloging was a good
candidate.  The Defense Logistics Agency (DLA) began a catalog
reengineering project to examine the overall cataloging business
process, and both the Army and the Navy separately started business
case analyses for materiel management functions, including
cataloging.  In early 1996, the Deputy Under Secretary of Defense for
Logistics proposed a DOD-wide study (business case analysis) of
cataloging operations within DOD that would bring the assessments
then under way by the services and DLA into one comprehensive
assessment.\5

DOD's business case analysis assessed four ways to manage cataloging
operations:  (1) maintaining the status quo, (2) contracting them out
(using a commercial firm to provide cataloging services), (3)
consolidating them, and (4) centralizing and consolidating them.  For
each alternative, the analysis assumed a 7-year implementation period
(starting in fiscal
year 1997 and ending in fiscal year 2003) and that personnel
reductions would all take place in fiscal year 1999.  Estimated
savings both during the 7-year implementation period and after
implementation are primarily labor cost savings.  Table 2 presents
the results of the analysis. 



                                Table 2
                
                     Estimated Costs and Savings of
                  Alternatives for Managing Cataloging
                           Operations (fiscal
                            years 1997-2003)

                    (In millions of fiscal year 1996
                                dollars)

                                                Savings         Annual
                             Cost during         during  savings after
                           implementatio  implementatio  implementatio
Alternative                            n              n              n
-------------------------  -------------  -------------  -------------
Status quo                        $305.3          N/A\a          N/A\a
Consolidating                      279.8          $25.5           $3.8
Centralizing and                   274.8           30.5            7.1
 consolidating
Contracting out                   $276.1          $29.2          $11.1
----------------------------------------------------------------------
\a Not applicable. 

Source:  DOD Cataloging Business Case Analysis. 

The results of the business case analysis were briefed to the Deputy
Secretary of Defense in August 1996.  DOD officials decided that,
while contracting out appeared to offer the greater annual recurring
savings, centralizing and consolidating cataloging posed fewer risks. 
However, the officials decided that contracting pilot tests would be
conducted where it made sense.  On August 30, 1996, DOD asked DLA to
take the lead in implementing required actions in support of
centralizing and consolidating cataloging.  Within DLA, the Defense
Logistics Services Center was given responsibility for
implementation. 


--------------------
\2 DOD officials estimate that 2,000 to 2,200 personnel perform
cataloging tasks on a full- or part-time basis.  The total amount of
time these personnel devote to cataloging equates to 907 full-time
equivalent personnel. 

\3 Various other agencies also perform cataloging functions but these
agencies account for only a small percent of reported cataloging
transactions. 

\4 Directions for Defense, Report of the Commission on Roles and
Missions of the Armed Forces (May 24, 1995). 

\5 DOD Cataloging Business Case Analysis, KPMG Peat Marwick LLP (Aug. 
8, 1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

It is uncertain that the estimated personnel reductions and savings
will occur.  DOD's estimates are based on several assumptions that
either will not necessarily occur or have changed since DOD made the
estimates.  DOD based the estimates, for example, on an assumption of
what a standardized cataloging process may look like but has not
settled on an actual design of the centralized and consolidated
system.  Detailed studies to document existing cataloging processes
are still ongoing and will be important for determining how
cataloging processes can be separated from other materiel management
functions.  DOD also assumed that an ongoing system development
project to develop a standardized cataloging system would be
successful and thus did not consider any system development costs in
estimating savings.  However, DOD has since halted work on that
system, and costs to develop a new one are uncertain. 

DOD faces significant challenges in implementing the consolidation. 
Prior DOD cataloging consolidation efforts incurred problems that
will need to be taken into consideration in developing detailed
implementation plans for consolidation.  First, separating cataloging
from other service provisioning and materiel management functions may
be difficult and could negatively affect cataloging operations during
the transition.\6 Second, DOD may lose much of its cataloging
experience because of the reluctance of experienced catalogers to
relocate.  A DLA official stated that DLA has begun developing plans
that address these risks and that no cataloging functions will be
transferred to Battle Creek until these plans are complete.  However,
these plans were not available for our review.  Third, planning for
the new standardized cataloging process and the necessary
standardized cataloging system will not be completed until after
catalogers are moved to Battle Creek.  DOD also plans, in conjunction
with the move, to reduce the number of catalogers to levels
envisioned only after process reengineering and consolidation of
cataloging have occurred.  DOD officials believe the move will
increase the likelihood of catalogers adapting to the as yet
unplanned new processes and systems.  However, senior officials
responsible for service cataloging operations have expressed concerns
about the risks inherent in proceeding without detailed plans to
guide the consolidation. 

Until a standardized cataloging process is developed, it is not
possible to determine the reasonableness of the employee groups'
proposals concerning further staff reductions. 


--------------------
\6 "Provisioning" is the process of ensuring effective spare parts
support for new weapons and equipment. 


   UNTIL DOD'S PLANS ARE
   FINALIZED, PERSONNEL
   REQUIREMENTS AND SAVINGS WILL
   REMAIN UNCERTAIN
------------------------------------------------------------ Letter :3

DOD's 1996 business case analysis projected that DOD could
potentially reduce the number of full-time equivalent catalogers from
907 to 753 and save approximately $7.1 million annually by
centralizing and consolidating its cataloging operations.  The staff
projections, however, are based on assumptions about what a
standardized cataloging process might look like rather than on actual
plans for reengineered processes.  DOD also assumed that a
standardized provisioning and cataloging system under development at
the time the business case analysis was conducted would meet its
cataloging system needs and did not recognize costs to develop such a
system.  The system DOD was counting on, however, has been
terminated.  Development costs for a new system are uncertain.  Until
DOD completes its planning on a design for the new cataloging process
and develops a cost estimate for the new standardized system, it has
no firm basis for projecting staff requirements and savings from
centralizing and consolidating cataloging operations. 


      STANDARDIZED DESIGN IS
      NEEDED AS A BASIS FOR
      PROJECTING SAVINGS
---------------------------------------------------------- Letter :3.1

Differences exist among the services and defense agencies both in
their approaches to cataloging and the extent to which cataloging
tasks are integrated into other functions.  Some differences are
organizational (such as the Air Force's operating a consolidated
cataloging process while the other military services and agencies do
not), and some involve process differences (such as the degree to
which cataloging tasks are integrated into other materiel management
and acquisition processes).  The Navy, for example, no longer has
stand-alone cataloger positions.  Instead, its cataloging tasks are
performed in conjunction with other provisioning, procurement, and
integrated logistics data management actions.  Standardizing these
diverse cataloging processes is essential to operating in a
consolidated environment. 

DOD has not yet decided how a standardized cataloging process would
work.  Its projection that 753 full-time equivalent employees will be
needed for a centralized and consolidated operation is an estimate
based on the assumption that the new standardized process will not
differ markedly from some of the best practices currently in use and
that these best practices can be adopted by the other services and
agencies.  Accordingly, DOD identified the best practices currently
in use and, using productivity data for the best practices,
extrapolated that data to the total DOD workload to approximate the
staff requirements for a new standardized process.  DOD's business
case analysis acknowledges that this methodology does not dictate the
way that cataloging functions would be performed in a real
consolidated environment, but DOD officials stated that they believe
it provides a good estimate of the resources that will be needed.  We
do not agree that this provides an adequate basis for making staff
reductions.  More information on DOD's methodology is provided in
appendix I. 


      STAFFING REQUIREMENTS ARE
      UNCERTAIN
---------------------------------------------------------- Letter :3.2

DOD's business case analysis methodology provides a good starting
point for more detailed analysis and planning.  However, sufficient
uncertainties about future processes make the analysis a questionable
basis for making actual personnel reductions in the absence of more
detailed planning.  Because DOD has not yet developed its new
cataloging business process, its staff requirements are subject to
change.  In October 1997, for example, a senior-level cataloging
committee recommended that DOD exempt two cataloging functions from
consolidation--item management coding and nuclear cataloging.  DLA
officials report that these two cataloging functions involve 26
full-time equivalent catalogers.  Because 26 catalogers will remain
at their present work sites, this will reduce expected personnel
savings.  DOD has not yet made a decision on the committee's
recommendation. 

Other changes in DOD's staffing requirements may come from individual
service and defense agency requests to exempt some cataloging
activities, or portions of activities, from centralization and
consolidation.  For example, in October 1997, the Commander of the
Navy Inventory Control Point formally requested that DLA exempt 62 of
the 92 positions the Navy was scheduled to lose from its cataloging
operations.  According to the Navy's request, cataloging activities
are integrated into other materiel management processes, and it is
not possible to separate them without disrupting other processes and
creating redundancies between the Navy and the new centralized
cataloging facility.  The Navy also pointed out that the business
case analysis found that its integrated process was the most
efficient, responsive process for the two largest cataloging
functions--new item introduction and data management.  Thus, the Navy
is reluctant to risk disrupting its cataloging process until DLA
determines if consolidation offers greater efficiencies than the
Navy's integrated processes.  DLA catalogers have asked for
exemptions for 39 personnel performing data maintenance activities,
and the other military services and defense agencies may seek
exemptions for some of their personnel as well.  Were all of these
waiver requests valid, they would negate a major portion of the
savings expected to occur through cataloging consolidation.  A DLA
official said that these requests will be addressed when DLA develops
the individual service and defense agency business plans, but he
expects that most requests for exemptions will likely be denied. 

DLA is in the preliminary stages of planning how it will standardize
processes and meet its system needs but intends to move existing
cataloging services to Battle Creek in three groups.  Catalogers from
(1) the Army, the Air Force, and the Defense Supply Center-Columbus
would move in 1998; (2) the Defense Supply Center-Richmond and the
Marine Corps in 1999; and (3) the Navy, the Defense Industrial Supply
Center, the Defense Personnel Support Center, and the Defense Special
Weapons Agency in 2000.  Catalogers from the Air Force and the
Defense Logistics Services Center are already located in Battle
Creek.  After the move the services and defense agencies would
continue to operate using their unique cataloging processes and
systems.  Meanwhile, DLA would begin the task of developing a common
process.  Detailed studies of the individual service and defense
agency cataloging processes that DLA officials describe as a first
step in reengineering cataloging processes began in October 1997, and
a DLA official estimates that these studies will take approximately
2 years to complete.  These studies will document how (1) each of the
services' and agencies' existing processes work and (2) cataloging
processes would be separated from other materiel management
processes.  Presumably such studies would also determine whether
consolidation is the preferred option from a cost and operational
standpoint compared with some current approaches where cataloging is
integrated into other materiel management processes. 


      COST TO STANDARDIZE
      CATALOGING SYSTEMS IS
      UNKNOWN
---------------------------------------------------------- Letter :3.3

The military services and defense agencies maintain separate
logistics data management systems, and these systems provide the data
needed to perform cataloging functions.  According to cataloging
managers at the sites visited, the system differences are significant
and a cataloger from one service or agency would be unable to perform
cataloging functions using another service's or agency's logistics
data management systems.  To consolidate operations, DOD will need to
develop a standardized system that can handle the differing service
and defense agency item management processes.  However, DOD did not
consider costs for a standardized cataloging system in its estimate
for a centralized and consolidated cataloging operation.  Such costs
could materially affect the projected savings from consolidating
cataloging operations. 

At the time the business case analysis was conducted, DOD was in the
midst of developing a standardized system called the Provisioning and
Cataloging Technical Support System (PCTSS).  This system was being
developed by the Joint Logistics Services Center to standardize a
cataloging and provisioning system for logistics data management
across DOD.  According to DOD, approximately $48 million was spent on
development, and the business case analysis estimated that completing
the cataloging portions of the PCTSS system would cost $139 million. 
However, a contractor official told us that system completion costs
were not included in the analysis because of the assumption that the
costs for completing the system would be incurred with or without
consolidation. 

The contractor's assumptions were valid at the time the business case
analysis was completed, but in late 1996, DOD terminated development
of the PCTSS system.  With the demise of PCTSS, DOD will need a new
development effort for a standardized cataloging system.  System
development costs have not yet been estimated.  The team leader for
DLA's cataloging and transition office believes that the $139 million
estimate in the business case analysis is excessive but has not
offered an alternative estimate.  As a first step DLA hired a
contractor to review the former PCTSS development effort and to
determine what is usable and what must be redone.  DOD officials also
stated that whatever the development costs are, they would be offset
by the costs that would have been incurred in maintaining the myriad
of existing systems.  However, DOD could not provide us with data to
support this position.  Further, we believe that to fully assess
costs DOD would need to evaluate the expected life-cycle costs of the
two approaches.  Without a full assessment of costs and savings, DOD
cannot fully determine the extent to which savings will exceed costs
and the amount of time that would be needed for savings to offset the
costs associated with this consolidation effort. 


   DOD FACES SIGNIFICANT
   CHALLENGES IN CENTRALIZING AND
   CONSOLIDATING OPERATIONS
------------------------------------------------------------ Letter :4

Although DOD has not yet developed a standardized cataloging process
or determined how it will meet its needs for a standardized
cataloging system, it has decided to relocate catalogers to Battle
Creek, and reduce the number of catalogers to be relocated to a level
envisioned after the processes and systems are standardized. 
According to the business case analysis, centralizing catalogers
under one command will increase the likelihood of catalogers adopting
to the new processes and procedures.  However, DOD's prior
experiences in consolidating cataloging operations show that
consolidating entails risks that if not adequately addressed can
significantly degrade cataloging services.  A DLA official told us
they are preparing plans that address these risks.  However, at the
conclusion of our review the plans had not been completed. 


      QUESTIONS EXIST ABOUT
      SEPARATING CATALOGING FROM
      OTHER FUNCTIONS
---------------------------------------------------------- Letter :4.1

Senior officials at the two DLA and two military service cataloging
sites we visited expressed concerns about consolidating cataloging
operations without a clearly defined business process to guide the
consolidation.  According to these officials, many cataloging
processes are integrated with other processes, and separating them
without a clear understanding of how a new process will work could
affect customers and create additional costs and inefficiencies.  For
example, Navy officials report that cataloging data maintenance is
generally done by a weapon system equipment specialist, item manager,
or other noncataloging person in conjunction with other provisioning,
procurement, or logistics data management actions.  While the Navy
would have to give up positions to a centralized cataloging activity,
supply center personnel will still be required to determine and
originate the appropriate data changes.  They suggest that cataloging
centralization will result in some redundancy between the service and
the centralized cataloging activity.  The Deputy Director of the
Defense Supply Center-Columbus similarly maintains that removing some
functions from the inventory control point may have negative effects
on some processes and could result in increased response times. 

A DOD official stated that, in the short term, centralizing
cataloging personnel before reengineering cataloging processes could
result in inefficiencies and added costs.  However, the official said
these inefficiencies would disappear when the processes were
reengineered.  The official also said that centralizing before
reengineering is justified because prior efforts to consolidate had
met with resistance and an inability to develop consensus between the
services and defense agencies on a common approach to cataloging. 
This official also said that centralizing cataloging under one
command is key to further efforts to achieve an integrated and
consolidated cataloging operation.  We believe that, while
consolidating into one command may be necessary to overcome service
parochialism, a sound decision should be predicated on a clear
understanding of the new process and its expected costs and benefits,
including confirmation of the feasibility and benefits of separating
integrated cataloging functions from the services that include
cataloging as part of the services' overall provisioning processes. 


      CATALOGER EXPERIENCE WAS
      LOST IN PREVIOUS
      CONSOLIDATIONS
---------------------------------------------------------- Letter :4.2

DOD's prior experiences in consolidating cataloging operations
indicates a high risk of losing substantial cataloger experience and
that such moves must be carefully managed.  For example, in 1976 when
the Air Force consolidated its cataloging and standardization
operations in Battle Creek, it suffered a significant loss of
cataloging experience from catalogers who were unwilling to relocate. 
According to an Air Force history of the move, only 87 of 574 persons
slated to relocate made the move, and no supervisory cataloging
personnel relocated.\7 The history reports that personnel problems
were so severe that all other problems paled beside them.  Air Force
cataloging productivity suffered during the first year of operations
and only high-priority work was accomplished.  Routine work, such as
revising existing catalog data, was put aside until the second year
of operation.  The Air Force reports that it ultimately resolved its
problems and was able to reduce its cataloging and standardization
infrastructure by 69 percent.  The Army was able to fill 90 percent
of its authorized positions when it partially consolidated its
cataloging operations in Huntsville, Alabama, in 1994, but officials
report they lost a significant amount of cataloger experience because
many people swapped jobs to avoid moving.  Sixty percent of those
transferring had little or no cataloging experience and had to be
trained on the job.  Army officials also state that insufficient
management personnel transferred to ensure effective supervision of
employees, and productivity following the move dropped severely for
more than a year. 


--------------------
\7 The Centralization of Cataloging and Standardization at Battle
Creek, Office of History, Air Force Logistics Command, Study No. 
396, Sept.  1980. 


      DOD ACTIONS ALSO CREATE RISK
---------------------------------------------------------- Letter :4.3

DOD is adding to its risk by reducing the number of catalogers before
cataloging processes are standardized.  DOD's business case analysis
found that 907 full-time equivalent persons are required to maintain
existing cataloging processes and projected that 753 persons would be
needed after cataloging processes were consolidated.  However, DLA
plans call for transferring only 753 full-time equivalent persons to
Battle Creek where initial operations would be centralized but not
consolidated.  Senior service and defense agency representatives told
DOD that they could operate existing systems at those levels, but no
additional assessments were made to indicate how the existing
processes would be maintained with fewer staff.  Cataloging managers
at the inventory control points we visited expressed serious
reservations about the ability to operate existing processes at
reduced staffing levels. 

The impact of DOD's decision to reduce the staffing for its
centralized cataloging activity to 753 full-time equivalent positions
may also be much greater than it appears.  If only 753 full-time
equivalent personnel of the 2,200 personnel involved in cataloging
are transferred, approximately 66 percent of the experience base
would be lost.  While DOD's business case analysis assumed that the
753 transferred catalogers would be able to perform all cataloging
tasks of their service or agency, this is an assumption that may be
questionable if cataloging tasks are as integrated into other
processes as cataloging managers claim. 

DOD is aware of the potential loss of technical knowledge from
catalogers that do not wish to relocate but states that the strategy
of moving personnel over a 3-year period will allow time to replace
or train new personnel.  Additionally, some catalogers will become
available as the Defense Logistics Services Center and the Air Force
Cataloging and Standardization Center, already located in Battle
Creek, reduce their staffs. 


      DOD REPORTS THAT ITS PLANS
      WILL ADDRESS KNOWN RISKS
---------------------------------------------------------- Letter :4.4

DOD originally planned to move the first group of catalogers to
Battle Creek in October 1997 but has since postponed the move until
at least April 1998.  According to a DLA official, DLA now intends to
leave all cataloging functions at their current work locations until
DLA completes detailed plans for separating and moving each services'
and agencies' cataloging processes and connectivity plans for their
automation systems.  At the conclusion of our review, these plans
were still being developed. 


   PROSPECTS FOR ADDITIONAL STAFF
   REDUCTIONS ARE UNCERTAIN
------------------------------------------------------------ Letter :5

We reviewed proposals from employee groups from Philadelphia,
Pennsylvania, and Columbus, Ohio, who have expressed the view that
cataloging operations could be performed at their respective
locations with fewer staff than DOD plans for the centralized
facility in Battle Creek.  Until a standardized process for
cataloging is developed, however, it is not possible to determine the
reasonableness of either DOD's or the employee groups' staffing
projections. 

Employees of the Naval Inventory Control Point-Philadelphia, the
Defense Personnel Support Center-Philadelphia, the Defense Industrial
Supply Center-Philadelphia, and the Defense Supply Center-Columbus,
maintain that DOD cataloging operations could be performed using
fewer employees if processes currently in use at their respective
locations were adopted.  Specifically, the Philadelphia group
believes that cataloging operations could be run using 431 full-time
equivalent employees and Columbus believes cataloging operations
could be run using 472 full-time equivalent employees.  Our analysis
of both groups' projections, however, found that the methodologies
were not based on reengineered cataloging processes.  Instead, both
groups assumed that their processes could be adopted by the other
services and agencies.  However, because cataloging tasks are
embedded in numerous other materiel acquisition and provisioning
processes and developing a standardized process will be a complex
task, the extent to which ongoing processes could be adopted as is
assumed in the proposals is not known. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

Many uncertainties exist regarding what personnel reductions and
savings will occur from DOD's planned centralization and
consolidation of its cataloging operations.  To estimate savings, DOD
first needs a detailed plan showing how a standardized cataloging
process will work and an estimate of the development costs for a
standardized cataloging system.  Until these steps are completed, the
personnel reductions and expected savings from centralizing and
consolidating cataloging operations are uncertain. 

DOD's prior experiences in centralizing and consolidating cataloging
operations show that separating cataloging processes from other
materiel management processes is a complex task.  To avoid
interruptions to cataloging services, implementation should be
predicated on a sound plan that addresses the known risks and defines
how a standardized cataloging process will work and existing
processes will be separated from other integrated processes. 

DOD began preliminary studies of the services' and agencies'
cataloging processes in late 1997 as a first step toward developing a
standardized process.  These studies will take approximately 2 years
to complete.  Until these studies are completed and DOD has developed
a detailed design for a consolidated system, there is a high risk of
DOD's disrupting cataloging services by centralizing cataloging
personnel. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

We recommend that, before cataloging personnel are transferred to
Battle Creek, Michigan, the Secretary of Defense direct the Director
of DLA to develop a clearly defined plan for standardizing the
cataloging processes.  We also recommend that DOD develop a full
assessment of the costs and savings of the consolidation and
determine the time required for savings to offset the implementation
costs. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

DOD provided written comments on a draft of this report and they are
included in their entirety in appendix II along with our evaluation
of them.  DOD partially concurred with our recommendation that a
clearly defined plan for standardizing the cataloging processes
should be developed before cataloging personnel are moved to Battle
Creek and did not concur with our recommendation that it should
develop a full assessment of the costs and savings of consolidation. 

DOD reported that it started developing a business plan for each
location for the transition of cataloging to Battle Creek prior to
our audit and is working on establishing a standardized cataloging
system.  Additionally, DOD stated that we incorrectly reported that
it has not considered the lessons learned from prior consolidation
efforts.  DOD also stated that it had already conducted a business
case analysis and that representatives from each of the military
services and defense agencies supported the cost and personnel data
and savings the study identified.  DOD believes that conducting
another business case analysis would needlessly delay any effort to
consolidate and centralize and would not necessarily ensure more
accurate cost and savings data because assumptions in the follow-on
business case analysis could easily change over time as well. 

Our draft report recognized that DOD has started developing some
business plans for transferring catalogers to a central cataloging
facility, including connectivity plans for the existing computer
systems and plans for separating and moving each services' and
agencies' cataloging processes, and we did not mean to imply that DLA
was ignoring lessons learned from prior consolidations.  However, at
the time of our review none of the plans had been completed or were
available for us to review.  In the absence of plans, we identified
those areas that we believe needed to be addressed, particularly
those historical problem areas from prior cataloging consolidations. 
Further, it is not clear to us to what extent each of the services
endorse the savings estimate from the business case analysis.  Our
report points out questions and uncertainties about savings
identified by service level officials associated with service
cataloging activities.  These uncertainties are underscored by the
requests for exemptions to the planned personnel reductions. 

The intent behind the plan called for in our recommendation is not
the business plan DOD refers to in its comments.  We were referring
to the need for DOD to develop a plan that details how a consolidated
cataloging process will work and the costs of developing a
standardized cataloging system.  As we stated in the report, DOD
plans to move catalogers to Battle Creek where they would continue to
operate using the service-unique cataloging processes and systems. 
DLA would then complete the task of developing a common process and
system.  However, without detailed plans on how a consolidated
process will work and a clear identification of the costs of
developing a standardized system, DOD cannot be certain of its
resource needs or the costs of implementation and has no assurance
that it will achieve its objective of reducing infrastructure and
saving money.  A well-informed decision should be based on clearly
identified resource needs and implementation costs, particularly
given the relatively small annual savings projected. 

Advance planning is also critical to selecting the most
cost-effective cataloging option.  For example, the business case
analysis found that the Navy's cataloging processes for the two
largest cataloging tasks--data maintenance and new item
introduction--were the most efficient, and the Navy reports that this
efficiency stems from integrating the processes, not consolidating
them.  By centralizing prior to completing planning, however, the
possibility that integrating these functions may be the preferred
option is not addressed. 

DOD also misunderstands our second recommendation that it develop a
full assessment of the costs and savings of consolidation.  We did
not mean to imply that DOD should conduct another business case
analysis of cataloging prior to proceeding.  Rather, we meant that
DOD should clearly identify costs based on its current implementation
plan.  The business case analysis was not an implementation plan, and
many of its assumptions are no longer valid.  For example, the plan
assumed that all personnel reductions would take place in fiscal year
1999.  However, this is not what DOD currently plans.  Similarly, at
the time of the analysis no decision had been made on where
cataloging operations would be centralized.  Since that time DOD has
decided to centralize in Battle Creek and cost estimates for
renovating work space can be firmed up, as can estimates of the
number of personnel who will be displaced, moved, and trained.  Most
importantly, system development cost data needs to be assessed. 


   SCOPE, AND METHODOLOGY
------------------------------------------------------------ Letter :9

To assess DOD's cost and savings projections, we reviewed DOD's
business case analysis and implementation plans.  We reviewed DOD's
estimation methodology, potential problems that may affect current
cost and schedule estimates, and the causes of previous schedule
slippages and cost increases.  We discussed DOD's planning and
estimated costs and savings with KPMG, the contractor who conducted
the analysis; officials from the Office of the Deputy Under Secretary
of Defense for Logistics; the Defense Logistics Agency, Ft.  Belvoir,
Virginia; the Defense Logistics Services Center, Battle Creek,
Michigan; the Air Force Cataloging and Standardization Center, Battle
Creek, Michigan; the Army Logistics Support Activity, Huntsville,
Alabama; the Army Aviation and Missile Command, Huntsville, Alabama;
the Defense Supply Center, Columbus, Ohio; the Navy Inventory Control
Point, Philadelphia, Pennsylvania; the Navy Inventory Control Point,
Mechanicsburg, Pennsylvania; the Defense Industrial Supply Center,
Philadelphia, Pennsylvania; and the Defense Personnel Support Center,
Philadelphia, Pennsylvania.  Our tentative findings were also
discussed with the Assistant Deputy Secretary of Defense for Materiel
and Distribution. 

Our information on DOD's planning to support its consolidation effort
was obtained from the Air Force history of its 1976 consolidation and
discussions of lessons learned from the consolidation with officials
at the Air Force Cataloging and Standardization Center.  Our
information on lessons learned from the Army's 1994 experience in
partially consolidating its cataloging operations in Huntsville,
Alabama, was obtained from discussions with the Army's Cataloging
Branch Chief, Logistics Support Activity, Huntsville, Alabama, who
was involved in managing the Army's consolidation in Huntsville.  We
also discussed the risks of collocating and consolidating the
cataloging function with senior officials at each of the sites we
visited during our assessment of DOD's plans. 

Our information on the proposals made by two employee groups that
state that DOD could achieve even greater personnel reductions and
savings by consolidating cataloging operations in other locations
(instead of Battle Creek, Michigan) was obtained from employees at
the Navy Inventory Control Point, Philadelphia, Pennsylvania; the
Defense Industrial Supply Center, Philadelphia, Pennsylvania; the
Defense Personnel Support Center, Philadelphia, Pennsylvania; and the
Defense Supply Center, Columbus, Ohio.  We analyzed both groups'
staff projections and discussed our conclusions with them.  We also
discussed the Philadelphia and Columbus employees' assertions about
staffing needs with officials at the Defense Logistics Services
Center and the Office of the Deputy Under Secretary of Defense for
Logistics. 

We performed our review from September 1997 to January 1998 in
accordance with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :9.1

We are providing copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committees on Armed Services and on
Appropriations and the House Committees on National Security and on
Appropriations; the Secretaries of Defense, the Army, the Navy, and
the Air Force; the Commandant of the U.S.  Marine Corps; and the
Director of DLA.  Copies will be made available to others upon
request. 

Please contact me at (202) 512-8412 if you or your staff have any
questions concerning this report.  Major contributors to this report
were
Barry W.  Holman, Glenn D.  Furbish, and David F.  Combs. 

David R.  Warren, Director
Defense Management Issues


THE DEPARTMENT OF DEFENSE'S
METHODOLOGY FOR IDENTIFYING
ALTERNATIVE STAFF REQUIREMENTS
=========================================================== Appendix I

Department of Defense (DOD) officials assumed that the new
reengineered cataloging process would be similar to current
processes.  By using productivity data for the best practices
currently in use and extrapolating that data to the total DOD
workload, they approximated the staff requirements for the new
standardized process.  The following steps were used: 

1.  Actual cataloging costs for 11 common cataloging functions were
identified for each military service and defense agency and a service
or defense agency was identified that performed each function most
economically. 

2.  Using cost data from the most economical process, DOD projected
function costs for the other services and agencies.  For example, the
Navy introduced new items most economically at an average of $77 per
item.  Estimated costs for new item introduction for the other
services and defense agencies were computed by multiplying the number
of new items they introduced by $77. 

3.  Estimated function costs were then adjusted upward for risk based
on the perceived difficulty of implementation.  Low-risk tasks were
adjusted by 25 percent, medium by 50 percent, and high by 75 percent. 

4.  A total process cost for each alternative was then computed by
adding the individual function costs.  DOD's existing cataloging
process costs were $72.8 million annually.  Process costs in a
consolidated environment were projected to be $64.6 million annually. 
Process costs in a centralized and consolidated environment were
projected to be $60.5 million annually. 

5.  Staffing requirements for the alternatives were then determined
based on the projected savings for each alternative.  To illustrate,
a centralized and consolidated process would save DOD an estimated 17
percent ($60.5/$72.8 = 0.83).  A 17-percent reduction in the existing
cataloger workforce leaves 753 catalogers needed for a centralized
and consolidated operation (907 x 83% = 753). 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I

See comment 1. 



(See figure in printed edition.)

Now on p.  12. 

See comment 2. 

Now on p.  12. 

See comment 3. 



(See figure in printed edition.)

See comment 4. 


GAO COMMENTS

1.  Our draft report included statements by Defense Logistics Agency
(DLA) officials that they have begun developing plans that address
these risks.  We highlighted previous problems to emphasize their
importance or the need for a plan to deal with future risks, not to
suggest that DOD was not aware of these problems.  However, at the
conclusion of our fieldwork in November 1997, no plans had been
completed or were available for review that showed how DLA intended
to deal with these known risk areas. 

2.  The business plans DOD refers to in its official comments are not
those intended by the recommendation.  DOD's plans are those
discussed in comment 1.  We are referring to the need for DOD to
develop a plan that details how a consolidated cataloging process
will work and the costs of developing a standardized cataloging
system.  DOD does not currently intend to complete this plan until
after catalogers are centralized, but not consolidated, in Battle
Creek.  However, as stated in our report, without this plan DOD can
neither identify its resource needs nor the cost of implementing its
decision.  Given the relatively small annual savings involved, we
believe this information is critical to a well-informed decision. 

3.  We did not recommend that DOD conduct another business case
analysis.  Rather, we recommended that DOD develop a full assessment
of the costs and savings of the consolidation and determine the time
required for savings to offset the implementation costs.  DOD's
business case analysis is not an implementation plan and does not
clearly identify the costs of implementation.  Instead, it projected
costs based on numerous assumptions, many of which are no longer
valid.  DOD now has considerably more information regarding
centralization at its disposal and should update its information
before it proceeds.  In particular, DOD should identify the costs for
standardizing its cataloging systems. 

4.  DOD's comment does not accurately reflect our recommendation.  We
recommended that DOD have the then-ongoing defense review being
conducted by the National Defense Panel also examine the savings and
risks associated with inventory control point consolidation.  We do
not necessarily agree that the consolidation of cataloging is the one
area that makes the most sense, given service concerns about their
ability to easily separate cataloging from their integrated
provisioning processes.  DOD's detailed documentation of existing
cataloging processes should provide greater insight into the
feasibility and desirability of breaking apart such integrated
functions. 

*** End of document. ***