Defense Logistics: Integrated Plans and Improved Implementation Needed to
Enhance Engineering Efforts (Testimony, 06/27/2000, GAO/T-NSIAD-00-206).

Pursuant to a legislative requirement, GAO discussed the Department of
Defense's (DOD) logistics reengineering initiatives, focusing on the:
(1) DOD's reengineering efforts; (2) potential effect of reengineering
efforts on combat forces; and (3) factors that could limit the
achievement of the reengineering goals.

GAO noted that: (1) DOD has taken steps towards reengineering its
logistics processes; (2) however, many aspects of the overall plan are
incomplete, raising questions about whether or when the overall goals of
improved service and lower costs will be achieved; (3) key steps DOD has
taken include establishing 30 pilot programs to test various
reengineering concepts and establishing a new office responsible for
coordinating implementation of the reengineering effort and overseeing
efforts to link hundreds of ongoing service-sponsored reengineering
initiatives to the overall reengineering plans; (4) DOD has not
developed an overarching plan that integrates individual service efforts
into a single DOD-wide implementation strategy; (5) 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
they will be able to provide key information in time to support interim
decisionmaking deadlines; (6) in some instances, pilot test plans have
not been fully developed, and in others, test results may be delayed;
(7) DOD has not estimated the total costs of completing logistics
reengineering or developed a supporting budget plan; (8) 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 DOD-wide basis; (9) it is too early to assess the impact
reengineering logistics support will have on combat forces; (10)
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, the ability of contractors to
meet the surge requirements, the effects of contracting on the number of
positions available to military personnel returning to the United States
from overseas assignments or at-sea deployments, and the loss of funding
flexibility; (11) DOD is in the early phases of developing its Joint
Logistics Warfighter Initiative test, which may be useful in assessing
the impacts of various logistics reengineering efforts on combat forces
in an operational environment; (12) several factors, if not addressed,
could limit DOD's ability to achieve its reengineering goals of improved
service and lower costs; and (13) these include the impact that use of
sole-source, long-term contracts would have on anticipated reengineering
savings and the effects that existing laws and policies would have on
the implementation of reengineering initiatives.

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

 REPORTNUM:  T-NSIAD-00-206
     TITLE:  Defense Logistics: Integrated Plans and Improved
	     Implementation Needed to Enhance Engineering Efforts
      DATE:  06/27/2000
   SUBJECT:  Combat readiness
	     Logistics
	     Defense capabilities
	     Reengineering (management)
	     Defense contingency planning
	     Defense procurement
IDENTIFIER:  DOD Joint Logistics Warfighter Initiative Test
	     DOD Logistics Support System

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GAO/T-NSIAD-00-206

DEFENSE LOGISTICS Integrated Plans and Improved Implementation Needed to
Enhance Engineering Efforts Statement of David R. Warren, Director, Defense
Management Issues, National Security and International Affairs Division

United States General Accounting Office

GAO Testimony Before the House Armed Services Committee,

Subcommittee on Military Readiness

For Release on Delivery June 27, 2000 2: 00 PM EDT

GAO/ T- NSIAD- 00- 206

Page 1 GAO/ T- NSIAD- 00- 206 Defense Logistics Mr. Chairman and Members of
the Subcommittee:

We are pleased to be here today to discuss the Department of Defense's (DOD)
logistics reengineering initiatives and the actions we believe are needed to
enhance the success of these initiatives. Logistics is an important and
expensive function. The Department is using about $84 billion of its $280-
billion budget this year for logistics support activities. Despite this
expenditure, failing equipment and parts shortages continue to be a problem.
At the same time, the Department would like to modernize its aging fleets of
aircraft, ground combat vehicles, and ships, but does not have the funding
it believes is necessary to accomplish this goal at the pace it believes is
necessary. 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 reengineer its logistics support
through various initiatives.

As you requested, our testimony today focuses on (1) the Department's
reengineering efforts, (2) the potential effect of the reengineering efforts
on combat forces, and (3) the factors that could limit the achievement of
reengineering goals. Information for this testimony is from a report we
issued on June 23, 2000 dealing with the DOD reengineering initiatives. 1

RESULTS IN BRIEF The Department of Defense has taken steps towards
reengineering its logistics processes. However, many aspects of the overall
plan are incomplete, raising questions about whether or when the overall
goals of improved service and lower costs will be achieved. Key steps the
Department has taken include establishing 30 pilot programs to test various
reengineering concepts and establishing a new office responsible for
coordinating implementation of the reengineering effort and overseeing
efforts to link hundreds of ongoing service- sponsored reengineering
initiatives to the overall reengineering plans. However, DOD 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
they 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, DOD has not estimated the total costs of completing logistics
reengineering or developed a supporting budget plan. 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.

1 See Defense Logistics: Actions Needed to Enhance Success of Reengineering
Initiatives (GAO/ NSIAD- 00- 89, June 23, 2000).

Page 2 GAO/ T- NSIAD- 00- 206 Defense Logistics It is too early to assess
the impact that reengineering logistics support will have 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, the ability of contractors to meet
the surge requirements, the effects of contracting on the number of
positions available to military personnel returning to the United States
from overseas assignments or at- sea deployments, and the loss of funding
flexibility. The Department is in the early phases of developing its Joint
Logistics Warfighter Initiative test, which may be useful in assessing the
impacts 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 in
assessing the impact of the reengineering concepts on combat forces will
therefore be very limited. Consequently, its usefulness in supporting
planned decisions at the end of fiscal year 2002 to expand the use of new
logistics concepts DOD- wide is questionable.

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 impact that use of sole- source, long- term contracts would have
on anticipated reengineering savings and the effects that existing laws and
policies would have on the implementation of reengineering initiatives.

In our current report on this subject, we make recommendations to improve
the planning and implementation of the logistics reengineering effort. More
specifically, we recommend that the Department develop an overarching plan
to integrate the reengineering efforts of all the components, reassess the
schedule for various initiatives, develop a methodology for evaluating
savings, and reevaluate the approach for assessing the use of increased
numbers of contractors on the battlefield. The Department generally agreed
with our report and its recommendations.

BACKGROUND The Department of Defense uses a combination of in- house
military and civilian employees and contractors to provide the vast support
operations that are required to keep military airplanes, ships, and ground
vehicles operational for peacetime training and operations and ready to
support contingency operations whenever and wherever they occur. A breakdown
of the estimated fiscal year 2000 logistics system personnel and costs is
presented below.

Page 3 GAO/ T- NSIAD- 00- 206 Defense Logistics

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

(dollars in billions)

Function Personnel a Costs b

Depot maintenance 61,987 $5.9 Other national- level maintenance c 13,378 3.9
Material management 39,068 19.1 Distribution and transportation 16,339 2.6
Operational d maintenance 403,320 16.7 Operational d supply 141,327 5.8
Operational d transportation 44,119 1.3 Other operational logistics e
158,298 6.0 Other product support f 3,744 0.2 Logistics support not related
to weapon systems g 363,051 22.3

Total 1,244,631 $83.8

a Includes military active duty and reserve personnel and DOD civilian
employees. b Includes costs for both DOD and contractor operations. c
Includes maintenance that is not part of the defense working capital fund
(such as ordnance depots and ship

maintenance activities not in a depot). d Refers to unit level related
functions.

e Includes funding and personnel attributable to operational logistics but
not categorized exclusively into maintenance, supply, or transportation. f
Includes miscellaneous product support not categorized exclusively as
maintenance, supply, or transportation (such

as logistics administrative support). g Consists 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 and
making greater use of improved technologies, new business processes, and
commercial transportation.

PROGRESS MADE, BUT UNCERTAINTIES REMAIN ABOUT PLANS, SCHEDULES, AND THE
SUFFICIENCY OF TEST DATA

DOD has taken some steps to reengineer its logistics support activities. For
example, it has outlined key principles and concepts that it wants to test
for broader application in logistics restructuring. 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. Additionally, the Department's
reengineering schedule appears overly optimistic, and some pilot programs
may not provide meaningful tests of reengineering concepts.

Two key documents set forth the general principles of DOD's reengineering
process. The first is the August 1999 Logistics Strategic Plan, which
outlines the characteristics of the new logistics concept and sets 2005 as
the timeframe for implementation. The second is DOD's April 1998 Report to
Congress on Actions to Accelerate Movement to

Page 4 GAO/ T- NSIAD- 00- 206 Defense Logistics the New Workforce Vision,
which provides a broad overview of planned reengineering

efforts and discusses five fundamental reengineering concepts:

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

ï¿½ Competitively sourcing product support by using competition or business
case analysis to select a source for long- term, total life- cycle 2
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 vendors through long-
term partnerships with private sector providers to support weapon systems
using techniques such as on- demand manufacturing.

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

The first four concepts were more fully addressed in a July 1999 DOD report,
Product Support for the 21st Century, and the fifth by the October 1999
report Program Manager Oversight of Life- Cycle Support. Based on the two
reports, DOD established 30 pilot programs (10 in each service) that will be
used to test the five concepts.

Although the services have been directed to develop a plan that links their
initiatives to DOD's overall vision, it remains unclear whether, when, or
how these individual service plans will be integrated. 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 Logistics Strategic Planobjectives. While there is no
requirement to develop an overall

DOD plan that integrates the service plans, DOD officials said that the
integration will be accomplished through the Department's planned new
logistics architecture, which is supposed to provide a blueprint that will
guide and control the development and maintenance of the many related
logistics systems. Development of this logistics architecture is a key goal
of a new office established within the Office of the Secretary of Defense to
coordinate the implementation of the reengineering effort.

Uncertainties also exist about the overly optimistic implementation schedule
that has been established for DOD's reengineering program. For example, the
Department plans to use 30 pilot programs to generate information to develop
future models for reengineering and policy changes, and to fully implement
reengineered support strategies DOD- wide by the end of 2005. However, 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. Additionally, other challenges that
must be overcome include questions about the transfer of government parts
inventories to the private sector and the availability of sufficient funding
to fully implement some of the 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. Table 2 shows the
number of pilot programs in each service that we have

2 The life cycle of a system includes development, procurement, operation,
support, and disposal.

Page 5 GAO/ T- NSIAD- 00- 206 Defense Logistics determined will have
problems providing information to meet the Department's

reengineering schedule.

Table 2: Number of Pilot Programs Whose Program Plans Are Not Likely to Meet
Logistics Reengineering Timelines

Number of pilots by service Problem a 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 7 6 8 21

a Problems are not mutually exclusive; consequently, some pilot programs are
included in more than one category. Source: Our analysis. Additionally, the
pilots will have difficulty showing how much savings or improvements could
come from a specific reengineering concept because they will have difficulty
determining the causes of savings: reengineered processes or other reasons
(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 fuelefficient engine. Reengineering
plans, however, do not include a methodology to determine which of the two--
the engine or the changes in logistics-- would be responsible for which
portion of any future savings. Without the ability to make this distinction,
decisions may be made to expand the use of a concept that produces little or
no savings.

Finally, significant up- front investment costs are often required to
implement the reform initiatives, but these costs have not been identified
or budgeted. The Department has not estimated the total costs of completing
the logistics reengineering initiatives or developed a supporting budget
plan. 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.

EFFECTS OF REENGINEERING EFFORTS ON COMBAT FORCES NOT YET KNOWN

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. Nonetheless, logistics support personnel from the Joint
Chiefs of Staff and combat commands in the United States and Europe have
voiced a number of concerns about the potential effects that some
reengineering efforts could have on their operational capability. These
include the presence of increasing numbers of contractor personnel on the
battlefield, the ability of contractors to deal cost- effectively with surge
requirements, the potential reduction of rotational positions to meet
training or operational requirements, and the overall impact of the
reengineering effort on product support costs

Page 6 GAO/ T- NSIAD- 00- 206 Defense Logistics and funding. These issues
regarding the reengineering process will need to be addressed

soon, if the initiatives are to be successful:

ï¿½ Contractors on or near the battlefield. The potential presence of private
contractors near or on the battlefield to order and distribute supplies,
maintain items, and provide technical support has created concern that
combat units' ability to conduct wartime missions could be weakened if
contractors are withdrawn or are unwilling to stay during hostilities.
Further, 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, just at a time when the services are trying to reduce
their logistical presence in areas close to the battlefield.

ï¿½ Higher wartime requirements. Reliance on commercial supply chains to
support wartime and surge requirements could be a problem, especially if
more than one theater of operations is involved. Combat officials believe
that temporary surges in demand may be manageable in the commercial sector,
where vendors deal with demand patterns that are generally known. DOD has
successfully used prime vendor arrangements for some consumable items such
as food and medical supplies, which have large networks of suppliers.
However, combat officials noted, military parts and systems have different
characteristics than food and medical supplies. They involve limited numbers
of potential suppliers and they often have demand patterns that are
difficult to predict because parts are often unique and have low usage or
erratic demand.

ï¿½ Control of funding. 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 weapon system
program managers. Although they acknowledge that quality of support is a key
goal, officials are also concerned that shifting control of operations and
maintenance funding away from combat commands to program managers
potentially diminishes the commander's flexibility to manage unit- funding
priorities. For example, under the current process, 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 officials state that a planned test using U. S. Central Command forces
during operational exercise in Egypt may be useful in assessing the
operational effectiveness of reengineered logistics systems. The Department
is in the early phases of developing its Joint Logistics Warfighter
Initiative test, but the test is scheduled to take place before the
reengineering initiatives are fully implemented, and its usefulness in
assessing the impact of the reengineering concepts on combat forces will
therefore be very limited. Consequently, its usefulness in supporting
planned decisions at the end of fiscal year 2002 to expand the use of new
logistics concepts DOD- wide is questionable.

Page 7 GAO/ T- NSIAD- 00- 206 Defense Logistics OTHER ISSUES THAT COULD
AFFECT REENGINEERING GOALS

If not addressed, several other factors would limit DOD's ability to achieve
its reengineering goals. These include (1) the impact on savings from not
centrally managing parts, (2) the impact that the likely use of sole-
source, long- term contracts would have on anticipated savings, (3) and the
effects of existing laws and policies on the implementation of reengineering
initiatives.

Impact on Savings from Not Centrally Managing Parts DOD has not examined
whether reengineering efforts may reduce some of the savings currently
obtained from centrally managing items that are used by more than one
system. In a March 1999 letter to the Deputy Undersecretary of Defense
(Logistics), military service and Defense agency commanders indicated that
they could consolidate orders for common items used by different weapon
systems, thus decreasing the number of parts to be stocked and benefiting
from economies of scale. Service logistics officials further expressed
concern that if program managers were to make 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.

Impact of Sole- source, Long- term Contracts on Reengineering Savings
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
contract. 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. 3 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, primarily because of a lack of qualified firms.

Impact of Laws and Policies on DOD's Logistics Reengineering Initiatives
DOD's efforts to implement product support reengineering concepts must take
into account existing statutory and policy constraints. Service and DOD
officials identified some major statutory provisions and policies that could
impact reengineering efforts.

Page 8 GAO/ T- NSIAD- 00- 206 Defense Logistics

Page 9 GAO/ T- NSIAD- 00- 206 Defense Logistics initiatives and details for
how DOD plans to achieve its final logistics system end

state.

ï¿½ To improve the implementation of DOD's logistics reengineering, we
recommend that the Secretary of Defense (1) reassess the Department's
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 Department's approach for addressing the combat command
concerns dealing with 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
before proceeding with implementation of product support reengineering.

The Department generally agreed with our report and its recommendations. Mr.
Chairman, this concludes our formal statement. If you or other members of
the Subcommittee have any questions, we will be pleased to answer them.

Contacts and Acknowledgements For future questions regarding this testimony,
please contact David Warren or Julia Denman at (202) 512- 4290. Other
individuals making key contributions to this testimony included John Strong,
Larry Junek, Glenn Knoepfle, and John Brosnan.

(709520, 709485)

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