Defense Depot Maintenance: Challenges Facing DOD in Managing Working
Capital Funds (Testimony, 05/07/97, GAO/T-NSIAD/AIMD-97-152).

GAO discussed financial management and logistics management issues
relating to the effectiveness and efficiency of the Department of
Defense's (DOD) operations, focusing on the: (1) operations of DOD's
working capital funds; and (2) management of DOD's depot maintenance
program.

GAO noted that: (1) to date, the working capital funds have not yet
accomplished the goal of operating on a break-even basis, and DOD
estimates the fund will have an accumulated operating loss of about $1.7
billion at the end of fiscal year (FY) 1997; (2) since 1993, the working
capital funds have had a cash shortage; (3) to ensure that the cash
balances remained positive, the funds have advance billed their
customers; (4) while the three services have liquidated $3.6 billion of
outstanding advance billings from February 1995 to January 1997, the
outstanding advance billing balance is still $1.6 billion; (5) GAO's
analysis of the FY 1998 prices for five business areas indicates that
they are probably too low to recover the expected FY 1998 operating
costs and/or recover prior year losses by over $300 million; (6) excess
capacity, which is currently about 40 percent in DOD's depot maintenance
system, is a significant contributor toward the inefficiency and high
cost of DOD's maintenance program and is generating significant losses
in the depot maintenance activity group of the service's working capital
fund; (7) DOD has made overly optimistic assumptions about cost savings
that can be achieved from outsourcing depot maintenance activities; (8)
when outsourcing results in increasing, rather than decreasing costs,
expected depot maintenance savings will not be realized; (9) to the
extent projected savings were budgeted, losses will occur; (10) materiel
cost increases are generating losses for the depot maintenance capital
fund; (11) GAO's work also shows that weaknesses in DOD's inventory
management system such as inadequate visibility over items and
purchasing of unneeded stocks have contributed to rising material costs;
(12) in addition, inadequate control of government-furnished material to
contractors has also led to losses in contract depot maintenance; (13)
in conclusion, the inefficient operation of depot maintenance activities
results in a reduction of the military services' purchasing power
through their operations and maintenance funds; (14) in addition, other
factors also impact the cost-effectiveness of depot maintenance
operations, including inventory management practices, repair processes,
and readiness requirements; (15) to their credit, each of the military
services have programs underway to improve depot maintenance and other
logistics activities; and (16) while it is too early to assess the resu*

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

 REPORTNUM:  T-NSIAD/AIMD-97-152
     TITLE:  Defense Depot Maintenance: Challenges Facing DOD in 
             Managing Working Capital Funds
      DATE:  05/07/97
   SUBJECT:  Military cost control
             Cash management
             Financial management
             Logistics
             Cost effectiveness analysis
             Privatization
             Base closures
             Maintenance costs
             Equipment maintenance
             Industrial funds
IDENTIFIER:  Defense Business Operations Fund
             Air Force Working Capital Fund
             Army Working Capital Fund
             DOD Working Capital Fund
             Navy Working Capital Fund
             
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Cover
================================================================ COVER


Before the Subcommittee on Defense,
Committee on Appropriations,
United States Senate

For Release
Expected at
10:00 a.m., EDT
Wednesday,
May 7, 1997

DEFENSE DEPOT MAINTENANCE -
CHALLENGES FACING DOD IN MANAGING
WORKING CAPITAL FUNDS

Statement of Henry L.  Hinton, Jr., Assistant Comptroller General,
National Security and International Affairs Division

GAO/T-NSIAD/AIMD-97-152

GAO/NSIAD/AIMD-97-152T

Defense Depot Maintenance

709262, 511616


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

  AGMC -
  BRAC -
  DBOF -
  DOD -
  OSD -
  NAVSEA -
  DLH -
  PEMCO -
  CORM -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss financial management and
logistics management issues relating to the effectiveness and
efficiency of the Department of Defense's (DOD) operations. 
Specifically, we will focus on the operations of DOD's working
capital funds, which collect and disburse over $65 billion annually,
and on DOD's management of the $13 billion depot maintenance program. 
It is important to note that these areas fall within defense
financial management and infrastructure activities, 2 of the 24 areas
we identified as high-risk areas within the federal government.\1

These issues have significant impact on the efficiency and
effectiveness of how DOD spends its operations and maintenance funds. 
DOD has consistently experienced losses in the operations of various
working capital funds, including the depot maintenance activity
group, and has had to request additional funding to support their
operations.  This issue has been an area of concern to this
subcommittee and other congressional committees.  Before we get into
specifics, I will briefly summarize our key points. 


--------------------
\1 Defense Financial Management (GAO/HR-97-3, Feb.  1997) and Defense
Infrastructure Management (GAO/HR-97-7, Feb.  1997).  In 1990, GAO
began a special effort to report on the federal program areas its
work identified as high risk because of vulnerabilities to waste,
fraud, abuse, and mismanagement. 


   WORKING CAPITAL FUNDS' CASH
   MANAGEMENT AND OPERATIONS
   ISSUES
---------------------------------------------------------- Chapter 0:1

Our work on working capital funds cash management and operations
shows the following: 

  To date, the working capital funds have not yet accomplished the
     goal of operating on a break-even basis, and DOD estimates the
     funds will have an accumulated operating loss of about $1.7
     billion at the end of fiscal year 1997.  However, we believe
     that the funds have achieved a measure of success because the
     services are doing a better job of identifying the costs of
     doing business and including those costs in the prices charged
     customers.  Setting prices to recover more of the costs of
     providing goods and services to customers gives managers a
     window into the costs of DOD support operations--including costs
     for direct labor, material, overhead, and contracts.  With a
     more complete cost picture, managers can account for past
     activities, manage current operations, and assess progress
     toward planned objectives.  Further, more accurate
     identification of costs enables those responsible for providing
     oversight to make more informed policy decisions by highlighting
     the cost associated with those decisions. 

  When the Defense Business Operations Fund was established in 1991,
     DOD consolidated the cash balances of the nine industrial and
     stock funds into a single account that was managed centrally by
     the Office of the Secretary of Defense (Comptroller).  In
     February 1995, DOD devolved the responsibility for cash
     management to the military services and DOD components.  We
     agree with DOD's decision to place the responsibility for
     managing the working capital funds' cash at the military service
     and DOD component level because it makes each individual DOD
     component directly accountable for its respective cash balance
     as well as their decisions that impact cash.  Each DOD component
     now has an incentive to more accurately price the goods and
     services that its working capital fund charges customers since
     inaccurate prices could lead to not having enough cash to cover
     day-to-day operating expenses. 

  Since 1993, the working capital funds have had a cash shortage.  To
     ensure that the cash balances remained positive, the funds have
     advance billed their customers.  While the three services have
     liquidated $3.6 billion of outstanding advance billings from
     February 1995 to January 1997, the outstanding advance billing
     balance is still $1.6 billion.  Further, the Navy and Air Force
     advance billed their customers about $2.9 billion during
     calendar year 1996 to ensure that their cash balances remained
     positive. 

  Our analysis of the fiscal year 1998 prices for five business areas
     indicates that they are probably too low to recover expected
     fiscal year 1998 operating costs and/or recover prior year
     losses by over $300 million.