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Lessons Learned in Transforming Its Freight Distribution System' which 
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Washington, DC 20548: 

United States Government Accountability Office: 

May 8, 2007: 

Congressional Committees: 

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

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

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

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

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

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

Scope and Methodology: 

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

Summary: 

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

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

Background: 

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

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

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

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

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

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

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

* coordinate, manage, and optimize freight shipments from notification 
to delivery; 

* provide in-transit visibility to government systems and real-time 
access to shipment information; 

* facilitate the resolution of loss and damage claims with carriers; 

* manage carrier quality and performance; and: 

* collaboratively develop, recommend, and implement process 
improvements. 

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

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

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

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

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

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

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

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

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

DOD Has Initiated Practices Needed for Organizational Transformation: 

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

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

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

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

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

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

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

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

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

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

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

Conclusions: 

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

Recommendations: 

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

Agency Comments and Our Evaluation: 

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

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

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

Signed by: 

William M. Solis: 
Director, Defense Capabilities and Management: 

List of Congressional Committees: 

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

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

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

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

[End of section] 

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

Role of the 3PL. 

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

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

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

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

Program development and implementation. 

Lesson learned from the 3PL prototype: Stakeholder buy-in and 
collaboration is needed for successful implementation. All stakeholders 
must support the program, and the support must come from the highest 
level in the organization's hierarchy; 
DOD actions in planning for DTCI: The DTCI program management office 
has initiated several actions to gain and maintain buy-in from 
stakeholders. The DTCI program manager and division chiefs host a 
biweekly teleconference with all the service representatives and any 
other key service stakeholders, along with sending out weekly e-mail 
updates. The DTCI program management office has made several service 
site and headquarters visits. The DTCI program manager briefs at senior 
leader distribution governance meetings. The DTCI transition planning 
team holds planning meetings to ensure stakeholder collaboration. 

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

Lesson learned from the 3PL prototype: Site visits should be conducted 
with DOD and contractor personnel before start-up to ensure that all 
sites understand the process and are ready to begin shipping. If face- 
to-face site visits are not possible, a conference call should be 
conducted to review any requirements and issues specific to the 
shipping site; 
DOD actions in planning for DTCI: DOD's schedule calls for a gradual 
rollout, which it refers to as a "safe start" approach. Coordination 
has been completed with all the stakeholders in determining the rollout 
plan. Initial sites will be DLA Defense Distribution Centers with high-
volume shipping activity. The DTCI program management office has 
established a transition planning team that has visited implementation 
sites to provide information about DTCI processes and benefits. The 
team will visit or conduct video teleconferences with all sites prior 
to implementation at each site. According to program officials, these 
visits will also help identify site unique requirements in order to 
tailor implementation efforts at each location. 

Lesson learned from the 3PL prototype: The first shipment should not be 
released until all systems and processes have been tested and are 
functioning properly. A poorly executed start-up can jeopardize the 
success of the program. Both parties (the government and the 
contractor) should ensure that their systems and processes are ready 
before initiating the first shipment; 
DOD actions in planning for DTCI: The DTCI solicitation specifies the 
contractor shall establish information systems communications 
integration prior to initiating shipments. The contractor will prepare 
a test plan that must be approved by the DTCI program management 
office. The final DTCI joint test plan is due no later than 30 days 
after contract award. To accommodate any site-specific differences, the 
contractor shall deliver site-specific test plan addendums no later 
than 30 calendar days prior to implementation at each DTCI shipping 
location. 

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

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

Information technology systems and integration. 

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

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

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

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

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

Performance and performance metrics. 

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

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

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

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

Lesson learned from the 3PL prototype: According to some military 
services, smaller, low-volume sites did not receive acceptable levels 
of service under the 3PL prototype; 
DOD actions in planning for DTCI: The DTCI performance work statement 
requires the contractor to provide an acceptable service to all 
shipping locations, regardless of volume. 

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

Business processes. 

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

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

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

Contracting. 

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

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

Lesson learned from the 3PL prototype: Proposed contract modifications 
should be resolved and implemented quickly. It is impossible to 
anticipate and include every requirement in the initial contract. But 
when a situation occurs that requires a contract change, both parties 
should resolve the issue and implement the change to the contract in an 
expeditious manner; 
DOD actions in planning for DTCI: U.S. Transportation Command is 
building a robust capability within the DTCI program management office 
to manage postaward contract activities and respond quickly to any 
contractual issues. 

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

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

Lesson learned from the 3PL prototype: Commit to a 6-month contracting 
process; 
DOD actions in planning for DTCI: The DTCI program evolved over a 2-
year period. The program was initiated in 2004, and the final 
solicitation was distributed in the summer of 2006. As of early 2007, 
the source selection process was ongoing. 

Lesson learned from the 3PL prototype: Use a down-select process, then 
write a contract; 
DOD actions in planning for DTCI: U.S. Transportation Command is 
evaluating proposals and intends to award a contract after conducting 
discussions, both written and oral, with offerors whose proposals have 
been determined to be within the competitive range. 

Lesson learned from the 3PL prototype: Select a World-Class 3PL that 
has done an implementation as large as the one pursued by DOD; 
DOD actions in planning for DTCI: The 3PL's ability to implement DTCI 
will be considered during the source selection process. 

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

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

Miscellaneous. 

Lesson learned from the 3PL prototype: Address personnel reductions and 
reassignments that may result from implementation of the program and 
changes made from process improvements; 
DOD actions in planning for DTCI: According to program officials, DTCI 
is designed to be "personnel neutral," with no cost savings projected 
as a result of personnel reductions. The change management plan and 
communications plan are structured to carry this message forward from 
the DTCI program management office. 

Lesson learned from the 3PL prototype: Military services expressed 
concern regarding management and award fees under DTCI coming from 
their service budgets; 
DOD actions in planning for DTCI: The DTCI program management office 
has advised the services to plan for these costs in their fiscal year 
2008 to fiscal year 2013 Program Objective Memorandum (POM). The DTCI 
program management office also noted that in future years, these costs 
should be offset by reduced transportation costs. 

Source: GAO analysis. 

[End of table] 

[End of section] 

Enclosure II: Comments from the Department of Defense: 

Deputy Under Secretary Of Defense For Logistics And Materiel Readiness: 
3500 Defense Pentagon: 
Washington, DC 20301-3500: 

May 2 2007: 

Mr. William M. Solis: 
Director, Defense Capabilities and Management, 
U.S. Government Accountability Office: 
441 G Street, N. W., 
Washington, DC 20548: 

Dear Mr. Solis: 

This is the Department of Defense (DoD) response to the GAO draft 
report, GAO-07-675R, "Defense Transportation: DoD Has Taken Actions to 
Incorporate Lessons Learned in Transforming Its Freight Distribution 
System," dated April 11, 2007 (GAO Code 350880). 

The Department has reviewed the subject GAO draft report and concurs 
with the recommendation. A detailed response is enclosed. 

Sincerely, 

Signed for: 

Jack Bell: 

Enclosure: 
As stated: 

GAO Draft Report - Dated April 11, 2007 GAO Code 350880/GAO-07-675R: 

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

Department Of Defense Comments To The Recommendation: 

Recommendation: The GAO recommends that the Secretary of Defense direct 
the Under Secretary of Defense for Acquisition, Technology, and 
Logistics, in conjunction with the Commander, U.S. Transportation 
Command, to develop and implement a plan for sharing Defense 
Transportation Coordination Initiative (DTCI) lessons learned across 
the Department. (pg. 14/GAO Draft Report): 

DOD Response: Concur. The Defense Acquisition University (DAU) already 
has a "lessons learned" section within their "contingency contracting" 
section of their website Hyperlink, 
(https://acc.dau.mil/CommunityBrowser.aspx?id=18215). Action will 
betaken to alter/expand the DAU website to include lessons from the 
DTCI contract. 

[End of section] 

(350880): 

FOOTNOTES 

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

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

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

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

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

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

[7] 2B Brokers, et al., B-298651, Nov. 27, 2006, 2006 CPD 178. 

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

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

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

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

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

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

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

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

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

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

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