Navy Ordnance:

Analysis of Business Area Price Increases and Financial Losses

AIMD/NSIAD-97-74: Published: Mar 14, 1997. Publicly Released: Mar 14, 1997.

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Pursuant to a congressional request, GAO reviewed the financial and operational management issues relating to the Navy ordnance business area which was included in the Defense Business Operations Fund (DBOF).

GAO noted that: (1) the business area's price increased from $50.02 per direct labor hour in fiscal year (FY) 1994 to $89.03 per direct labor hour in FY 1996, a 78-percent increase; (2) a large part of this price increase was due to the inclusion of significant overhead costs in the prices charged customers, costs that were previously paid for through direct appropriations or by Navy major commands; (3) even though the prices increased, the business area reported it lost about $212 million during fiscal years 1994 through 1996, and would have lost more if it had not been allowed to increase its prices in order to recoup prior year losses; (4) these losses primarily occurred because: (a) actual overhead costs that the business area was responsible for exceeded budget projections; and (b) the business area received lower-than-expected workload levels which prevented it from generating enough revenue to recover its budgeted overhead costs; (5) these rising prices and consistent losses ultimately reduce the purchasing power of the customers' appropriations; (6) the Navy's implementation of DBOF and its reorganization to consolidate ordnance functions have resulted in more costs being identified and included in the prices charged customers; (7) this has helped to identify areas of inefficient operations within the business area that contribute to the price increases, principally overhead costs; (8) however, the Navy ordnance business area still needs to take a number of actions to ensure that accurate and consistent information is available to effectively manage the business operations; and (9) specifically, GAO found that the business area: (a) did not accurately forecast the amount of work to be performed; (b) used a pricing structure that did not allow individual ordnance activities to charge prices that represented their estimated cost of doing business; and (c) did not accurately budget and account for costs.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD concurred on the need to develop a plan to streamline the Navy's ordnance operations and reduce its infrastructure costs. While the Navy did not develop a comprehensive plan, it did take many of the steps that GAO recommended. The FY 1999 budget request for the Navy ordnance business area reflects a major restructuring and downsizing, while ensuring that required capabilities and commitments are supported. The budget addressed specific actions required to streamline Navy ordnance operations and eliminate unnecessary infrastructure, including overhead costs. The Navy is also planning to transfer the weapons stations' ordnance operations from the Navy Ordnance Center to the Atlantic and Pacific Fleets on October 1, 1998. This realignment of ordnance operations enables the Fleet commanders to seek further efficiencies in the ordnance operations, including the function related to ammunition loading and unloading of naval ships and commercial vessels.

    Recommendation: To ensure that the Navy ordnance business area operates on a break-even basis, the Secretary of Defense should direct the Secretary of the Navy to develop a plan to streamline the Navy ordnance operations. This plan should: (1) concentrate on eliminating unnecessary infrastructure, including overhead; (2) identify specific actions that need to be accomplished; (3) include realistic assumptions about the savings that can be achieved; (4) establish milestones; and (5) clearly delineate responsibilities for performing the tasks in the plan.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: The Navy has discontinued the uniform pricing structure. These two facilities are: (1) Seal Beach and its detachments on the West Coast; and (2) Norfolk and its detachments on the East Coast. Starting in fiscal year 2000, each lead weapons support facility will have its own prices. While the Navy does not plan to develop prices for each individual activity, it has developed prices for the two lead weapons support facilities.

    Recommendation: The Secretary of the Navy should direct the Navy ordnance business area to discontinue the uniform price structure and develop prices for individual Navy ordnance activities.

    Agency Affected: Department of Defense: Department of the Navy

  3. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation on the need to validate estimates with customers and consider workload trends when developing future workload estimates and setting prices for the Navy ordnance business area. The Navy ordnance business area will continue to refine and formalize the annual workload validation process it performs to support workload projections and customer prices used to develop its budget estimate.

    Recommendation: The Secretary of Defense and the Secretary of the Navy should ensure that the workload used in developing prices at the individual Navy ordnance activities are based on more realistic estimates by directing the Navy ordnance business area to: (1) continue to validate the workload estimates with customers; and (2) compare forecasted to actual work (direct labor hours) received from customers and consider these trends in developing the workload estimates.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation on the need to validate estimates with customers and consider workload trends when developing future workload estimates and setting prices for the Navy ordnance business area. The Navy ordnance business area will continue to refine and formalize the annual workload validation process it performs to support workload projections and customer prices used to develop its budget estimate.

    Recommendation: The Secretary of Defense and the Secretary of the Navy should ensure that the workload used in developing prices at the individual Navy ordnance activities are based on more realistic estimates by directing the Navy ordnance business area to: (1) continue to validate the workload estimates with customers; and (2) compare forecasted to actual work (direct labor hours) received from customers and consider these trends in developing the workload estimates.

    Agency Affected: Department of Defense: Department of the Navy

  5. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation. DOD agrees on the need to validate workload estimates with customers and consider workload trends when developing future workload estimates and setting prices for the Navy ordnance business area. In developing the fiscal year 2000 prices, the Navy ordnance business area has: (1) refined its analytical approach; (2) increased customers' involvement in developing workload estimates; and (3) increased Navy ordnance leadership and management involvement in developing workload estimates. The business area is also comparing forecasted to actual workload to develop trends and is considering these trends in developing the workload estimates.

    Recommendation: The Secretary of Defense and the Secretary of the Navy should ensure that costs, especially overhead costs associated with the ammunition storage and distribution mission, are accurately allocated to the customers benefitting from the services.

    Agency Affected: Department of Defense

  6. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation on the need to accurately allocate the total costs of the ammunition storage and distribution mission to the customers benefiting from the services. The Navy has taken two actions to implement this recommendation. First, the Navy ordnance business area developed a new method for charging for ammunition storage and distribution work at the Concord weapons station. Specifically, effective in fiscal year 1999, it will charge customers based on the cost per ton shipped or received. Second, the Navy ordnance activity group did a better job in allocating base maintenance overhead costs to the ammunition storage and distribution function. As a result, the ammunition storage and distribution function costs will increase $15 million in fiscal year 1999, which in turn, will increase the prices it charges customers.

    Recommendation: The Secretary of Defense and the Secretary of the Navy should ensure that costs, especially overhead costs associated with the ammunition storage and distribution mission, are accurately allocated to the customers benefitting from the services.

    Agency Affected: Department of Defense: Department of the Navy

 

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