Army Depot Maintenance:

Ineffective Oversight of Depot Maintenance Operations and System Implementation Efforts

GAO-05-441: Published: Jun 30, 2005. Publicly Released: Jun 30, 2005.

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The Army depot maintenance activity group received about $2.6 billion of orders in fiscal year 2004 to repair helicopters, combat vehicles, and air defense systems. To perform this work, the group operates under the working capital fund concept, where customers are to be charged the anticipated costs of providing goods and services to them. GAO was asked to determine (1) if prices charged by the group have increased and, if so, why; (2) how the group allocates gains or losses incurred at the individual depot level; and (3) if the group exceeded its allowable carryover ceilings and the reasons for exceeding the ceilings. GAO was also asked to determine if the Army encountered problems implementing a new system, the Logistics Modernization Program (LMP), at the Tobyhanna Army Depot.

GAO identified four management weaknesses that are impairing the efficiency and effectiveness of Army depot maintenance operations. The activity group's average sales price increased from $111.87 per hour for fiscal year 2000 to $147.07 per hour for fiscal year 2005--a 31 percent increase (21 percent if adjusted for inflation). An increase in material costs was the major driver of the sales price increase. The Army has identified some causes of the higher material costs such as increased material usage to rebuild certain weapon systems under the Army's recapitalization program and higher prices that it pays suppliers for parts, but it has not completed a comprehensive analysis of material cost increases. As a result, the Army has not been able to take proactive steps to control rising material costs. GAO analysis showed that in setting future prices, the Army spread depot maintenance reported gains and losses across all depots rather than allocating them to the individual depot that incurred the gains or losses. While DOD policy does not specify how to allocate gains and losses at the depot level, this practice does not provide the right incentives to the depots to set prices correctly in the budget. If one depot consistently incurred losses, the Army would increase the prices at other depots to help recoup its losses. As a result, the depot incurring the losses is not held accountable for operating on a break-even basis. The end result of this practice is that customers of depots with consistent losses are, in effect, subsidized by customers of depots with consistent gains. GAO analysis also showed that the reported carryover (work not completed at fiscal year end) exceeded DOD's carryover ceilings from fiscal year 1996 through fiscal year 2003. Too much carryover could result in an activity group receiving funds from customers in one fiscal year but not performing the work until subsequent fiscal years. Factors contributing to carryover exceeding the ceilings include depots receiving new orders at fiscal year-end and not being able to obtain parts needed in a timely manner. Finally, the Army continued to encounter problems implementing a new system intended to improve depot operations. GAO previously reported on these problems in May 2004, and noted that the Army's inadequate requirements management and system testing were primary contributing factors to the problems. These problems are preventing the Tobyhanna Army Depot from accurately reporting on its financial operations, which, in turn, adversely impacts the depot's ability to accurately set prices. GAO's current review found that the Army has not put into place an effective management process to help ensure that the problems with the system are resolved. While the Army developed a process that identified the specific steps that should be followed in addressing the problems identified, the process was not followed. Until the underlying causes of the problems are corrected, other depots implementing LMP will encounter similar problems.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Army Materiel Command (AMC) performed an analysis to determine the factors affecting its material cost increases. AMC determined the material cost increases are the result of higher national maintenance standards, greater damage sustained by military equipment as a result of the ongoing war, and Army's recapitalization program. On November 21, 2005, AMC briefed the House Armed Services Committee on the results of its analysis. With this analysis, the Army should have better data to manage and control its material costs.

    Recommendation: To improve business operations of the Army Working Capital Fund, the Secretary of the Army should direct the Commander, Army Materiel Command, to develop and implement a systematic process for analyzing the depot maintenance activity group's material cost increases due to the price paid for material and material usage that would enable the Army to specifically identify and quantify all material cost drivers and take proactive steps to control these rapidly increasing material costs.

    Agency Affected: Department of Defense: Department of the Army

  2. Status: Closed - Implemented

    Comments: Defense concurred with this recommendation. The Army has added guidance to the fiscal year 2007 budget guidance for use by the Army Materiel Command stating that gains and losses should be allocated to the individual industrial installation incurring gains and losses if a several year trend shows that an installation has consistently realized gains or losses.

    Recommendation: To improve business operations of the Army Working Capital Fund, the Secretary of the Army should direct the Commander, Army Materiel Command, to allocate depot gains and/or losses to the individual depots if a several-year trend shows that an individual depot consistently realizes gains or incurs losses.

    Agency Affected: Department of Defense: Department of the Army

  3. Status: Closed - Implemented

    Comments: Over the past several years, GAO has reviewed various aspects of DOD's carryover policy. In our recent review of the Army depot maintenance activity group's carryover, GAO determined that the Army's reported actual carryover for fiscal years 2002 and 2003 was understated because prior years' orders were not included in the carryover calculation. The Army interpreted DOD's December 2002 carryover guidance as requiring only the inclusion of customer orders received in the current year when calculating carryover. As a result, the Army did not include customer orders received in prior years. For example, the dollar amount of reported actual carryover was understated by $95 million at the end of fiscal year 2003 because carryover related to orders received in fiscal year 2002 and prior was not included. The understatement of carryover was because DOD did not issue detailed written procedures for calculating actual carryover until June 2004. Army headquarters officials stated that prior to the issuance of the written guidance in June 2004, the new carryover instruction was based on verbal instructions that the Army received from the Office of the Under Secretary of Defense (Comptroller). In our June 2005 report, we recommended that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to clarify DOD's written guidance for calculating carryover so that the actual amount of carryover associated with current and prior year orders is required to be included in the reported amount provided to the Congress and DOD. DOD concurred with our recommendation, and on June 29, 2005 provided written guidance to the military services requiring them to include the actual amount of carryover associated with current and prior year orders in the amount reported to the Congress and within DOD. As a result, the Congress and DOD decision makers should have more reliable and consistent carryover information to perform their oversight role, including reviewing Army's budget to determine if an activity group has too much or not enough carryover.

    Recommendation: To improve business operations of the Army Working Capital Fund, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to clarify DOD's written guidance for calculating carryover so that the actual amount of carryover associated with current and prior year orders is required to be included in the reported amount provided to the Congress and DOD.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: Over the past several years, GAO has reviewed various aspects of DOD's carryover policy. In our recent review of the Army depot maintenance activity group's carryover, GAO determined that DOD's current carryover policy is unclear because it does not contain specific instructions for determining allowable carryover for work not completed on prior year orders. Based on DOD's verbal guidance to the Army on its carryover policy, the Army used the first year outlay rate for both (1) current year orders and (2) work not completed on prior years orders. By including both current and prior year orders in the allowable carryover calculation, the Army was allowed more carryover than if the Army used only the current year orders. In our June 2005 report, we recommended that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to issue written guidance that specifies that only current year orders are used in calculating the allowable amount of carryover for the Army depot maintenance activity group. DOD concurred with our recommendation, and on June 29, 2005 provided written guidance which required the Army depot maintenance group to include only current year orders in calculating the allowable amount of carryover. As a result, the Congress and DOD decision makers should have more reliable and consistent carryover information to perform their oversight role, including reviewing Army's budget to determine if an activity group has too much or not enough carryover.

    Recommendation: To improve business operations of the Army Working Capital Fund, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to issue written guidance that specifies that only current year orders are used in calculating the allowable amount of carryover for the Army depot maintenance activity group.

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: Defense concurred with this recommendation and stated that it is the Department's policy to not exceed the year-end carryover ceiling. Defense closely monitors the Army depot maintenance carryover and noted that the Army did not exceed the ceiling in fiscal year 2004. Further, in fiscal years 2005, the Army Industrial Operations activity group (includes Army depot maintenance and ordnance activities) did not exceed the carryover ceiling.

    Recommendation: To improve business operations of the Army Working Capital Fund, the Secretary of the Army should direct the Commander, Army Materiel Command, to continue to comply with DOD's policy on not exceeding the year-end ceilings on the amount of year-end carryover ceilings.

    Agency Affected: Department of Defense: Department of the Army

  6. Status: Closed - Implemented

    Comments: In July 2009, we reported that the Army had implemented corrective actions to resolve virtually all of GAO's prior recommendations related to LMP implementation, including those related to data conversion, billing and collection, requirements management and testing, and independent verification and validation reviews. For example, in the area of requirements management and testing we found that (1) users were involved in system testing; (2) an automated system was being used to capture test results; and (3) test results were evaluated by a group that consisted of system users, the LMP program office, and an independent contractor. Additionally, the Army took action to establish an independent verification and validation process. With the effective implementation and sustainment of these additional oversight procedures, the Army has sufficiently reduced its risks associated with the implementation of LMP to proceed with implementation at other Army depot locations.

    Recommendation: To improve business operations of the Army Working Capital Fund, the Secretary of the Army should direct the Commander, Army Materiel Command to delay implementation of LMP at the four remaining depots until the problems encountered by the Tobyhanna Army Depot with the system are resolved.

    Agency Affected: Department of Defense: Department of the Army

  7. Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and in October 2004, the LMP program office initiated actions to ensure that acceptable management controls were in place and processes were adhered to. On April 5, 2007, the Army Audit Agency (AAA) declared the first deployment of LMP to be substantially compliant with the Federal Financial Management Improvement Act (FFMIA) of 1996. After a review of AAA findings, the Army decided to go forward with deployment plans to implement the system at other depots.

    Recommendation: To improve business operations of the Army Working Capital Fund, the Secretary of the Army should direct the Commander, Army Materiel Command to implement the existing management procedures for ensuring the complete resolution of identified problems resulting from the implementation of LMP.

    Agency Affected: Department of Defense: Department of the Army

  8. Status: Closed - Implemented

    Comments: In July 2009, we reported that the Army had implemented a program to address the data conversion problems caused during the deployment of LMP, and also established a process to evaluate whether its data conversion activities have reduced the risks associated with this critical factor to acceptable levels. Further, we verified that the ending general ledger account balance in legacy finance and accounting systems were in agreement with the beginning balances shown in LMP prior to implementation of LMP at Corpus Christi and Letterkenny Army Depots in May 2009. With effective and sustained implementation of these corrective actions, the Army should reduce its risks of data conversion errors in migrating to using the LMP at Army depots.

    Recommendation: To improve business operations of the Army Working Capital Fund, the Secretary of the Army should direct the Commander, Army Materiel Command to reconcile all general ledger account balances between the legacy systems and LMP as of the date the Army deploys the system at the four depots that have not yet implemented the system.

    Agency Affected: Department of Defense: Department of the Army

  9. Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and stated in their comments to our report that actions were already underway to resolve/fix existing errors. The Army identified 11,500 materials requiring the unit of measure to be corrected. As of March 2007, the base unit of measure has been corrected for 11,188 materials (97 percent). The remaining 312 materials have been configured to use a reorder point planning process in LMP. The reorder point planning process keys on the unit of issue which is correct for the 312 materials. This corrective action safeguards those materials from having incorrect purchases made during production processing and prevents pricing errors.

    Recommendation: To improve business operations of the Army Working Capital Fund, the Secretary of the Army should direct the Commander, Army Materiel Command to correct unit of issue and material pricing errors in LMP.

    Agency Affected: Department of Defense: Department of the Army

 

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