Outsourcing DOD Logistics:

Savings Achievable But Defense Science Board's Projections Are Overstated

NSIAD-98-48: Published: Dec 8, 1997. Publicly Released: Dec 8, 1997.

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Pursuant to a congressional request, GAO reviewed the basis for the Defense Science Board's (DSB) estimate that the Department of Defense (DOD) could potentially save $6 billion annually by reducing its logistics infrastructure costs within the continental United States, focusing on: (1) the opportunities for logistics infrastructure savings; and (2) DOD's and GAO's analyses of the DSB's projected logistics infrastructure savings.

GAO noted that: (1) GAO agrees with the DSB that DOD can reduce the costs of its logistics activities through outsourcing and other initiatives; (2) DOD has already achieved over $700 million in savings from the use of a prime vendor program and other inventory-related reduction efforts for defense medical supplies; (3) according to studies by the Center for Naval Analyses, competition for work, including competition between the public sector and the private sector--regardless of which one wins--can result in cost savings; (4) many private-sector firms have successfully used outsourcing to reduce their costs of operations; (5) the DOD Program Analysis and Evaluation (PA&E) directorate's analysis shows, however, that the DSB's estimated annual savings of $6 billion is overstated by about $4 billion because of errors in estimates, overly optimistic savings assumptions, and legal and cultural impediments; (6) according to PA&E's analysis, this $4 billion includes: (a) $1 billion in overstated contract administration and oversight savings and one-time inventory savings; and (b) $3 billion in savings that would be unlikely or would be difficult to achieve within the Board's 6-year time frame, given certain legislative requirements and DOD's resistance to outsourcing all logistics functions; (7) GAO's analysis confirmed PA&E's conclusion that the Board's estimated savings were overstated; (8) GAO's analysis also raised questions about the Board's projected savings, but GAO does not know by how much or whether these questions would change the $2 billion in savings that PA&E concluded were achievable; (9) GAO questioned whether DOD would achieve a 25-percent savings from outsourcing, as the Board assumed, because the savings were based primarily on studies of public-private competitions in highly competitive private-sector markets; (10) however, competitive markets may not exist in some areas; (11) notwithstanding GAO's concerns about the magnitude of savings, DOD can make significant reductions in logistics costs; (12) the Secretary of Defense recently issued a strategic plan for achieving such reductions; (13) this report is a step in the right direction; and (14) DOD now needs an implementation plan based on a realistic assessment of the savings potential of various cost-reduction alternatives and the time frames for accomplishing various activities required to identify and implement the most cost-effective solutions.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: DOD concurred with the intent of GAO's recommendation. However, DOD concluded that a separate plan was not needed because DOD had a number of actions under way that were consistent with GAO's recommendation. Among the actions cited by DOD were the Quadrennial Defense Review, Defense Review Initiative, Omnibus legislative proposals, and the operations of its Defense Depot Maintenance Council. Accordingly, DOD has taken the position that additional action is not needed.

    Recommendation: To aid in achieving the most savings possible, the Secretary of Defense should require the development of a detailed implementation plan for improving the efficiency and effectiveness of DOD's logistics infrastructure, including reengineering, consolidating, outsourcing logistics activities where appropriated, and reducing excess infrastructure. The plan should establish time frames for identifying and evaluating alternative support options and resources, including personnel and funding, for accomplishing the cost-reduction initiatives.

    Agency Affected: Department of Defense

  2. Status: Closed - Not Implemented

    Comments: DOD concurred with the intent of GAO's recommendation. However, DOD concluded that a separate plan was not needed because DOD had a number of actions under way that were consistent with GAO's recommendation. Among the actions cited by DOD were the Quadrennial Defense Review, Defense Review Initiative, Omnibus legislative proposals, and the operations of its Defense Depot Maintenance Council. Accordingly, DOD has taken the position that additional action is not needed.

    Recommendation: DOD should present the plan to Congress in much the same way it presented its force structure reductions in the Base Force plan and the bottom-up review. This would provide Congress a basis to oversee DOD's plan and would allow the affected parties to see what is going to happen and when.

    Agency Affected: Department of Defense

 

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