Defense Depot Maintenance:

Challenges Facing DOD in Managing Working Capital Funds

T-NSIAD/AIMD-97-152: Published: May 7, 1997. Publicly Released: May 7, 1997.

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

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

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