B-118765, JUL. 28, 1958

B-118765, JUL. 28, 1958

TO THE SECRETARY OF THE DEFENSE:

IN OUR LETTER OF MARCH 18, 1958 (B-118765), WE SENT YOU COPIES OF OUR REPORT ON THE REVIEW OF OVERHAUL AND REPAIR ACTIVITIES OF NAVAL AIR STATIONS MANAGED BY THE BUREAU OF AERONAUTICS. THAT REPORT DISCLOSED IMPORTANT WEAKNESSES IN THE APPLICATION OF BASIC PRINCIPLES OF MANAGEMENT CONTROL GENERALLY RECOGNIZED AS NEEDED TO INSURE THE ORDERLY AND EFFICIENT OPERATION OF AIRCRAFT MAINTENANCE ACTIVITIES. ALSO, WE NOTED THAT THE DECISION HAD BEEN MADE TO PLACE THE OVERHAUL AND REPAIR ACTIVITIES UNDER THE NAVY INDUSTRIAL FUND TO IMPROVE FINANCIAL MANAGEMENT OF THESE ACTIVITIES.

WE, OR COURSE, REALIZE THAT THE TYPE OF FINANCING FOR A GIVEN ACTIVITY IS A MATTER TO BE DECIDED BY THE DEPARTMENT OF DEFENSE WITH THE APPROVAL OF THE BUREAU OF THE BUDGET. WE WISH TO POINT OUT, HOWEVER, THAT IN OUR OPINION, THE PRESENT METHOD OF FINANCING IS A RELATIVELY INSIGNIFICANT PROBLEM BEING FACED BY THE BUREAU OF AERONAUTICS IN MANAGING ITS OVERHAUL AND REPAIR ACTIVITIES. MOREOVER, WE BELIEVE THE OPPORTUNITIES FOR EFFECTING IMPORTANT IMPROVEMENTS IN THE MANAGEMENT CONTROL OVER THESE OPERATIONS EXTEND BEYOND THE INDIVIDUAL OVERHAUL AND REPAIR STATIONS. SUCH OPPORTUNITIES WOULD BE LOST BY FRACTIONATING THE EXISTING MANAGEMENT RESPONSIBILITIES INTO SEPARATE FINANCIAL ENTITIES THROUGH FINANCING THE NAVAL AVIATION OVERHAUL AND REPAIR ACTIVITIES OF EACH STATION UNDER THE NAVY INDUSTRIAL FUND.

THE BUREAU OF AERONAUTICS IS PRESENTLY ENGAGED IN INSTALLING A COMPREHENSIVE INTEGRATED MANAGEMENT CONTROL SYSTEM WITHIN THE PRESENT APPROPRIATION ACCOUNTING STRUCTURE, WHICH WE CONSIDER TO BE BASICALLY SOUND AND WELL CONCEIVED. THIS SYSTEM COVERS THE BROAD AREAS OF PROGRAMMING, PRODUCTION CONTROLS, BUDGETING, ACCOUNTING AND REPORTING DESIGNED TO SERVE AS THE BASIS FROM WHICH THE BUREAU, IN CONSONANCE WITH ITS OTHER AND BROADER NEEDS, CAN DIRECT AND REVIEW THE PERFORMANCE OF THE OVERHAUL AND REPAIR ACTIVITIES AS A PART OF THE TOTAL BUREAU MANAGEMENT RESPONSIBILITIES. UNTIL THE BUREAU'S MANAGEMENT CONTROL SYSTEM IS COMPLETELY INSTALLED AND ADEQUATELY TESTED AND UNTIL IT CAN BE CLEARLY ESTABLISHED THAT THE INDUSTRIAL FUND TECHNIQUE WOULD BE MATERIALLY PREFERABLE, A CHANGE IN THE METHOD OF FINANCING AT THIS TIME COULD ADVERSELY AFFECT THE ACCOMPLISHMENT OF IMPROVEMENTS IN THE OVER-ALL MANAGEMENT CONTROLS OF THE BUREAU OF AERONAUTICS.

THE OVERHAUL AND REPAIR DEPARTMENT AT THE UNITED STATES NAVAL AIR STATION AT QUONSET POINT, RHODE ISLAND, HAS BEEN SELECTED AS ONE OF THE FIRST AIRCRAFT OVERHAUL AND REPAIR SHOPS FOR CONVERSION TO THE NAVY INDUSTRIAL FUND. WE HAVE REVIEWED THE SURVEY REPORT OF THE JOINT WORKING PANEL FOR IMPLEMENTING INDUSTRIAL FUND FINANCING AT QUONSET POINT. ALSO, WE HAVE REVIEWED THE ACTIONS TAKEN BY THE BUREAU OF AERONAUTICS TO CORRECT THE MANAGEMENT CONTROL WEAKNESSES DISCLOSED IN OUR REPORT AND HAVE FURTHER CONSIDERED THE EFFECT THAT INDUSTRIAL FUND FINANCING WILL HAVE ON THE CONTROL OF AIRCRAFT MAINTENANCE ACTIVITIES. AS A RESULT OF THESE REVIEWS, WE OFFER THE FOLLOWING COMMENTS AND OBSERVATIONS FOR YOUR CONSIDERATION.

1. THE DEPARTMENT OF DEFENSE INDUSTRIAL FUND REGULATIONS STATE THAT AMONG THE PURPOSES OF THE INDUSTRIAL FUND IS THE PROVISION FOR MORE EFFECTIVE MEANS OF COST CONTROL AND THE ENABLING OF ESTABLISHMENTS TO "MORE EFFECTIVELY DISCHARGE THEIR RESPONSIBILITIES BY THE SEPARATE FINANCING OF THEIR OPERATIONS AND BY BUDGETING AND ACCOUNTING ACCORDING TO COMMERCIAL METHODS RATHER THAN THE MORE CUMBERSOME METHODS OF APPROPRIATION ACCOUNTING WHICH ARE NOT, AT PRESENT, READILY ADAPTABLE TO THIS TYPE OF OPERATION.'

THE PROBLEM OF MANAGEMENT CONTROL INVOLVED IN OPERATION OF OVERHAUL AND REPAIR SHOPS, AND THE TYPE OF COST BUDGETING AND ACCOUNTING NEEDED BY MANAGEMENT TO CONTROL THESE OPERATIONS WILL NOT BE RESOLVED BY A MERE CHANGE IN THE METHOD OF FINANCING. THE BASIC CONCEPTS AND PRINCIPLES AROUND WHICH THE BUREAU MANAGEMENT CONTROL SYSTEM NOW BEING INSTALLED WAS DEVISED ARE SUCH THAT THE SYSTEM CAN PROVIDE A SATISFACTORY BASIS FOR CONTROLLING COSTS OF GOODS AND SERVICES PRODUCED THROUGH SOUND BUDGETING, ACCOUNTING AND REPORTING. FINANCING THE OVERHAUL AND REPAIR ACTIVITIES DIRECTLY FROM THE APPROPRIATION STRUCTURE IS NOT NECESSARILY CUMBERSOME, AND TO THE EXTENT ANY INDIVIDUAL CASES EXIST, THEY CAN BE SUBSTANTIALLY SIMPLIFIED BY APPROPRIATE ADMINISTRATIVE ACTION.

UNDER THE CIRCUMSTANCES, WE BELIEVE MORE RAPID PROGRESS TOWARD THE ATTAINMENT OF IMPROVED MANAGEMENT OF THE OVERHAUL AND REPAIR ACTIVITIES WOULD BE OBTAINED BY CONCENTRATING ON THE MANAGEMENT CONTROL SYSTEM NOW BEING INSTALLED ON THE BASIS OF THE GROUND WORK ALREADY LAID THAN BY DIVERTING TIME AND EFFORT TO THE PROBLEMS INVOLVED IN THE CREATION OF A NEW FISCAL AND ACCOUNTING ENTITY. NOT ONLY WOULD THIS ENTITY BE SUBJECT TO BUDGETING, ACCOUNTING, AND REPORTING REQUIREMENTS WHICH SET IT APART FROM THE OTHER OPERATIONS FOR WHICH THE BUREAU IS RESPONSIBLE, BUT ALSO ITS USE MAY WELL HAMPER PROGRESS SINCE IT WOULD COVER ONLY THAT PART OF THE OPERATIONAL ENTITY FINANCED BY THE REVOLVING FUND.

2. INDUSTRIAL FUND REGULATIONS ALSO STRESS THE BENEFITS TO BE DERIVED FROM THE CREATION OF A BUYER-SELLER RELATIONSHIP BETWEEN ORDERING AND PERFORMING ACTIVITIES. THE BUREAU OF AERONAUTICS, HOWEVER, NOT ONLY IS RESPONSIBLE FOR MAINTENANCE OF AIRCRAFT, BUT ALSO ESTABLISHES OVERHAUL CRITERIA AND SCHEDULES AIRCRAFT AND ENGINE OVERHAULS INTO ITS VARIOUS OVERHAUL AND REPAIR DEPARTMENTS. THIS SCHEDULING IS DONE IN CONSONANCE WITH THE TYPES OF AIRCRAFT AND ENGINES SPECIFICALLY ASSIGNED BY THE BUREAU TO EACH OVERHAUL AND REPAIR SHOP BASED DIRECTLY UPON FLEET NEEDS AND NOT UPON THE SAME CRITERIA THAT WOULD BE EMPLOYED IN DEALING WITH A PRIVATE CONTRACTOR. UNDER PRESENT ORGANIZATION STRUCTURE, OPERATING PROCEDURES, AND POLICY GUIDANCE, NO GENUINE BUYER-SELLER RELATIONSHIP EXISTS.

3. THE JOINT WORKING PANEL SURVEY REPORT AND INDUSTRIAL FUND REGULATIONS BOTH POINT OUT THE ADVANTAGES OF SIMPLIFIED FINANCING OF OPERATIONS. THESE ADVANTAGES ALREADY EXIST UNDER PRESENT APPROPRIATION FINANCING TECHNIQUES OF THE BUREAU OF AERONAUTICS IN ITS AIRCRAFT MAINTENANCE PROGRAM TO AN EXTENT SELDOM FOUND IN THE MORE COMPLEX OPERATIONS OF THE DEPARTMENT OF DEFENSE. AS AN EXAMPLE, THE SURVEY REPORT DISCLOSES THAT OF 13.6 MILLION DOLLARS PROJECTED AS REQUIRED FOR FUNDING FISCAL YEAR 1957 OVERHAUL AND REPAIR OPERATIONS AT QUONSET POINT, 13.2 MILLION DOLLARS, OR APPROXIMATELY 95 PERCENT, WAS TO BE PROVIDED IN A SINGLE ALLOTMENT FROM THE BUREAU OF AERONAUTICS MAINTENANCE AND OPERATIONS APPROPRIATION; $336,740 WAS TO BE PROVIDED IN THREE OTHER ALLOTMENTS FROM THE SAME APPROPRIATION; AND LESS THAN $80,000 WAS ANTICIPATED FROM OTHER APPROPRIATIONS. ACTUAL FUND AUTHORIZATIONS RECEIVED FOR THE FIRST 6 MONTHS OF THE FISCAL YEAR AS DISCLOSED BY THE REPORT WERE:

CHART

PRINCIPAL OPERATING ALLOTMENT "C" $6,331,000

ALLOTMENT "D" (SAME APPROPRIATION) 34,750

ALLOTMENT "D" (SAME APPROPRIATION) 270,240

ALLOTMENT "D" (SAME APPROPRIATION) 2,900

TOTAL FROM AIRCRAFT AND FACILITIES, NAVY, 1957 $6,638,890

13 ADDITIONAL ALLOTMENTS FROM 10 APPROPRIATIONS 137,845

TOTAL FUND AUTHORIZED $6,776,735

THE PRESENT METHOD OF FINANCING OVERHAUL AND REPAIR ACTIVITIES WITH ESSENTIALLY A SINGLE ALLOTMENT PURSUANT TO AN OPERATING BUDGET IS CONSISTENT WITH OUR RECOMMENDATIONS TO YOU IN OUR LETTER OF MAY 21, 1957 (B-126405). TO CHANGE THIS METHOD OF FINANCING IN ORDER TO OVERCOME FUNDING PROBLEMS INVOLVING LESS THAN 5 PERCENT OF THE OVERHAUL AND REPAIR FUNDS MAY WELL RESULT IN THE DISADVANTAGES NOTED IN THAT LETTER. PARTICULARLY, SINCE THE USE OF PROJECT ORDERS WILL BE EXPANDED, THIS WOULD OPEN THE DOOR TO THE PROBLEMS EXPERIENCED AT OTHER ACTIVITIES WHERE PROJECT ORDERS ARE WIDELY USED.

IN SUMMARY, WE RECOMMEND THAT THE DECISION TO PLACE THE NAVAL AVIATION OVERHAUL AND REPAIR ACTIVITIES UNDER THE NAVY INDUSTRIAL FUND BE RECONSIDERED BY THE DEPARTMENT OF DEFENSE AND ANY APPLICATION THEREOF BE DEFERRED UNTIL SUCH TIME AS THE MANAGEMENT CONTROL SYSTEM HAS BEEN COMPLETELY INSTALLED AND TESTED. WE FEEL THIS IS PARTICULARLY DESIRABLE SINCE THERE HAS BEEN, TO OUR KNOWLEDGE, NO CLEAR SHOWING THAT THE INDUSTRIAL FUNDING TECHNIQUE WOULD BE MATERIALLY BENEFICIAL.

WE WILL BE PLEASED TO DISCUSS OUR THOUGHTS ON THE METHOD OF FINANCING NAVAL AVIATION OVERHAUL AND REPAIR ACTIVITIES WITH YOU OR WITH MEMBERS OF YOUR STAFF AT YOUR CONVENIENCE.

WE ARE SENDING A COPY OF OUR LETTER TO THE DIRECTOR OF THE BUREAU OF THE BUDGET FOR HIS INFORMATION.