Navy Depot Maintenance:

Privatizing Louisville Operations in Place Is Not Cost-Effective

NSIAD-97-52: Published: Jul 31, 1997. Publicly Released: Jul 31, 1997.

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David R. Warren
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Pursuant to a congressional request, GAO followed up on its September 1996 report on the Navy's preliminary cost comparison of privatizing-in-place maintenance workloads at its Louisville, Kentucky, depot with transferring the workloads to other Navy facilities, focusing on: (1) whether privatizing the depot maintenance workload in place at Louisville is more cost-effective than transferring the workload to other Department of Defense (DOD) facilities; and (2) the practicability of transferring the Louisville workload to other defense commercial contractor facilities.

GAO noted that: (1) the Navy's privatization-in-place of the workloads at the Louisville depot, without reducing excess capacity at its remaining depots, does not appear to be as cost-effective as transferring the workloads to underutilized Navy facilities; (2) GAO's analysis shows that the Navy's final cost comparison understated the annual savings from transferring the work and overstated the one-time transfer cost; (3) GAO estimates the one-time transition cost for transferring the workload is about $10 million less than the Navy projected; (4) using GAO's estimate, the cost for the transfer option is about $234 million, or about $100 million more than the privatization-in-place option; (5) GAO estimates annual savings of $29.9 million for the transfer option, or about $20.6 million more than the Navy estimated; (6) using GAO's estimates, the transfer option would pay back the additional one-time transition cost in less than 3.5 years, compared to the additional 12-year payback period computed using the Navy estimates; (7) the Navy's analysis recognized that transferring the workloads to underutilized facilities would reduce the overhead cost for each production unit; (8) however, the Navy's analysis applied per-unit savings only to the workloads transferred and not to existing workloads at receiving locations; (9) GAO estimates that transferring the workload rather than privatizing-in-place would have resulted in savings of about $48.6 million over the first 5-year period; (10) after that time, transferring would result in annual savings of about $29.9 million; (11) one of the contractors at Louisville could take over part of Louisville's workload at another industrial activity it operates that has significant excess capacity; (12) GAO estimates that transferring the gun repair workload to the Fridley, Minnesota, facility could result in annual savings of about $9.2 million on the consolidated Navy workloads performed at that facility; (13) Navy officials stated that the Navy intends to divest itself of this facility; (14) officials at the Hughes Missile Systems Company said they could not handle the other Louisville workload--the Phalanx close-in-weapon system--in existing facilities without incurring large infrastructure costs; (15) GAO recently issued a report identifying DOD infrastructure activities as a high-risk area; (16) GAO's primary concerns related to inefficient business processes and excess capacity, and GAO pointed out that DOD needs an overall plan for addressing the problem; and (17) the situation at Louisville is representative of this overall concern.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD stated that the Navy is engaged in a continuous process improvement which is intended to reduce excess capacity and improve throughput. For example, the Navy has ongoing programs to reengineer selected maintenance tasks and functions. Also, the Navy's regional maintenance program is designed to consolidate like functions and reduce excess infrastructure. While the Navy has not developed the suggested master plan, it is taking appropriate corrective action and this recommendation is no longer applicable.

    Recommendation: The Secretary of Defense should direct the Secretary of the Navy to develop a plan for reducing excess depot maintenance capacity and costs.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD concurred with the recommendation and directed the Secretary of the Navy to conduct and adequately document a cost analysis in conjunction with any decisions affecting the continuation of previously privatized mission essential work. However, according to DOD, as stated in the Department's response to the draft report, the alternatives permitted by Base Realignment and Closure (BRAC) did not include transferring the Louisville workload to other contractor facilities, and therefore that analysis would be inappropriate.

    Recommendation: The Secretary of Defense should direct the Secretary of the Navy to, prior to exercising any contract options for the Louisville workload, conduct a cost analysis that would compare the cost-effectiveness of privatizing the Louisville workload in place with transferring it to underutilized DOD or contractor facilities. The cost analysis should also include the total cost and savings associated with overhead cost reduction that would be realized at underutilized DOD and contractor facilities for workloads already produced at these locations.

    Agency Affected: Department of Defense


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