Military declares war on spend

The non-weapons buy is huge—currently about $80 billion to $100 billion annually. In fact, over the past five years, Defense has consistently spent more on acquiring services than on weapons, goods and equipment.

By Daniel W. Gottlieb -- Purchasing, 5/20/2004

For nearly four decades, Congress, the media, and the White House have figuratively and literally hammered the Department of Defense (DoD) and the military services for waste and inefficiencies in buying.

The pressure for defense procurement reform led to the appointment of a Presidential commission on DoD procurement in 1986 (known as the Packard Commission), which recommended a series of procurement reforms to a system that it characterized as a "Middle East bazaar."

One recommendation was to use fewer military specifications for common items that could be bought in the commercial market. Yet more than a decade later, milspecs were still the rule.

Usually the public is aware of Defense procurement in the multi-billion-dollar weapons programs. For the non-weapons buy, however, Defense in the past three years has quietly been adopting industrial purchasing best practices, according to industry, congressional, and DoD procurement policy officials.

In terms of potential savings and improving efficiencies, the non-weapons buy is huge-currently about $80 billion to $100 billion annually. In fact, over the past five years, Defense has consistently spent more on acquiring services than on weapons, goods and equipment, according to the Congress' auditing arm, the General Accounting Office (GAO).

Many factors are pushing the DoD to squeeze dollars out of the supply chain, including far-flung deployments of forces, the need to transfer the military from desk jobs to the field, White House pressure for outsourcing, and the National Defense Authorization Act for fiscal year 2002. The latter called for better management and oversight in buying services.

The goal is to leverage down inventory, logistics, number of transactions and other process costs, while at the same time boosting availability and quality of goods and services to support the warfighter. To accomplish this, military procurement is turning to spend analysis, strategic sourcing, longer-term contracts, and buying commercial off-the-shelf .

The central purchasing agency is the Defense Logistics Agency (DLA), of which about a third of its buys now comprises commercial off-the-shelf (COTS) items ranging from fasteners to large system subcomponents. This move to COTS rather than items manufactured exclusively for the military has opened up competition and allowed DoD to take advantage of economies from longer and steadier production runs from commercial suppliers, according to Terry Marlow, vice president for government affairs at the Aerospace Industries Association.

This has been one of the biggest advances in DoD procurement, Marlow says, but there is still a natural tendency in military contracting to call for unique specifications.

Overall metrics on DoD spend analysis and strategic sourcing are not available, but some individual "wins" are reported:

• The Air Force improved on-time deliveries from 40% to 89% on one spares contract,
• On another USAF spares and services contract, acquisition leadtime dropped from 136 to fewer than 25 days. By industry standards, 25 days may still seem an intolerable performance. Contrasted, however, with an average 660 days' lapse from order to delivery for its pipeline inventory before its strategic sourcing strategy, the Air Force counts it a win,
• DLA claims a $55 million one-time savings in inventory reduction resulting from strategic material sourcing.

Jacques Gansler, undersecretary of defense for acquisition, logistics and technology from 1997 to 2001, tells Purchasing that a lot more could be achieved throughout the DoD. He estimates conservatively that 10%—or $8 billion—could be squeezed out of the $80 billion and shifted to the urgent goals of force modernization. Congress cut $2.5 billion over the past two fiscal years from DoD's appropriation, saying it could be made up by better procurement practices.

DoD's first task has been to get access to the type of detail in the procurement data that would enable it to do spend analysis. DoD automatically reports all contract actions of $25,000 or more to the Federal Procurement Data Center (FPDC). This data only breaks down contracts by government-wide Federal Supply Code categories, which do not necessarily track DoD needs. "The data lack certain elements to allow for a complete and detailed spend analysis," says Domenic Cipicchio, the deputy for policy in the Defense Procurement and Acquisition Policy (DPAP) office. Within any category, such as IT services, for example, this data do not reveal how much is for hardware, software, or support services, officials explain.

Compiling more detailed acquisition data necessary to analyze how to acquire goods and services strategically will be difficult, according to Cipicchio. That effort has begun through DoD's Business Management Modernization Program (BMMP). The BMMP's Tri-Service (Air Force, Army, and Navy) pilot program aims to prove that actionable, detailed spend data can be obtained in an automated fashion. Col. Ted Harrison, who heads the effort to establish a common data warehouse across the three services, said it will not be ready for testing with actual contract data until May or June, 2004. Once in operation, the system will pull data automatically at the end of each business day, allowing "near real-time" retrieval, Harrison explained. Meanwhile, commodity teams are working with the data available.

Initially, DoD is focusing on three categories of the 52 service commodity areas identified: administrative services, management advisory services and IT services.

Running down the list of the approximately $66 billion DoD spent in fiscal 2002, via contracts of more than $25,000 each, it is difficult to find specific hard goods (see Selected DoD Buys table). That's because so much of the hard and soft goods DoD buys, except for some bulk commodities such as fuel, is wrapped into service contracts. Much of the dollar value of the true commodity buys (DoD calls various types of services "commodities") is done off government-wide schedules or through DLA. Buys from the latter in fiscal 2003 were $24 billion. Even the buys through DLA include a lot of services. The trend to bundle hardware into service contracts is particularly noticeable in DoD's acquisition and maintenance of IT systems.

"Now instead of just buying computers, DoD, like industry, is buying information services," explains Stan Solloway, president of the Professional Services Council, the largest trade organization representing companies providing systems engineering, IT and other technical services to the government. "This can involve everything from basic service on computers to seat management to network and help desk services." Solloway, deputy undersecretary for acquisition from 1998 to 2000, says that about a third of the government's IT hardware is bought off the GSA schedules, where price and delivery terms are negotiated with multiple suppliers.

"When you're doing a transformational IT buy, you have to do a lot of analysis of what you need so you're selecting the right technology," he says. The government is often short of the skill sets required for this "big picture" analysis, he adds.

Solloway says the focus in DoD's current spend analysis is not just on how much overall is being spent on IT, but also how much of this is involved in specific systems, for example.

In some cases, Defense buying authorities have moved beyond the stage of collecting and analyzing spend data to strategic sourcing and contracts designed to deliver better value. Interviews with acquisition policy chiefs at the Air Force Materiel Command (AFMC) and the DLA revealed definite movement in this direction over the past couple of years.

The common steps that have been taken that reflect best industry practice include:

• Acquiring IT solutions for automating spend data collection,
• Using available spend data to group commodities and/or types of services,
• Assigning senior representatives from across functions of the organization to participate in commodity groups or integrated product teams,
• Gathering market intelligence on suppliers and their suggestions on how better to meet military user requirements,
• Providing training and guidance to contracting officers on such matters as incorporated performance metrics into contracts,
• Establishing metrics for capturing evidence of savings, process improvement, and quality of goods and services delivered.

For more detail on the AFMC and DLA procurement initiatives, see the case studies accompanying this article.

In written answers to questions from PURCHASING, the department's DPAP says that commodity teams will establish metrics for each of the commodity pilot programs. "We would expect to see savings not only in hard dollar obligations, but also through efficiency gains in streamlining our acquisition process for each particular service commodity," DPAP says.

Former acquisition officials and the GAO indicate that DoD has made progress, but that it has a long way to go down the road of buying smarter. Gansler, who now directs the Center for Public Policy and Private Enterprise at the University of Maryland, says there has been progress in terms of the long perspective.

"DoD began in 1986 [the year of the Packard Commission report on DoD procurement reform] moving toward necessary changes. Have they done it all? No. The use of commercial specifications continues to improve. Logistic commercial parts and commercial specs is broadening the supply base for industrial parts. One of the areas we've not made as much progress in is professional services, making buyers smart on performance-based buying—even buying best value, and training hasn't gotten all the way down into the system."

Gansler highlighted the importance of training with a story of one buyer, who set out to make a buy in the commercial market for a part, but took the price from the catalogue and purchased a large quantity based on that price. "He was doing the right thing the wrong way. We went back and renegotiated the contract and got 72% savings."

Solloway says there has been "increased focus the past three to five years on best practices approach" as a result of legislative and administrative reforms put in place in the 1990s. "Changing the way DoD operates internally and at the same time helping the acquisition community evolve is like turning an oceanliner around," he says.

In a report last June, GAO said DoD faced special challenges in adopting best practices from the commercial world, but that large companies like IBM and Delta had overcome similar challenges.

Although DoD and the military departments now review individual services acquisitions valued at $500 million or more, GAO says, what is lacking is a department-wide assessment of how spending for services could be more effective.

"For DoD to change management practices for the contracting of services, it will require sustained executive leadership at DoD, as well as the involvement and support of Congress," GAO says.

"What is needed to do a world class job of logistics," Gansler says, "is for the (Defense) secretary or the deputy secretary to make this one of their highest priorities."