Pentagon’s Bloated Supply Chain Targeted for Savings
In Pentagon lingo, these are the “back end” costs of military operations that have risen unchecked for decades.
The Willie Sutton principle applies to defense logistics: It’s where the money is. A report by Deloitte Consulting LLP estimated that yearly military spending on maintenance of equipment, with associated supplies and transportation, is upwards of $150 billion — about $80 billion for weapons upkeep and $70 billion for supplies and spare parts.
The officer who oversees a major portion of the Pentagon’s logistics business says there is no easy way to control these runaway costs.
“That’s a tough one,” says Vice Adm. Mark Harnitchek, director of the Defense Logistics Agency, in Fort Belvoir, Va.
Only six months since taking over DLA, Harnitchek has directed the agency to shave $10 billion in costs over the next five years. Most of DLA’s expenses — about $46 billion last fiscal year — are straight purchases of stuff. Overhead costs are about five billion a year.
“Our theme for the [fiscal year 2014] program budget review is to reduce cost and improve support,” Harnitchek tells reporters June 27 at a breakfast meeting.
Bloated inventories, rather than staff, will be targeted for savings. None of the agency’s 27,000 civilian employees are being laid off, says Harnitchek.
Achieving the $10 billion savings goal “is going to be a challenge,” he says. Reductions in the demand for supplies — which predominantly is driven by military deployments — will not be counted in the savings. A DLA warehouse in Kuwait that is scheduled to be shut down in February, for instance, will save $90 million a year but will not be part of the $10 billion target, says Harnitchek.
Overbuying supplies is not unusual in the U.S. military, but with the Pentagon under pressure to cut spending, the culture of plenty is becoming unaffordable, he says. DLA has almost as large an infrastructure today as it did in 1992 when the agency was assigned responsibility for distributing supplies to all branches of the military. “We were in 26 places in 1992. We’re still in 26 places in 2012,” says Harnitchek. “We have less square footage but we are still in 26 places.”
Unnecessary supply stocks are a huge financial drain, he says. “We need to do a better job buying inventory. We buy way too much inventory that we don’t use, and we keep it too long.”
Food items and pharmaceutical products are examples of inventories that the Defense Department must shed, Harnitchek says. Supplies that are easily obtainable from commercial companies will no longer be stockpiled by DLA, he adds. “We manage a lot of inventory that could be purchased at Lowe’s or Home Depot. … Why spend $11 to manage a bag of nuts that costs 75 cents?”
More savings also could be squeezed from fuel purchases, Harnitchek says. The Defense Department spends about $15 billion a year on fuel, and consumes on average 130 million barrels of oil per year. DLA is studying ways to better time the market so it purchases fuel when prices are lower. Currently fuel buys are made based on demand.
Another means of cutting cost will be to better manage contractors. Lax management contributed to $750 million worth of disputed charges by Supreme Foodservice, a company that supplies food to U.S. troops in Afghanistan. Harnitchek says DLA has recouped $87 million so far, and negotiations with the firm continue. Although he has no knowledge of whether the charges were fraudulent, Harnitchek recognizes that DLA is partly to blame for not properly overseeing additional requirements — such as food airlift services — that were requested from the contractor and for which the company claimed higher costs than had been originally estimated.
When buying commodities such as spare parts, DLA plans to expand the use of reverse auctions, where suppliers bid against one another, says Harnitchek. “It works pretty well in areas where you have a lot of competition,” he says. Estimated savings range from 5 to 20 percent.
Many of the spare parts the military needs, however, are not available commercially or are technologically obsolete. The way to handle that is to make themanufacturers responsible for supplying those components under “performance based logistics” contracts, says Harnitchek.
Contracting problems aside, military analysts have blamed the Pentagon’s rising logistics costs on practices that are rooted in the Cold War way of doing business. The Defense Department measures the performance of its logistics system in “customer wait-time,” a term that describes how long troops have to wait to receive parts or supplies they requested. As a result, supplies are ordered multiple times, just in case previous orders get delayed in the transportation pipeline. The Pentagon in the mid-1990s sought a more efficient Wal-Mart style “just in time logistics” supply system, but that didn’t work either because the Pentagon cannot accurately predict consumption and respond to supply requests on short notice.