| Fiscal year— | |||
|---|---|---|---|
| 1997 | 1998 | 1999 | |
| Organic | 63 | 67 | 63 |
| Contract | 37 | 33 | 37 |
| Fiscal year— | |||||||
|---|---|---|---|---|---|---|---|
| 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | |
| Total | $5,346 | $5,709 | $5,655 | $5,892 | $6,145 | $5,933 | $6,424 |
| Public | 3,460 | 3,662 | 3,796 | 3,770 | 3,959 | 3,743 | 4,220 |
| Private | 1,886 | 2,046 | 1,858 | 2,121 | 2,186 | 2,190 | 2,204 |
| Public (percent) | 65 | 64 | 67 | 64 | 64 | 63 | 66 |
| Private (percent) | 35 | 36 | 33 | 36 | 36 | 37 | 34 |
| Mr. Bateman. Are new weapon systems considered as core? Are they reviewed for core requirements? Is it still the policy of the Department that new weapon systems will be maintained in the private sector? |
| Admiral Sterner. In accordance with DOD policy, depot maintenance workloads resulting from new weapon systems will be reviewed under the same process that all other workloads are reviewed. The current policy is to assign work to the most appropriate source (whether public or private), as determined through the DOD CORE methodology. |
| Mr. Bateman. A recent report by the Defense Science Board states savings of 20 to 40 percent would result from outsourcing DOD commercial activities to include depot maintenance. The report calls for DOD personnel to rely on “a robust, competitive private sector” to provide maintenance and logistics support. The Board believes that private sector competition already exists or would quickly develop to meet virtually all of DOD's support requirements. However, GAO states in its testimony that 90 percent of the depot maintenance contracts it sampled were awarded non-competitively. To what extent is the Board's 20 to 40 percent outsourcing savings estimates dependent on a competitive commercial market and to what extent is there not such a market for depot maintenance activities? |
| Admiral Sterner. In my position as a Systems Commander, I have not assessed nor analyzed the DSB report in detail. However, it would appear that the 20 to 40 percent savings are in reference to commercial activity competitions such as under OMB Circular A-76 procedures. |
| Mr. Bateman. To what extent will ownership of data rights by the original equipment manufacturers, plans to rely more on total contractor logistics support and long term contracts, and defense industry consolidations, reduce competition for depot maintenance workload? |
| Admiral Sterner. The extent to which the Government may acquire rights in data is governed by statue and limited data rights may affect the extent of available competition. However, our policy is to engage in full and open competition whenever practicable. |
| Mr. Bateman. In the absence of competition, to what extent do you believe outsourcing will achieve savings? |
| Admiral Sterner. As a general matter, competition provides the greatest assurance to the buyer of obtaining the best price. However, the Navy may employ other recognized methods to determine savings can be achieved. |
| Mr. Bateman. Should DOD retain non-core depot maintenance capabilities for workloads where there is not a competitive commercial market? |
| Admiral Sterner. Yes, the CORE methodology makes provisions for this situation. The Navy needs to retain organic workload that includes “best value” (no economical private sector source) and “only source of repair” (no qualified or interested private sector source). If there is a valid maintenance requirement and no private sector capability is available to meet the requirement, then we must maintain the ability to meet the maintenance requirement. |
| Mr. Bateman. Should DOD depots be allowed to compete for outsourced workloads where no competitive market exists? |
| Admiral Sterner. As stated above, we must make provisions for “best value” and “only source of repair.” Should such situations arise where workload has been outsourced, all reasonably available procedures should be considered to meet the Navy's needs. |
| Mr. Bateman. A recent report by the Defense Science Board states savings of 20 to 40 percent would result from outsourcing DOD commercial activities to include depot maintenance. The report calls for DOD personnel to rely on “a robust, competitive private sector” to provide maintenance and logistics support. The Board believes that private sector competition already exists or would quickly develop to meet virtually all of DOD's support requirements. However, GAO states in its testimony that 90 percent of the depot maintenance contracts it sampled were awarded non-competitively. |
| In a non-competitive environment how does DOD plan to assure it is getting the benefits and safeguards of a competitive commercial market? |
| Admiral Sterner. At NAVSEA, with rare exceptions, all ship depot maintenance performed in the private sector is competed. We also seek to improve competition, including in repair of specialized equipment; for example, we are in the process of competing the repair of sophisticated periscope equipment. Therefore, we are benefiting from a competitive commercial market. Questions regarding DOD's plans with regard to a non-competitive environment should be addressed to the Department of Defense. |
| Mr. Bateman. The DOD is changing its policy and using a “best value” approach when evaluating bids in a public-private competition, rather than simply evaluating each proposal on a least expensive basis. As the private sector can pick and choose its workload, and the public depots are assigned all types of workload, it is likely that public depots cannot run as efficiently as the private sector. |
| How will you determine best value in the private sector? |
| How are you going to determine best value in the public depots? |
| If you use a “past performance” criteria for determining best value, how will you determine past performance in the public depots when they have had little or no control over the assignment of workload or retention of skilled employees? |
| Admiral Sterner. Best value in the private sector is determined through a Source Selection Plan for the individual contract action guided by historical precedent and current conditions. The Source Selection Plan outlines the technical factors important to the fleet which normally include technical capability, management capability, resource availability, past performance, and cost. The technical factors are weighted in the Source Selection Plan and the contract award is based on the best value achieved through evaluation and scoring of the proposal. The factor weights may vary depending on the specific requirements. |
| The Navy does not currently plan to conduct public/private competitions for ship depot maintenance; therefore, determining best value and past performance criteria will not be applicable to public ship depots. |
| Mr. Bateman. Since each of the services have been responding to direction to privatize more and more depot maintenance work over the last two years, please provide us with a list of systems and dates regarding the estimated savings resulting from these actions. |
| Admiral Sterner. The only depot maintenance privatization in NAVSEA has been at NSWC Crane Division, Detachment Louisville, in accordance with BRAC 95. Based on the cost analysis performed prior to the decision to privatize, estimates are that the Navy will avoid $60M in costs for all of the privatized workload in the first five years. It is too early to identify specific system savings. |
| Mr. Bateman. DoD policy states that “paramount in all departmental policy considerations are (1) the readiness and sustainability requirements of DoD forces, (2) the optimum use of scarce department resources, and (3) exploitation of the strength of United States commercial industries.” On what do you base the readiness and sustainability requirements of DoD forces? Is the optimum use of scarce department resources based on the availability of funds or on employee levels? |
| Admiral Sterner. Readiness and sustainability requirements are based on JCS contingency scenarios. The optimum use of scarce resources is based on the availability of funds. |
| Mr. Bateman. Over the years, there has been concern voiced with the ability for the private sector to respond during times of national emergencies and concerns for work stoppages due to strikes and/or corporate business decisions. |
| How would you address these concerns? |
| What happens when the private sector makes a business decision to not continue a particular workload and by that time, the public depot previously accomplishing the workload has since closed? |
| Admiral Sterner. While it's true that we, the Navy, generally have no control over work stoppages due to strikes and/or corporate business decisions or over a contractor's ability to respond during times of national emergencies, we do have a historical track record that demonstrates a consistent responsiveness on the part of the private sector ship repair industrial base. |
| CORE exists in-house to meet national emergencies, minimize operational risks and to guarantee required readiness for ships and weapon systems. In addition, prior to the closure of any public depot facility, assessments are made regarding industrial base competencies and capabilities to ensure that mission essential weapon systems can be maintained and repaired in times of emergency. CORE requirements and the capabilities of both the public and private sectors are reviewed on a regular basis. |
| Mr. Bateman. It is DOD policy to place all new weapon systems depot level requirements with the original equipment manufacturers. |
| How can you maintain your depots if none of the new weapons systems are placed in these depots? |
| Is it true that if no new weapons systems are placed in the public depots, they will whither and close in nine years? |
| Admiral Sterner. I am advised that in accordance with DoD policy, depot maintenance workloads resulting from new weapons systems will be reviewed under the same process that all other workloads are reviewed. The current policy is to assign work to the most appropriate source (whether public or private), as determined through the DoD CORE methodology. |
| Mr. Bateman. The General Accounting Office recently completed a study of the privatization in place of the workload at Louisville that concluded that this action did not reduce the excess capacity at your other depots, did not appear to be as cost-effective as transferring the workloads to other underutilized Navy facilities, and that your contract costs at Louisville are greater than expected and growing. In fact, GAO estimates that by not following the original BRAC recommendations to consolidate the workload at other Navy facilities, you will forgo nearly $100 million in savings. |
| How do you respond to these findings? |
| Admiral Sterner. The type of work performed at Louisville is unique and the only excess capacity for this work existed at Louisville; this was recognized by the BRAC Commission. To reestablish the Louisville technical capability at other naval technical activities, the functions along with necessary personnel and equipment would have had to have been reestablished at the other naval technical activities. Transferring the Louisville workload would not have reduced the excess capacity that exists for other types of depot work. The Navy reduced the excess capacity at Louisville by privatization-in-place, and will allow industry to reduce their excess capacity by moving other work to Louisville, which is occurring. |
| The Navy performed a cost evaluation of the alternatives allowed by the BRAC Commission recommendation. The evaluation found that the privatization alternative will provide the Navy with a $60M cost avoidance over the life of the contract. We believe the annual transfer savings calculated by the GAO is overstated because it essentially double counts the BRAC savings associated with the closure of NSWC Louisville and it disregards any BRAC savings attributable to privatization. |
| Mr. Bateman. DOD intends to have selective public/private competitions for workloads where adequate competition does not exist in the private sector. For your depots to be a reasonable competitor for these workloads requires that they have the capability and capacity to perform the workloads. |
| What are you doing to ensure that your depots can be realistic competitors for these workloads? |
| Do you feel that you have the capability to effectively compete for depot workloads? |
| Would not the depots be more economically efficient if their workload was closer to their current capacity as opposed to artificially sizing them to CORE? |
| Admiral Sterner. The Navy, while recognizing the potential benefits to public/private competitions, anticipates few, if any opportunities to use this acquisition methodology. As a result, the Navy has no plans to participate in public/private competitions in the foreseeable future. |
| Mr. Bateman. Congress and DOD agree that a core capability should exist in public depots. Have you examined the current core requirements to test for reasonableness and to determine what percent of the maintenance funding will be core? |
| Admiral Sterner. Yes. The maintenance requirements and capabilities in NAVSEA depots were determined from the CORE methodology review and appear reasonable and sufficient to support the Navy's requirements. At this time, there has been no calculation of the impact on the public/private split percent based on operating the depots at CORE. |
| Mr. Bateman. It appears to me that DOD wants to eliminate much of the infrastructure costs associated with its depots in order to free up funds for other priorities such as force modernization. |
| If DOD is allowed to do so, what specific steps would be used to eliminate the excess infrastructure? |
| Has DOD developed plans and strategies to accomplish a reduction in the depot infrastructure? |
| What would you expect the depot infrastructure to look like after downsizing? |
| If DOD is allowed to size the depot infrastructure to its current definition of core, what depots would be affected? What would employment levels look like? |
| Admiral Sterner. The elimination of excess infrastructure, beyond the demolition of vacant and obviously unused facilities, requires consolidation of functions and re-engineering of ways of doing business at the activity grass root level. Such consolidations usually provide only long term savings because of the large initial investment required. For example, the relocation of heavy industrial shop equipment combined with necessary building renovation to accommodate relocated equipment is expensive. Operational efficiencies will ultimately pay for the consolidation/relocation but a long term investment is require to obtain this long term savings. |
| To encourage this long term investment, NAVSEA is exploring methods of providing central funding to support consolidation and infrastructure reduction at the activity level. Infrastructure owned by NAVSEA includes 94.9 million square feet (SF). BRAC decisions will reduce the ownership by approximately 30 percent to 68.6 million SF. Programmed reductions through FY99 will further reduce this infrastructure by an additional 0.9 million SF. |
| To quantify the size of the infrastructure demolition requirement within NAVSEA, a demolition data base has been established and has identified an additional 3.5 million SF that can be demolished. The data base identifies vacant or easily vacated facilities that can be demolished relatively quickly. The impact on activity operations is expected to be positive as these maintenance intensive, energy inefficient, unneeded facilities are demolished. |
| The combined effect of these various efforts is a total reduction in NAVSEA infrastructure of 34.4 million SF or 34%. Additional infrastructure reductions at the individual activity level to support the smaller Navy will require consolidation of functions and operations to free up additional space. The easy (and least expensive) consolidations have in many cases already taken place. This type consolidation often provides its own built-in incentive to the activity in the form of reduced maintenance, repair and operational costs. The remaining challenge is the longer payback consolidations involving expensive relocation of equipment and re-engineering of how we do business at the activity and sub-activity level. |
| Infrastructure reductions, with the exception of BRAC related realignment and closures, have lagged behind downsizing of the workforce or the budget. The downsized NAVSEA will be supported by a downsized infrastructure but not without considerable effort at all levels but particularly at the activity and subactivity level. |
| Infrastructure requirements, driven by operational considerations, are not proportional to the size of the workforce or the size of the budget. Reducing the number of people in an industrial shop by 20% does not mean that the shop can be physically 20% smaller. As with any business activity, there is a certain amount of “overhead” required for facilities. Determining the optimum size of the downsized infrastructure requirement and implementation of the reductions are time consuming and expensive. Infrastructure right-sizing will require dedicated resources. The short-term costs will be borne by our customers who will ultimately benefit from long-term savings. |
| Ship depots will be affected as their total maintenance infrastructure/capacity exceeds their CORE requirement. |
| Mr. Bateman. What impact will DOD's depot maintenance outsourcing plans, to include contractor logistics support, have on excess DOD depot capacity and the cost of performing work in these depots? |
| Admiral Lockard. An excess problem does not exist at the naval aviation depots. Our capacity utilization is currently at 94 percent. Our plans for depot maintenance outsourcing are made in accordance with our Industrial Strategy which postures core work at government-owned facilities and non-core work whenever it is determined to be the best value. |
| Mr. Bateman. Since outsourcing work from a DOD depot that already has excess capacity will result in more excess capacity and increased labor hour rates for the remaining workloads in the DOD depot, unless the depot is closed altogether, should this cost be considered in public/private depot competitions, if not, why not? |
| Admiral Lockard. Although the Naval Air Systems Command recognizes the potential benefits of public/private competitions, at this time we anticipate few, if any opportunities to use this acquisition methodology. As a result, Naval Air Systems Command has no plans to resume it. However, all costs incurred by the Government should be considered when making workload posturing decisions. |
| Mr. Bateman. How does DOD plan to reduce costly excess capacity and increase the efficiency of the depot? |
| Admiral Lockard. The Naval Air Systems Command has already taken the necessary steps to reduce its excess capacity by closing three of the six naval aviation depots and redistributing the work to the remaining depots, to other services, and to private industry. |
| Mr. Bateman. How does DOD plan to reduce its depot excess capacity resulting from outsourcing and privatizing-in-place workloads? |
| Admiral Lockard. Our plans for depot maintenance outsourcing are made in accordance with our Industrial Strategy and we do not have any plans to privatize-in-place any of our depot maintenance workload. |
| Mr. Bateman. The department has announced plans to expand direct vendor delivery. Will this be applied to depot-level repairable? Will this expansion take into account 60/40? |
| Admiral Lockard. The Naval Air Systems Command does not have any direct vendor delivery type contracts. These types of contracts are under the cognizance of the Naval Inventory Control Point under the jurisdiction of the Naval Supply Systems Command. |
| A recent report by the Defense Science Board states savings of 20 to 40 percent would result from outsourcing DOD commercial activities to include depot maintenance. The report calls for DOD personnel to rely on “a robust, competitive private sector” to provide maintenance and logistics support. The Board believes that private sector competition already exists or would quickly develop to meet virtually all of DOD's support requirements. However, GAO states in its testimony that 90 percent of the depot maintenance contracts it sampled were awarded non-competitively. |
| Mr. Bateman. To what extent will ownership of data rights by the original equipment manufacturers, plans to rely more on total contractor logistics support and long term contracts, and defense industry consolidations; reduce competition for depot maintenance workloads? |
| Admiral Lockard. Competition can only exist in an environment where more than one activity has the ability to accomplish the full range of work being competed. Whenever technical data, support equipment, or piece parts are proprietary, competition is not a viable avenue. However, if a determination is made to compete a particular product in the future, we could, if appropriate, negotiate with the original equipment manufacturers for the rights of the items necessary to conduct a competition. |
| The DOD is changing its policy and using a “best value” approach when evaluating bids in a public-private competition, rather than simply evaluating each proposal on a least expensive basis. As the private sector can pick and choose its workload, and the public depots are assigned all types of workload, it is likely that public depots cannot run as efficiently as the private sector. |
| Mr. Bateman. How will you determine best value in the private sector? How are you going to determine best value in the public depots? |
| Admiral Lockard. The best value for both the private and public sectors is determined by comparing the areas of cost, technical competence, schedule and quality. Information required to make best value determinations is available through evaluation of existing data, requests for proposals, should cost studies and implementation of business case analysis. |
| Mr. Bateman. If you use a “past performance” criteria for determining best value, how will you determine past performance in the public depots when they have had little or no control over the assignment of workload or retention of skilled employees? |
| Admiral Lockard. Elements such as schedule and quality are used in assessing past performance. Determining best value requires more than past performance; whenever possible, identical work content will be used in the assessment. |
| Mr. Bateman. Since each of the services have been responding to direction to privatize more and more depot maintenance work over the last two years, please provide us with a list of systems and dates regarding the estimated savings resulting from these actions. |
| Admiral Lockard. Major privatization projects regarding naval aviation depot maintenance were implemented as a result of BRAC-93 decisions to close three naval aviation depots. The decision to privatize the H-3 and T-2 workloads were based on capacity utilization. They represented non-core capabilities, and our aviation depot capacity was better utilized for core requirements such as the H-53, F-14 and EA-6B. The result of these action was a better utilized organic sector supporting core capabilities. |
| Over the years, there has been concerned voiced with the ability for the private sector to respond during times of national emergencies and concerns for work stoppages due to strikes and/or corporate business decisions. |
| Mr. Bateman. How would you address these concerns? |
| Admiral Lockard. Our experience in Desert Storm and Desert Shield has shown that the private sector can be responsive during times of national emergencies. However, there is concern with the private sector supporting the Joint Chiefs of Staff engaged weapons systems if there is no alternative source for accomplishment of required work. Without alternative sources of depot maintenance our ability to support our engaged forces could be negatively impacted. |
| Mr. Bateman. What happens when the private sector makes a business decision to not continue a particular workload and by that time, the public depot previously accomplishing the workload has since closed? |
| Admiral Lockard. If the work was competitively awarded, we would recompete. If the work was not competitively awarded, we would establish capability in either the public or private sector, whichever provides the best value. |
| Mr. Bateman. Congress and DOD agree that a core capability should exist in public depots. Have you examined the current core requirements to test for reasonableness and to determine what percent of the maintenance funding will be core? |
| Admiral Lockard. We have calculated our core capability, last source and best value requirements using the approved DOD core methodology. The results are reasonable and represent a little more than 60 percent of our current naval aviation depot maintenance workload. |
| It appears to me that DOD wants to eliminate much of the infrastructure costs associated with its depots in order to free up funds for other priorities such as force modernization. |
| Mr. Bateman. If DOD is allowed to do so, what specific steps would be used to eliminate the excess infrastructure? Has DOD developed plans and strategies to accomplish a reduction in the depot infrastructure? What would you expect the depot infrastructure to look like after downsizing? If DOD is allowed to size the depot infrastructure to its current definition of core, what depots would be affected? What would employment levels look like? |
| Admiral Lockard. The Naval Air Systems Command has been extremely proactive in eliminating its excess infrastructure. As previously stated, we have already closed three of our six naval aviation depots, eliminating 50 percent of our infrastructure. We have no plans for further reductions. The remaining three depots are sized to perform core related work in accordance with DOD's current definition. Out-year personnel levels will remain relatively stable. |
| One of the reasons given for delaying the closure of Kelly and McClellan Air Logistics centers is to minimize the adverse impact on readiness. However, the three naval aviation depots recommended for closure by the 1993 BRAC commission are all expected to be closed within three years or less. |
| Mr. Bateman. Did the rapid closure of the three naval aviation depots significantly degrade the Navy's readiness? |
| Admiral Lockard. We did not experience any significant degradation in readiness as a result of rapid closure. Our intent of accelerating the closures was to minimize the period of disruption and to realize savings sooner. A review of lessons learned from the closure and realignment process substantiate the success of implementation without delay. |
| The Navy adopted an accelerated closure schedule for three aviation depots recommended for closure by the 1993 BRAC Commission. |
| Mr. Bateman. Please describe the lessons that the Navy learned from adopting the accelerated closure schedule. GAO's statement indicates the depots were closed in half the time allowed under the BRAC law. |
| Admiral Lockard. Due to the unpredictable and erratic loss of personnel, skill imbalances and work stoppages there is either too much work or not enough work in specific shop areas. This leads to significant inefficiencies during the closure period. Accelerating the closure period therefore, reduces the disruption period. Two specific issues and lessons learned are: |
| Issue: Attrition in certain skill areas make it impossible to complete some scheduled workload. |
| Lesson Learned: Completion of the last workload in many product lines with only organic staff resources becomes almost impossible. Military, civil service, and contractor personnel from a variety of activities are required to rectify skill imbalances and shortfalls. For example, participation of individuals including military, civilian and contractor personnel from six different activities enabled us to complete the final P-3 ARIES II aircraft modification with unblemished program safety, product quality and timely delivery. |
| Issue: Executing workload transitions. |
| Lesson Learned: The transfer of responsibility for workload moves needs to transition to the gaining activities as soon as possible. Factors at closing depots will degrade the effectiveness of the transition. Some of these factors are personnel attrition, low morale, low productivity, focus on personnel concerns rather than transition objectives, and emphasis on meeting closure schedule rather than transition objectives. |
| During the closure period depots still incur the fixed cost of keeping the facility open. This fixed cost is spread over an ever decreasing direct workload base. Accomplishing work at a closing depot, therefore, becomes very costly. Cost per direct labor hour increases greatly at all closing activities at the end of the closure period. Because of this higher than normal customer cost, some customers may opt to put workload elsewhere further exacerbating the fixed overhead dilemma. |
| Prolonging the period of closure requires dealing with a long term management problem of security. Historically, closing activities have incurred some degree of sabotage and pilferage. A shortened closure period and intense security measures reduced this impact to our depots to negligible. |
| A prolonged closure period gives many employees a sense of uncertainty regarding the closure. Employees can make the inference that the decision could be reversed and, therefore, stonewall progress towards making the closure. Management must make a dedicated effort to show commitment to closure and expedite assistance to personnel for relocation or career change. |
| Mr. Bateman. You have not included CLS and ICS in your 60/40 calculation. My reading of the law reveals no exemption for these categories of maintenance. What is your legal authority for this exclusion? |
| Admiral Lockard. It is the Navy's understanding that it is DOD policy that CLS and ICS are not to be included in the “60/40” calculation. |
| Mr. Bateman. What is the current 60/40 spread for each of the Services? Last year during the hearings you also provided outyear projections. Would you please do the same this year. |
| Admiral Lockard. The 60/40 spread for the Department of the Navy for the period FY 1996-2002 is as follows: |
| Fiscal year— | |||||||
|---|---|---|---|---|---|---|---|
| 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | |
| Total | $5,346 | $5,709 | $5,655 | $5,892 | $6,145 | $5,933 | $6,424 |
| Public | 3,460 | 3,662 | 3,796 | 3,770 | 3,959 | 3,743 | 4,220 |
| Private | 1,886 | 2,046 | 1,858 | 2,121 | 2,186 | 2,190 | 2,204 |
| Public (percent) | 65 | 64 | 67 | 64 | 64 | 63 | 66 |
| Private (percent) | 35 | 36 | 33 | 36 | 36 | 37 | 34 |
| Mr. Bateman. If ICS and CLS were calculated in the 60/40 data, would each Military Department be in compliance? What about the projections? |
| Admiral Lockard. The Department of the Navy would be in compliance with the law, for both current and future projections, if ICS and CLS were included in the 60/40 calculations, as demonstrated on the previous two charts. |
| Mr. Bateman. Why are upgrade programs factored into the organic share and not the contractor share of 60/40? |
| Admiral Lockard. The guidance for calculating 60/40 was provided to the Navy by the Office of the Secretary of Defense, under which we are directed not to include upgrade programs in the contractor share of 60/40. |
| Mr. Bateman. Last year at this time we were told the depots' cost accounting systems weren't adequate enough to make cost comparisons for public versus private competitions. Now after we rejected your privatization initiative, we're being told all is well and the Department is set to begin a competition program. What's going on here? What's changed? I don't recall any major Departmental initiatives in this area. |
| Admiral Lockard. The Navy is aware that the Office of the Secretary of Defense has drafted guidance to reinstitute public/private competition. That guidance has not yet been promulgated; therefore, we are not in a position to comment. |
| Mr. Bateman. Can you summarize the changes to the Cost Comparability Handbook? Were any changes made to the way contractor costs are looked at? |
| Admiral Lockard. The Navy is aware that OSD may recommend changes to the Cost Comparability Handbook in connection with their public/private competition guidance. However, since that guidance has not been promulgated, we do not know the final details. |
| Mr. Bateman. What's going to be different from the old public versus private competition program? |
| Admiral Lockard. As stated previously, the Navy does not yet know the final details of OSD's public/private competition guidance. |
| Mr. Bateman. When do you plan to start again? |
| Admiral Lockard. The Navy does not know when OSD's public/private competition guidance will be finalized. The Navy, while recognizing the potential benefits to public/private competitions, anticipates few, if any opportunities to use this acquisition methodology. As a result, the Navy has no plans to participate in public/private competitions in the foreseeable future. |
| Mr. Bateman. Will all depots be permitted to participate, or will there be restrictions? |
| Admiral Lockard. As stated above, the Navy does not plan to participate in public/private competitions in the foreseeable future. |
| Mr. Bateman. Two years ago, the DSB recommended the Department maintain the CORE concept. This year they recommend the Department abandon that concept. I notice that there were military advisors connected with both studies. Can you tell us what changed over the past two years that prompted this change in view? |
| Admiral Lockard. I have not been advised of what specific changes in the past two years affected the recommendations of the November 1996 DSB Report. |
| Mr. Bateman. Some very senior OSD officials have ridiculed the latest DSB report by pointing out that it lacks analytical foundation. Do you agree with that characterization? |
| Admiral Lockard. In my position as a Systems Commander, I have not assessed nor analyzed the DSB report in detail and therefore cannot provide a fully informed opinion regarding the adequacy of the report's analytical foundations. |
| Mr. Bateman. The 1996 DSB Summer Study on Innovative Support Structure for the 21st Century Military Superiority indicates savings of $30B per year are possible. Are you finding similar results in your QDR studies? |
| Admiral Lockard. The QDR studies are still in a preliminary stage and it would therefore be premature to quantify savings which may be identified in that review. |
| Mr. Bateman. The same study calls for a 5 percent per year reduction in civilian workforce and a 2 percent per year reduction in military personnel over the next five years. Can you accomplish these reductions and still stay within the 60/40 restriction? Can you accept these and still maintain readiness? Has there been any move, that you know of, to implement these recommendations? |
| Admiral Lockard. I have been advised that the Navy has not analyzed the impact of the Defense Science Board recommendations and that there has been no direction to implement these recommendations. In any event, the results of the Quadrennial Defense Review should be assessed before any reductions are made. |
| Mr. Bateman. In your opinion, would there be violation of the law if the recommendations contained in the DSB Summer Study were to be implemented? |
| Admiral Lockard. I have been advised that full implementation of the DSB recommendations may require relief from, or revision of, existing statutes, such as 10 U.S.C. 2466. |
| Mr. Bateman. It would seem that the people conducting the studies would stand to benefit should the DSB recommendations be implemented. How can this apparent conflict of interest be avoided in the future? |
| Admiral Lockard. The Defense Science Board is a Federal Advisory Committee established to provide independent advice to the Secretary of Defense. Therefore, matters concerning its membership and activities should be addressed to the Secretary of Defense. |
| Mr. Bateman. Your methodology gives the appearance of rigor. However, in actual practice it appears that anything and everything can become non-CORE at the convenience of the Department. Wouldn't you agree that the CORE methodology is a sham? |
| Admiral Lockard. The DoD CORE policy provides a sound basis for identification of the depot maintenance capabilities required to ensure a ready and controlled organic source of technical competence. We would like a stable workload base so we can have a stable work force. This would make for a streamlined industrial base planning and execution process. However, many factors drive the composition of our workloads necessary to sustain CORE capabilities, and these factors are not static. For example, force structure changes drive the size of our requirements. The introduction of new technologies will change the skills that are required. Changes to operational scenarios will drive both the skill requirements and the size of the CORE requirement. In this ever-changing environment, we need to have a responsive process that allows us to adapt to these changes. The current methodology provides us this capability. |
| Mr. Bateman. Have you changed the definition of CORE from what was reported to us last March? |
| Admiral Lockard. No, the definition remains the same. |
| Mr. Bateman. Please provide us with the workload necessary to sustain core capabilities for each of the Services, by depot. |
| Admiral Lockard. CORE has been developed at the total activity group level and at the product level, but not at the individual depot level. CORE quantities are expressed in direct labor hours (DLHs). Total Navy DLHs are 37.659M, broken out as follows: |
| Mr. Bateman. Are new weapon systems considered as core? Are they reviewed for core requirements? Is it still the policy of the Department that new weapon systems will be maintained in the private sector? |
| Admiral Lockard. In accordance with DOD policy, depot maintenance workloads resulting from new weapon systems will be reviewed under the same process that all other workloads are reviewed. The current policy is to assign work to the most appropriate source (whether public or private), as determined through the DOD CORE methodology. It is important to remember what it is the skills required to maintain the new weapons systems that are evaluated in the core methodology. |
| Mr. Bateman. In the absence of competition to what extent do you believe outsourcing will achieve savings? |
| Admiral Lockard. As a general matter, competition provides the greatest assurance to the buyer of obtaining the best price. However, the Navy may employ other recognized methods to determine savings can be achieved. |
| Mr. Bateman. Should DOD retain non-core depot maintenance capabilities for workloads where there is not a competitive commercial market? |
| Admiral Lockard. Yes, the CORE methodology makes provisions for this situation. The Navy needs to retain organic workload that includes “best value” (no economical private sector source) and “only source of repair” (no qualified or interested private sector source). If there is a valid maintenance requirement and no private sector capability or no competitive private sector capability is available to meet the requirement, then we must maintain the ability to meet the maintenance requirement. |
| Mr. Bateman. Should DOD depots be allowed to compete for outsourced workloads where no competitive market exists? |
| Admiral Lockard. As stated above, we must make provisions for “best value” and “only source of repair.” Should such situations arise where workload has been outsourced, all reasonably available procedures should be considered to meet the Navy's needs. |
| Mr. Bateman. A recent report by the Defense Science Board states savings of 20 to 40 percent would result from outsourcing DOD commercial activities to include depot maintenance. The report calls for DOD personnel to rely on “a robust, competitive private sector” to provide maintenance and logistics support. The Board believes that private sector competition already exists or would quickly develop to meet virtually all of DOD's support requirements. however, GAO states in its testimony that 90 percent of the depot maintenance contracts it sampled were awarded non-competitively. |
| In a non-competitive environment how does DOD plan to assure it is getting the benefits and safeguards of a competitive commercial market? |
| Admiral Lockard. While I cannot speak for the Department of Defense, from a Naval Air Systems Command perspective, the commercial market is sufficient to ensure that we receive the benefits derived from a competitive environment. We will continue to take advantage of the competitive commercial market whenever feasible. |
| Mr. Bateman. DOD policy states that “paramount in all departmental policy considerations are (1) the readiness and sustainability requirements of DOD forces, (2) the optimum use of scarce department resources, and (3) exploitation of the strength of United States commercial industries.” On what do you base the readiness and sustainability requirements of DOD forces? Is the optimum use of scarce department resources based on the availability of funds or on employee levels? |
| Admiral Lockard. Readiness and sustainability requirements are based on JCS contingency scenarios. The optimum use of scarce resources is based on the availability of funds. |
| Mr. Bateman. DOD intends to have selective public/private competitions for workloads where adequate competition does not exist in the private sector. For your depots to be a reasonable competitor for these workloads requires that they have the capability and capacity to perform the workloads. |
| What are you doing to ensure that your depots can be realistic competitors for these workloads? |
| Do you feel that you have the capability to effectively compete for depot workloads? |
| Would not the depots be more economically efficient if their workload was closer to their current capacity as opposed to artificially sizing them to CORE? |
| Admiral Lockard. The Navy, while recognizing the potential benefits to public/private competitions, anticipates few, if any opportunities to use this acquisition methodology. As a result, the Navy has no plans to participate in public/private competitions in the foreseeable future. |
| DOD's depot maintenance system has substantial excess capacity that includes underutilized facilities, workspace, and equipment. Such excess capacity and the cost of supporting this capacity results in excess depot maintenance costs. Consolidating workloads into fewer facilities and disposing of excess capacity can result in substantial depot maintenance savings. |
| Mr. Bateman. What impact will DOD's depot maintenance outsourcing plans, to include contractor logistics support, have on excess DOD depot capacity and the cost of performing work in these depots? |
| General Viccellio. DOD plans to conduct public/private competitions for selected non-core workload packages at its closing depots. USAF does not have “depot maintenance outsourcing plans,” although outsourcing is one of several possible outcomes. Under any outcome, we anticipate substantial workloads will relocate to the remaining depots. Should the public offeror(s) be successful in competition, the already substantial workload transfer from closing to non-closing depots would increase. The AF is also pursuing dual and joint-use initiatives with the private sector to use more effectively the existing industrial capacity at the remaining ALCs. These partnering initiatives will allow the DOD to share its operating costs with industry. Sharing these costs with industry will benefit the DOD by reducing operating costs, and thus ultimately benefit the taxpayers. In addition, these initiatives will allow the AF to more effectively use its industrial resources at the remaining depots. The AF will continue to explore innovative ways to reduce costs to the taxpayers and to effectively use its capacity at the three remaining depots. |
| Mr. Bateman. Since outsourcing work from a DOD depot that already has excess capacity will result in more excess capacity and increased labor hour rates for the remaining workloads in the DOD depot, unless the depot is closed altogether, should this cost be considered in public/private competitions, if not why not? |
| General Viccellio. The Air Force believes that along with public/private competitions, we must look at eliminating excess capacity using strategies such as transferring workload, partnering with industry, and divesting unneeded facilities and equipment. During public/private competition, capabilities, risks, costs and savings will be considered in evaluation of both the public and private bids. Allowing DOD depots to compete for the workload and spread costs over a larger workload base will lower overhead costs should their proposal be accepted. If private offerors incorporate commercial workload alongside government work, overhead costs may also decrease, not increase. |
| Mr. Bateman. How does DOD plan to reduce costly excess capacity and increase the efficiency of its depots? |
| General Viccellio. The Air Force has looked hard at capacity utilization at our remaining depots, and is working long range strategies to improve the utilization. These strategies include transferring workloads that sustain core capabilities, moving work to depots won under public-private competitions, partnering with industry, and divesting unneeded facilities and equipment. |
| Mr. Bateman. How does DOD plan to reduce its depot capacity resulting from outsourcing and privatizing-in-place workloads? |
| General Viccellio. The Air Force is looking hard at capacity utilization at our remaining depots and is working long range strategies to improve capacity utilization. These strategies include transferring workloads that sustain core capabilities, moving work to depots won under public-private competitions, partnering with industry, and divesting unneeded facilities and equipment. Should the public offeror(s) be successful in competition, the already substantial workload transfer from closing to non-closing depots would increase. As a part of the public/private competitions we plan to evaluate the public and private bids so as to ensure that any potential consolidation savings, and resulting recurring and one time costs, are carefully considered. |
| Mr. Bateman. Do you agree that transferring the workloads at Kelly and McClellan Air Force Bases' existing underutilized depots substantially reduce labor hour rates for all work performed at these depots and do you agree with GAO's estimates that savings would be about $182 million annually? |
| General Viccellio. The outcome of the public/private competition will provide the true costs and savings associated with the competing approaches. As a general matter, increasing the capacity utilization at non-closing depots through either workload transfer or partnering with commercial activities would indeed spread overhead costs across a larger production base. The Air Force has no disagreement with the GAO's point that this is the case. To predict potential cost savings/avoidances, however, requires a commodity-by-commodity analysis, since the beddown of workloads similar to those already in place may call for an overhead structure quite different from that required to support a workload totally new to the receiving location. The same applies to any analysis of materiel rates as workload is transferred. It is the Air Force's position that GAO's analysis, which essentially postulated workload consolidation without appropriately increasing the necessary overhead, exaggerated related cost avoidances. In the preparation of the public bids associated with ongoing public/private competitions, the real impacts of workload movement and consolidation will be considered. |
| Mr. Bateman. You have not included CLS and ICS in your 60/40 calculation. My reading of the law reveals no exemption for these categories of maintenance. What is your legal authority for this exclusion? |
| General Viccellio. In 1994 during the mark up for the FY95 National Defense Authorization Act, specific provisions were included that would have added interim contractor support (ICS) and contract logistics support (CLS) (and other provisions) to the calculation of “60/40”. These provisions were discussed during conference and were deleted prior to final enactment, even though other changes were made to the “60/40” provision. Accordingly, the Department has continued to exclude ICS and CLS. |
| Mr. Bateman. What is the current 60/40 spread for each of the Services? Last year during the hearings you also provided out year projections, would you please do the same this year? |
| General Viccellio. The Air Force 60/40 ratio is as follows: |
| Fiscal year— | |||||||
|---|---|---|---|---|---|---|---|
| 1996 | 1997 | 1998* | 1999* | 2000* | 2001* | 2002* | |
| Organic | 71 | 70 | 71 | 71 | 71 | 70 | 70 |
| Contract | 29 | 30 | 29 | 29 | 29 | 30 | 30 |
| Fiscal year— | |||||||
|---|---|---|---|---|---|---|---|
| 1996 | 1997 | 1998* | 1999* | 2000* | 2001* | 2002* | |
| Organic | 71 | 70 | 63 | 63 | 64 | 63 | 63 |
| Contract | 29 | 30 | 37 | 37 | 36 | 37 | 37 |
| Fiscal year— | ||||
|---|---|---|---|---|
| 1996 | 1997 | 1998 | 1999 | |
| Workload to support core capabilities1 | 25.5 | 23.1 | 23.1 | 23.1 |
| Total Organic Workload1 | 27.2 | 26.3 | 26.1 | 25.7 |
| Direct labor hours in millions1 |
| Fiscal year | ||
|---|---|---|
| 1996 | 1997 | |
| OC-ALC | 91 | 89 |
| OO-ALC | 54 | 54 |
| SA-ALC | 89 | 86 |
| SM-ALC | 63 | 66 |
| WR-ALC | 77 | 73 |
| Fiscal year— | |||||
|---|---|---|---|---|---|
| 1998 | 1999 | 2000 | 2001 | 2002 | |
| PERCENT | |||||
| Organic | 83 | 82 | 85 | 84 | 83 |
| Contract | 17 | 18 | 15 | 16 | 17 |
| Total | 100 | 100 | 100 | 100 | 100 |
| DOLLARS IN MILLIONS | |||||
| Organic | 172 | 161 | 204 | 196 | 177 |
| Contract | 35 | 36 | 37 | 37 | 37 |
| Total | 207 | 197 | 241 | 233 | 214 |
| Economic Assumptions | (8 | Civilian Under Execution | (9 | Administrative Travel | (2 | IG Consolidation | Reduced Audits | (1 | Pay of People | (17 | Nat'l Defense Stockpile | (7 | Federally Funded Research & Development Centers |
| Information Resource Mgt | (10 | Nat'l Defense Stockpile | (12 | TRANSCOM Efficiencies | (6 | Fuel Tax Credit | (2 | Anti-terrorism | Federally Funded Research & Development Centers | Carryover | (31 | DBOF Pass Through | (29 | Spare and Repair Parts | (12 |
| Category: | |
| Direct Labor | $26.47 |
| Direct Material | 26.22 |
| Direct Other | 1.23 |
| Mission Overhead | 23.43 |
| Base Support | 11.95 |
| General & Admin Expense | 1.93 |
| Operating Results Adj | 1.17 |
| JLSC Surcharge | 1.31 |
| FY98 Rate | 93.71 |
| FY96 | FY97 | FY98 | FY99 | |
|---|---|---|---|---|
| Workload to support core capabilities1 | 25.5 | 23.1 | 23.1 | 23.1 |
| Total Organic Workload1 | 27.2 | 26.3 | 26.1 | 25.7 |
| FY96 | FY97 | FY98 | FY99 | |
|---|---|---|---|---|
| Workload to support core capabilities1 | 25.5 | 23.1 | 23.1 | 23.1 |
| Total Organic Workload1 | 27.2 | 26.3 | 26.1 | 25.7 |
| Reserve | |
| Total Value | |
| (millions) | |
| NPR-2 | $5.025 |
| NOSR-1 | (0.769) |
| NOSR-2 | 0.789 |
| NOSR-3 | 2.845 |