Outsourcing DOD Logistics

The Pentagon believes that it can significantly reduce logistics costs through outsourcing, but a study by the Program Analysis and Evaluation Directorate within the Office of the Secretary of Defense found that the Defense Science Board's estimate of $6 billion in annual savings is overstated by $4 billion. This overstatement is due to errors in estimates, overly optimistic savings assumptions, and legal and cultural impediments. GAO agrees that the estimate is overstated. GAO's analysis also raises questions about the Board's projected savings, but GAO does not know how much or whether these questions would change the $2 billion in savings that the Program Analysis and Evaluation Directorate concluded were achievable.

GAO noted that: (1) GAO agrees with the DSB that DOD can reduce the costs of its logistics activities through outsourcing and other initiatives; (2) DOD has already achieved over $700 million in savings from the use of a prime vendor program and other inventory-related reduction efforts for defense medical supplies; (3) according to studies by the Center for Naval Analyses, competition for work, including competition between the public sector and the private sector--regardless of which one wins--can result in cost savings; (4) many private-sector firms have successfully used outsourcing to reduce their costs of operations; (5) the DOD Program Analysis and Evaluation (PA&E) directorate's analysis shows, however, that the DSB's estimated annual savings of $6 billion is overstated by about $4 billion because of errors in estimates, overly optimistic savings assumptions, and legal and cultural impediments; (6) according to PA&E's analysis, this $4 billion includes: (a) $1 billion in overstated contract administration and oversight savings and one-time inventory savings; and (b) $3 billion in savings that would be unlikely or would be difficult to achieve within the Board's 6-year time frame, given certain legislative requirements and DOD's resistance to outsourcing all logistics functions; (7) GAO's analysis confirmed PA&E's conclusion that the Board's estimated savings were overstated; (8) GAO's analysis also raised questions about the Board's projected savings, but GAO does not know by how much or whether these questions would change the $2 billion in savings that PA&E concluded were achievable; (9) GAO questioned whether DOD would achieve a 25-percent savings from outsourcing, as the Board assumed, because the savings were based primarily on studies of public-private competitions in highly competitive private-sector markets; (10) however, competitive markets may not exist in some areas; (11) notwithstanding GAO's concerns about the magnitude of savings, DOD can make significant reductions in logistics costs; (12) the Secretary of Defense recently issued a strategic plan for achieving such reductions; (13) this report is a step in the right direction; and (14) DOD now needs an implementation plan based on a realistic assessment of the savings potential of various cost-reduction alternatives and the time frames for accomplishing various activities required to identify and implement the most cost-effective solutions.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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