Defense Depot Maintenance

This testimony discusses financial management and logistics management issues relating to the effectiveness and efficiency of the Defense Department's (DOD) operations. GAO focuses on the operations of DOD's working capital funds, which collect and disburse more than $65 billion annually, and on DOD's management of the $13 billion depot maintenance program. DOD has consistently experienced losses in the operations of various working capital funds, including the depot maintenance activity group, and has had to request additional money to support their operations. GAO has included these issues in its list of government programs at high risk for waste, fraud, abuse, and mismanagement. (See GAO/HR-97-3 and GAO/HR-97-7.)

GAO noted that: (1) to date, the working capital funds have not yet accomplished the goal of operating on a break-even basis, and DOD estimates the fund will have an accumulated operating loss of about $1.7 billion at the end of fiscal year (FY) 1997; (2) since 1993, the working capital funds have had a cash shortage; (3) to ensure that the cash balances remained positive, the funds have advance billed their customers; (4) while the three services have liquidated $3.6 billion of outstanding advance billings from February 1995 to January 1997, the outstanding advance billing balance is still $1.6 billion; (5) GAO's analysis of the FY 1998 prices for five business areas indicates that they are probably too low to recover the expected FY 1998 operating costs and/or recover prior year losses by over $300 million; (6) excess capacity, which is currently about 40 percent in DOD's depot maintenance system, is a significant contributor toward the inefficiency and high cost of DOD's maintenance program and is generating significant losses in the depot maintenance activity group of the service's working capital fund; (7) DOD has made overly optimistic assumptions about cost savings that can be achieved from outsourcing depot maintenance activities; (8) when outsourcing results in increasing, rather than decreasing costs, expected depot maintenance savings will not be realized; (9) to the extent projected savings were budgeted, losses will occur; (10) materiel cost increases are generating losses for the depot maintenance capital fund; (11) GAO's work also shows that weaknesses in DOD's inventory management system such as inadequate visibility over items and purchasing of unneeded stocks have contributed to rising material costs; (12) in addition, inadequate control of government-furnished material to contractors has also led to losses in contract depot maintenance; (13) in conclusion, the inefficient operation of depot maintenance activities results in a reduction of the military services' purchasing power through their operations and maintenance funds; (14) in addition, other factors also impact the cost-effectiveness of depot maintenance operations, including inventory management practices, repair processes, and readiness requirements; (15) to their credit, each of the military services have programs underway to improve depot maintenance and other logistics activities; and (16) while it is too early to assess the results of these programs, GAO believes they are addressing several key problems, such as the reduction of repair cycle time.