Defense Transportation
DOD Has Taken Actions to Incorporate Lessons Learned in Transforming Its Freight Distribution System Gao ID: GAO-07-675R May 8, 2007The Department of Defense (DOD) transports second destination freight from over 600 locations to thousands of destinations throughout the continental United States each year at a cost of approximately $900 million. In 2001, DOD conducted a prototype program to better understand whether commercial best practices--specifically the use of a third-party logistics provider--could be applied to its freight transportation system and reduce costs. The prototype, which included a 1-year base agreement with two 1-year option periods, was conducted at selected Defense Logistics Agency (DLA) and military service shipping locations in the southeastern United States. At the conclusion of the first year, DLA exercised an option to extend the prototype at its shipping locations, whereas the military service shipping locations returned to DOD's previous freight shipping system due to dissatisfaction with the prototype's performance. On the basis of the prototype, DOD concluded that a third-party logistics provider could successfully integrate with DOD transportation processes if the program was designed and implemented correctly to capitalize on the benefits of using a third-party logistics provider while also addressing the performance problems that were experienced with the prototype. In 2004, the Under Secretary of Defense for Acquisition, Technology, and Logistics initiated the Defense Transportation Coordination Initiative (DTCI) to improve the reliability, predictability, and efficiency of moving materiel within the continental United States through a long-term partnership with a third-party logistics provider. DOD issued a request for proposals in June 2006 and plans to award a contract during fiscal year 2007. The DTCI contracting vehicle will be an indefinite-delivery, requirements-type contract3 that will pay the contractor on a cost-reimbursable basis for moving freight, a monthly fixed price for management services, and a semi-annual award fee based on contractor performance. The contract covers commodities that DOD refers to as "freight all kinds"4 and excludes a number of shipment types, such as household goods; arms, ammunition, and explosives; and sensitive and classified shipments. Scheduled for a phased implementation over 3 years, DTCI will encompass 67 DLA and military service shipping locations by the end of 2009, with the potential to add almost 200 more military service shipping locations. According to DOD, freight costs at the DTCI locations are estimated at about $250 million annually. DOD has projected a savings in freight costs of approximately $60 million in the third year of implementation, after DTCI has become operational at all sites. Net savings will be less due to management costs associated with implementing DTCI. DOD views DTCI as an organizational transformation aimed at leveraging a third-party logistics provider's existing commercial business, along with its best commercial practices, to achieve efficiencies in distribution and associated cost savings. The implementation of DTCI represents a shift from the current decentralized transportation management practice of having individual DOD transportation officers manage freight, to the use of a centralized system in which a single third-party logistics provider coordinates freight transportation for the sites. DTCI is also a key DOD initiative to address distribution problems in supply chain management, which we have designated as a high-risk area in the federal government. In response to Senate Report No. 109-254 accompanying the National Defense Authorization Act for Fiscal Year 2007 and as agreed with Congress, this letter provides information on DOD's plans for implementing DTCI. Our specific objectives were to (1) identify the actions DOD took to incorporate lessons learned from the earlier prototype program in its planning for DTCI and (2) evaluate the steps DOD has taken to achieve the organizational transformation envisioned under DTCI.
DOD took numerous actions to incorporate lessons learned from the prototype program in its planning for DTCI. Specifically, we identified 36 lessons learned--including successes and problems--from the prototype, and determined that DOD had taken actions that were responsive to each of these. For example, the prototype succeeded in showing the benefits of using both electronic data interchange between the government's and contractor's systems and a Web-based tracking system to provide visibility over shipments, and DOD plans to require the DTCI contractor to use both of these technologies. However, the prototype also experienced problems in areas such as program development and implementation, information technology systems and integration, performance, business processes, and contracting. DOD, in its planning for DTCI, has made changes in response to these lessons learned. For example, during the prototype, the military services had several concerns about performance, such as the contractor's inconsistency in picking up freight on time, contributing to their dissatisfaction with that program. To address this lesson learned, the contract solicitation for DTCI includes on-time pickup as one of several key indicators to measure contractor performance. The prototype also showed that a 1-year base contract period was inadequate to secure a level of commitment or investment from the partners in a third-party logistics relationship and to develop effective communication processes. In contrast to the prototype contract, DOD plans to enter into a 3-year base agreement with a third-party logistics provider for DTCI with the option for two 1-year extensions and the possibility of two additional 1-year award options--a potential contract period totaling up to 7 years. Furthermore, the prototype experienced problems because the interfaces between the contractor's and the government's information technology systems were not fully operational when the prototype began. For DTCI, DOD has established a team addressing interface integration, and it plans to conduct robust testing at each site before DTCI is implemented. The DTCI program management office has also developed a policy of "safe start," intended to reduce risk to the government and build confidence in the partnership between the third-party logistics provider and the government. For example, according to program officials, in the initial phase of DTCI implementation, only DLA shipping sites are involved. The military service sites will not be participating until the contractor has demonstrated full capability with their system interfaces and training of shipping installation personnel is completed. While DOD incorporated lessons learned from the prototype in its planning for DTCI, DOD components pursuing similar types of acquisitions may be unable to benefit from the successes and problems experienced during implementation of DTCI because DOD lacks a plan for disseminating DTCI lessons learned. Effective sharing of lessons learned is a key tool for institutionalizing change and facilitating efficient operations. The DTCI program management office has initiated efforts to gather lessons learned. However, without dissemination of these lessons learned to the broader DOD acquisition community, other DOD components pursuing similar types of acquisitions may lack useful information that could assist their efforts. Therefore, we are recommending that DOD develop and implement a plan for sharing DTCI lessons learned across the department. In commenting on a draft of this correspondence, DOD concurred with our recommendation.
RecommendationsOur 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.
Director: Team: Phone:GAO-07-675R, Defense Transportation: DOD Has Taken Actions to Incorporate Lessons Learned in Transforming Its Freight Distribution System
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Washington, DC 20548:
United States Government Accountability Office:
May 8, 2007:
Congressional Committees:
Subject: Defense Transportation: DOD Has Taken Actions to Incorporate
Lessons Learned in Transforming Its Freight Distribution System:
The Department of Defense (DOD) transports second destination
freight[Footnote 1] from over 600 locations to thousands of
destinations throughout the continental United States each year at a
cost of approximately $900 million. In 2001, DOD conducted a prototype
program to better understand whether commercial best practices--
specifically the use of a third-party logistics provider[Footnote 2]--
could be applied to its freight transportation system and reduce costs.
The prototype, which included a 1-year base agreement with two 1-year
option periods, was conducted at selected Defense Logistics Agency
(DLA) and military service shipping locations in the southeastern
United States. At the conclusion of the first year, DLA exercised an
option to extend the prototype at its shipping locations, whereas the
military service shipping locations returned to DOD's previous freight
shipping system due to dissatisfaction with the prototype's
performance.
On the basis of the prototype, DOD concluded that a third-party
logistics provider could successfully integrate with DOD transportation
processes if the program was designed and implemented correctly to
capitalize on the benefits of using a third-party logistics provider
while also addressing the performance problems that were experienced
with the prototype. In 2004, the Under Secretary of Defense for
Acquisition, Technology, and Logistics initiated the Defense
Transportation Coordination Initiative (DTCI) to improve the
reliability, predictability, and efficiency of moving materiel within
the continental United States through a long-term partnership with a
third-party logistics provider. DOD issued a request for proposals in
June 2006 and plans to award a contract during fiscal year 2007. The
DTCI contracting vehicle will be an indefinite-delivery, requirements-
type contract[Footnote 3] that will pay the contractor on a cost-
reimbursable basis for moving freight, a monthly fixed price for
management services, and a semi-annual award fee based on contractor
performance. The contract covers commodities that DOD refers to as
"freight all kinds"[Footnote 4] and excludes a number of shipment
types, such as household goods; arms, ammunition, and explosives; and
sensitive and classified shipments. Scheduled for a phased
implementation over 3 years, DTCI will encompass 67 DLA and military
service shipping locations by the end of 2009, with the potential to
add almost 200 more military service shipping locations. According to
DOD, freight costs at the DTCI locations are estimated at about $250
million annually.[Footnote 5] DOD has projected a savings in freight
costs of approximately $60 million in the third year of implementation,
after DTCI has become operational at all sites. Net savings will be
less due to management costs associated with implementing DTCI.
DOD views DTCI as an organizational transformation aimed at leveraging
a third-party logistics provider's existing commercial business, along
with its best commercial practices, to achieve efficiencies in
distribution and associated cost savings. The implementation of DTCI
represents a shift from the current decentralized transportation
management practice of having individual DOD transportation officers
manage freight, to the use of a centralized system in which a single
third-party logistics provider coordinates freight transportation for
the sites. DTCI is also a key DOD initiative to address distribution
problems in supply chain management, which we have designated as a high-
risk area in the federal government.[Footnote 6]
In response to Senate Report No. 109-254 accompanying the National
Defense Authorization Act for Fiscal Year 2007 and as agreed with your
office, this letter provides information on DOD's plans for
implementing DTCI. Our specific objectives were to (1) identify the
actions DOD took to incorporate lessons learned from the earlier
prototype program in its planning for DTCI and (2) evaluate the steps
DOD has taken to achieve the organizational transformation envisioned
under DTCI.
The Senate Report also asked us to assess the business case analysis
DOD developed, including the assumptions regarding cost savings that
could be generated by DTCI. The business case analysis was addressed in
a Comptroller General decision[Footnote 7] on a protest that was filed
regarding the terms of the DTCI request for proposals. In that
decision, we denied the protest and concluded that DOD reasonably
determined that consolidating the management of freight shipments under
a third-party logistics provider would result in substantial cost
savings and efficiencies and was necessary to meet the agency's needs.
The Comptroller General's decision further stated that DOD had
concluded the third-party logistics provider concept could work if
designed and implemented correctly. Therefore, we did not address the
business case analysis in this letter.
Scope and Methodology:
To identify the lessons learned from the prototype program, we reviewed
several assessments commissioned by DOD that were completed in 2002 and
2005.[Footnote 8] We also obtained the views of the military services
regarding both the lessons learned from the prototype and DOD's plans
for DTCI. For reporting purposes, we consolidated lessons learned that
covered similar issues and grouped them into the following categories-
-role of the third-party logistics provider, program development and
implementation, information technology systems and integration,
performance and performance metrics, business processes, contracting,
and miscellaneous. We met with DTCI program officials to discuss the
actions taken to incorporate lessons learned from the prototype into
DOD's planning for DTCI. To verify these actions, we obtained key
program documents such as the acquisition plan, communication plan, and
contract solicitation, which included the performance work statement.
We considered a lesson learned to be incorporated when we determined
that DOD's planned actions were evident in these key program documents.
Because the provisions of the contract solicitation, including those
that resulted from lessons learned, will be subject to negotiation and
may change following contract award, it was too early to determine
whether DOD fully implemented all the actions planned in response to
lessons learned from the prototype. In reviewing the steps DOD has
taken to achieve the organizational transformation envisioned under
DTCI, we made use of our prior work to identify key practices
organizations use to transform their cultures to become more results
oriented, customer focused, and collaborative in nature. We determined
the extent to which the DTCI program management office had incorporated
these practices into its plans and operations. As part of this effort,
we reviewed DOD's plans for assessing and managing performance after
the contract is awarded. We determined that the data we used were
sufficiently reliable for our purposes. We conducted our work between
July and August 2006 and between December 2006 and March 2007[Footnote
9] in accordance with generally accepted government auditing standards.
Summary:
DOD took numerous actions to incorporate lessons learned from the
prototype program in its planning for DTCI. Specifically, we identified
36 lessons learned--including successes and problems--from the
prototype, and determined that DOD had taken actions that were
responsive to each of these. For example, the prototype succeeded in
showing the benefits of using both electronic data interchange[Footnote
10] between the government's and contractor's systems and a Web-based
tracking system to provide visibility over shipments, and DOD plans to
require the DTCI contractor to use both of these technologies. However,
the prototype also experienced problems in areas such as program
development and implementation, information technology systems and
integration, performance, business processes, and contracting. DOD, in
its planning for DTCI, has made changes in response to these lessons
learned. For example, during the prototype, the military services had
several concerns about performance, such as the contractor's
inconsistency in picking up freight on time, contributing to their
dissatisfaction with that program. To address this lesson learned, the
contract solicitation for DTCI includes on-time pickup as one of
several key indicators to measure contractor performance. The prototype
also showed that a 1-year base contract period was inadequate to secure
a level of commitment or investment from the partners in a third-party
logistics relationship and to develop effective communication
processes. In contrast to the prototype contract, DOD plans to enter
into a 3-year base agreement with a third-party logistics provider for
DTCI with the option for two 1-year extensions and the possibility of
two additional 1-year award options--a potential contract period
totaling up to 7 years. Furthermore, the prototype experienced problems
because the interfaces between the contractor's and the government's
information technology systems were not fully operational when the
prototype began. For DTCI, DOD has established a team addressing
interface integration, and it plans to conduct robust testing at each
site before DTCI is implemented. The DTCI program management office has
also developed a policy of "safe start," intended to reduce risk to the
government and build confidence in the partnership between the third-
party logistics provider and the government. For example, according to
program officials, in the initial phase of DTCI implementation, only
DLA shipping sites are involved. The military service sites will not be
participating until the contractor has demonstrated full capability
with their system interfaces and training of shipping installation
personnel is completed. While DOD incorporated lessons learned from the
prototype in its planning for DTCI, DOD components pursuing similar
types of acquisitions may be unable to benefit from the successes and
problems experienced during implementation of DTCI because DOD lacks a
plan for disseminating DTCI lessons learned. Effective sharing of
lessons learned is a key tool for institutionalizing change and
facilitating efficient operations. The DTCI program management office
has initiated efforts to gather lessons learned. However, without
dissemination of these lessons learned to the broader DOD acquisition
community, other DOD components pursuing similar types of acquisitions
may lack useful information that could assist their efforts. Therefore,
we are recommending that DOD develop and implement a plan for sharing
DTCI lessons learned across the department. In commenting on a draft of
this correspondence, DOD concurred with our recommendation.
To make the fundamental changes in the freight transportation system
envisioned under DTCI, DOD has taken positive steps to initiate best
practices employed by other private and public sector organizations to
transform their cultures so they can become more results oriented,
customer focused, and collaborative in nature. Still, the long-term
success of DTCI remains uncertain given the challenges inherent in
undertaking organizational transformation and because the program is
still in its early stages, with a contract yet to be awarded and the
program scheduled for rollout over a 3-year period. Our prior work has
identified key practices that have been used by large organizations to
achieve transformation. Some of these practices include dedicating an
implementation team to manage the transformation process, establishing
a communication strategy to create shared expectations and report
related progress, and focusing on a key set of principles and
priorities. So far, DTCI has employed these and other best practices in
its efforts to move from the current decentralized transportation
management activities to a centralized system under a single third-
party logistics provider. For example, the DTCI program management
office has established a transition planning team to oversee the
transformation of DTCI from acquisition activity to implemented
program, including developing initial plans and building relationships
with all the government stakeholders at sites where DTCI will be
initially implemented. One of the key priorities of the DTCI program
management office has been to establish plans and initiate efforts for
assessing and managing performance after contract award. Specifically,
DOD has built performance indicators into the DTCI contract
solicitation, scheduled periodic program management reviews, initiated
a process improvement team, developed a quality assurance surveillance
plan, and proposed to use award fees as an incentive to promote desired
outcomes--elements aimed at ensuring the delivery of services to meet
or exceed the terms of the contract. For example, DOD plans to conduct
periodic performance management reviews at various points during the
rollout of the program. The first review is scheduled to occur after
DTCI is implemented at the first three sites, and a second review is
scheduled after implementation at the next three sites. Subsequently,
the contractor is expected to conduct program management reviews on a
monthly basis. According to program officials, the reviews will
include, among other things, a comparison of actual costs to projected
costs and a review of various performance indicators. While these
planned post-contract award efforts are promising, the long-term
success of DTCI will depend on the extent to which DOD follows through
on institutionalizing the practices it has initiated to transform its
freight transportation system, as well as the contractor's performance
during implementation of the program.
Background:
DOD's freight transportation is currently managed by transportation
officers, who are assigned to various components of DOD, such as DLA
and the military services. To arrange for freight movements within the
United States, transportation officers generally use one of two
vehicles: a Tailored Transportation Contract, which is generally
awarded to multiple carriers for large and small-volume shipments based
on specific regions, shipment lanes, and commodities;[Footnote 11] or
tenders, which are generally issued to carriers for shipments outside
the requirements of a Tailored Transportation Contract, such as
ammunition, explosives, or unit moves.[Footnote 12]
When notified of a shipment requirement, the transportation officer may
contact several potential carriers, eventually selecting one and
arranging for the shipment. DOD shippers execute these actions without
centralized planning, coordination, or control. They independently
select the mode of transportation, level of service, and transportation
provider. This decentralized process focuses on satisfying the
requirements of local shippers, rather than on achieving DOD-wide
efficiencies or cost savings.
We have previously reported on deficiencies in DOD's management of its
transportation. These deficiencies included a lack of coordination
among the services, which contributed to ineffective oversight
programs. In 1993, we reported on strategies that commercial shippers
use for managing their transportation functions and reducing
costs.[Footnote 13] We identified opportunities where DOD can make
greater use of commercial practices and encouraged DOD to adopt some of
these practices where feasible. In 1999, we noted that DOD had made
progress in reforming its transportation system through initiatives to
reengineer its financial management processes, and we recommended that
DOD assess the costs and benefits of reengineering the transportation
financial management processes through contracting to a third-party
logistics provider.[Footnote 14]
Noting the growing use of third-party logistics providers in the
commercial sector, the Deputy Secretary of Defense approved a study to
assess the feasibility of using third-party logistics providers to meet
some of DOD's continental United States surface freight transportation
requirements. The feasibility study,[Footnote 15] initiated in 1998,
concluded that using a third-party logistics provider had the potential
to generate transportation cost savings, provide better access to
performance data, improve customer service, and improve shipment data.
The study recommended a prototype study in a small region using a third-
party logistics provider.
Based on that recommendation, the Assistant Deputy Under Secretary of
Defense for Transportation Policy requested the U.S. Transportation
Command and DLA serve as codirectors for the prototype to ensure
effective implementation and thorough analysis of the full range of
options a third-party logistics provider may offer in satisfying DOD
freight movement requirements. To support this prototype, the Military
Traffic Management Command, a subcomponent command of the U.S.
Transportation Command, contracted for a third-party logistics provider
to manage freight transportation and provide related services in
support of installation transportation officers for the movement of
freight shipments for selected commodities outbound from DLA and
military service locations in the southeastern region of the United
States--specifically in the states of Alabama, Georgia, and Florida--to
all points in the continental United States. The prototype began in
2001 and ended in 2004.
DOD concluded from its experiences with the prototype that a third-
party logistics provider (or coordinator) could successfully be
integrated with DOD's shipping processes if the program was designed
and implemented correctly and that the integration of coordination
services with freight transportation could achieve cost savings. In
2004, the DTCI logistics transformation concept was initiated by the
Under Secretary of Defense for Acquisition, Technology, and Logistics.
U.S. Transportation Command, designated as DOD's single manager of
transportation and the department's distribution process owner, is the
lead agency for DTCI and has established a program management office to
manage this effort. In June 2006, DOD issued a request for proposals
for a third-party logistics provider to handle all aspects of freight
shipment for certain commodities.
Under plans for DTCI, the coordinator would eliminate the need for DOD
transportation officers to contact freight carriers for those
commodities covered in the program. The coordinator would be expected,
among other things, to:
* coordinate, manage, and optimize freight shipments from notification
to delivery;
* provide in-transit visibility to government systems and real-time
access to shipment information;
* facilitate the resolution of loss and damage claims with carriers;
* manage carrier quality and performance; and:
* collaboratively develop, recommend, and implement process
improvements.
The DTCI contractor is expected to assume responsibility for
transportation services in a phased approach, increasing the number of
DOD sites as implementation progresses. Phase I will include DLA
Defense Distribution Centers, Phase II will include various military
service locations that are located within close proximity of the
Defense Distribution Centers, and Phase III will include additional
military service locations.
DOD Took Numerous Actions to Incorporate Lessons Learned from the
Prototype Program into Plans for DTCI:
DOD took numerous actions to incorporate lessons learned from the
prototype program into its planning for DTCI. Specifically, we
identified 36 lessons learned--including successes and problems--from
the prototype, and determined that DOD had taken actions that were
responsive to each of these. Some of the lessons learned highlighted
benefits derived from using a third-party logistics provider. For
example, one success of the prototype was its demonstration that a
contractor could serve as a single point of contact for transportation
officers, enabling them to initiate a request for shipment simply by
contacting the third-party provider instead of making multiple calls to
potential carriers. Hence, a third-party logistics provider could
reduce the time needed to find a freight carrier, allowing
transportation officers to concentrate on other duties. The prototype
also demonstrated that the systems DOD uses to manage its shipping
could successfully interface with commercial shipping systems through
the use of an electronic data interchange. This paperless process
reduces processing time and minimizes data errors. Prior to the
prototype, the transportation officers in the prototype region relied
on telephone, fax, and e-mail to transmit information. In addition, the
prototype revealed the benefit of using a Web-based tracking system to
provide visibility over shipments. In response to both of these
benefits demonstrated by the prototype, DOD plans to require the DTCI
contractor to use electronic data interchange and to provide DOD with
the ability to track and trace shipments through the use of a Web-based
tool. DOD has also included provisions in the contract solicitation
that would require the contractor to establish a secure connection with
DOD systems, as well as maintain an appropriate level of security in
its information technology systems.
However, the prototype also experienced problems in areas such as
program development and implementation, information technology systems
and integration, performance and performance metrics, business
processes, and contracting. In its planning for DTCI, DOD has made
changes in response to these lessons learned. Some of these lessons
learned and DOD's related actions are highlighted below. Enclosure I
provides a more comprehensive list of lessons learned and related DOD
actions.
For example, during the prototype, the military services had several
concerns about performance, such as the contractor's inconsistency in
picking up freight on time, contributing to their dissatisfaction with
that program. To address this lesson learned, the DTCI contract
solicitation includes on-time pickup as one of several key indicators
to measure contractor performance. Another performance-related concern
that one military service expressed was that on numerous occasions, the
contractor in the prototype was unable to provide next-day service.
This concern is addressed in the DTCI performance work statement which
provides for urgent deliveries through the use of expedited service and
surge requirements. Furthermore, the DTCI quality assurance
surveillance plan specifies penalties for failure to achieve the key
performance indicators, which includes not meeting delivery dates.
The prototype also showed that a 1-year base contract period was
inadequate to secure a level of commitment or investment from the
partners in a third-party logistics relationship and to develop
effective communication processes. In contrast to the prototype
contract, DOD plans to enter into a 3-year base period with a third-
party logistics provider for DTCI with the option for two 1-year
extensions and the possibility of two additional 1-year award term
options--a potential contract period totaling up to 7 years.[Footnote
16] Furthermore, the prototype experienced problems because the
interfaces between the contractor's and the government's information
technology systems were not fully operational when the prototype began.
For DTCI, DOD has established a team addressing interface integration,
and it plans to conduct robust testing at each site before DTCI is
implemented. The DTCI program management office has also developed a
policy of "safe start," intended to reduce risk to the government and
build confidence in the partnership between the coordinator and the
government. For example, according to program officials, in the initial
phase of DTCI implementation, only DLA shipping sites are involved. The
military service sites will not be participating until the contractor
has demonstrated full capability with their system interfaces and
training of shipping installation personnel is completed.
Another lesson learned from the prototype was the value of having a
third-party logistics provider help develop the request for proposals.
To assist in the development of the DTCI request for proposals, DOD
hired a logistics management consultant and its subcontractor--a
commercial third-party logistics provider. Both the consultant and its
subcontractor signed organizational conflict of interest agreements and
agreed not to compete under the DTCI solicitation. DOD also provided
several opportunities for industry involvement, including discussions
with industry representatives early in the development of requirements
and later on to share comments and concerns on the draft solicitation.
Finally, the contract requirements in the prototype program limited the
contractor's ability to optimize shipment consolidations and make
process improvements. The contract structure also limited the
incentives for the contractor to assess DOD's logistics systems and
offer suggestions to improve service and lower cost. In contrast, DTCI
is designed to provide more flexibility to the contractor in order to
encourage efficiencies in distribution and associated cost savings. The
solicitation establishes a cost savings goal based on the contractor's
ability to consolidate and optimize freight shipments and the
contractor is expected to show significant annual progress toward that
goal. In addition, the DTCI solicitation provides historical workload
data to include spikes due to seasonal demands for the offerors to base
their proposed rates and has a "Not-To-Exceed" structure for all DTCI
shipment route rates, therefore balancing risk to the contractor and
providing greater flexibility to satisfy requirements.
While DOD incorporated lessons learned from the prototype in its
planning for DTCI, other DOD components, including the military
services and agencies, may be unable to benefit from the successes and
problems experienced during implementation of DTCI because DOD lacks a
plan for disseminating DTCI lessons learned throughout DOD. As GAO has
previously noted, effective sharing of lessons learned is a key tool
for institutionalizing change and facilitating efficient operations.
During our review, we identified a number of steps DOD has taken to
transform the freight transportation system under DTCI. These steps,
discussed later in this letter, could result in lessons learned about
the successes and problems experienced during this organizational
transformation. Further, the DTCI program management office has
initiated efforts to gather lessons learned during implementation For
example, the DTCI program management office has drafted a charter to
establish a process improvement team to serve as a forum to collect and
implement lessons learned by gathering, reviewing, and approving
proposed process improvements, authorizing rollout of process
improvement plans, and acting as an advocate within DOD for changes to
improve DTCI. However, without dissemination of these lessons learned
to the broader DOD acquisition community, other DOD components pursuing
similar types of acquisitions may lack useful information that could
assist their efforts. For example, DOD components seeking to apply
commercial practices to their logistics or other service functions may
not be aware of, or have access to, DTCI lessons learned. The Under
Secretary of Defense for Acquisition, Technology, and Logistics, as the
principle advisor to the Secretary of Defense for all matters relating
to DOD acquisition, maintains a knowledge-sharing Web site operated in
conjunction with the Defense Acquisition University. This Web site
could be one vehicle for disseminating the DTCI lessons learned.
DOD Has Initiated Practices Needed for Organizational Transformation:
To make the fundamental changes in the freight transportation system
envisioned under DTCI, DOD has taken positive steps to initiate best
practices that have been used by private and public sector
organizations to transform their cultures so they can become more
results oriented, customer focused, and collaborative in nature. Still,
the long-term success of DTCI remains uncertain given the challenges
inherent in organizational transformational efforts and because the
program is still in its early stages, with a contract yet to be awarded
and the program scheduled for rollout over a 3-year period.
Our prior work has identified key practices that large private and
public sector organizations have used to achieve
transformation.[Footnote 17] Some of these practices include dedicating
an implementation team to manage the transformation process,
establishing a communications strategy to create shared expectations
and report related progress, and focusing on a key set of principles
and priorities. So far, DTCI has employed these and other best
practices in its efforts to move from its current decentralized
transportation management activities to a centralized system under a
single third-party logistics provider.
For example, the DTCI program management office has established a
transition planning team to oversee the transformation of DTCI from
acquisition activity to implemented program, including developing
initial plans and building relationships with all the government
stakeholders at sites where DTCI will be initially implemented. As GAO
has previously reported, a strong and stable implementation team that
is responsible for day-to-day management of the transformation is
important to ensure that the program receives the focused, full-time
attention needed to be sustained and successful. DTCI's transition
planning team, which includes guidance from a change management expert,
has already conducted several site visits to bring stakeholders on
board with the changes DTCI will bring about compared to DOD's current
freight distribution practices. In doing so, the team has started
preparing notebooks, called "battle books," to be used as a reference
point for site unique requirements and to familiarize team members
traveling to each DTCI site for implementation purposes. Each battle
book will eventually incorporate site visit notes, "as is" and "to be"
process charts denoting potential process changes, key personnel,
blueprints of warehousing and shipping facilities, minutes from video
and teleconferences, photos, local maps, and action items. In addition,
DTCI's transition planning team is responsible for drafting plans
covering the areas of transition, change management, and training, as
well as a plan of action and milestones. Once a contractor is on board,
the team intends to assist in the integration process, address issues
unique to certain sites, perform "rehearsal of concept" drills, and
document lessons learned from each site implementation.
Based on our review, we found that implementing an effective
communications strategy is a key priority for the DTCI program
management office. During organizational transformations, communicating
information early and often helps to build an understanding of the
purpose of planned changes and builds trust among stakeholders. For
example, the DTCI program management office has worked towards gaining
buy-in and collaboration through a steady flow of communication with
stakeholders. In doing so, the DTCI program management office has made
information-sharing a priority through several avenues. For example,
the program manager and office division chiefs participate in biweekly
teleconferences with all military service representatives and other key
DOD stakeholders, during which participants discuss program updates,
scheduling, and other concerns, among other things. Two-way exchange
that allows for feedback from stakeholders is central to forming the
effective internal and external partnerships that are vital to the
success of any organization. Further, the DTCI program manager has
briefed senior leaders at various venues such as the Distribution
Process Owner Executive Council, the Defense Business Board, and the
Surface Deployment and Distribution Command Symposium.
DOD has initiated efforts indicating that it is focused on a key set of
principles and priorities at the outset of the transformation. For
example, the DTCI program management office has embedded customer
satisfaction as a core value. Embedding core values is one way an
organization can show that it is focused on a key set of principles and
priorities by defining the attributes that are intrinsically important
to what the organization does and how it will do it. The implementation
of DTCI will affect a large number of stakeholders. According to the
DTCI program management office, the greatest internal effect will be on
the transportation officers, who will be changing the way they do their
work. To adapt to this change, DTCI's transition planning team has had
to manage the expectations of stakeholders, including explaining to
transportation officers that the third-party logistics provider will
perform some--but not all--of the transportation officers' current
functions while their responsibilities will expand into other areas
such as process improvement, distribution analysis, and customer
relations management. Furthermore, the contractor will be expected to
monitor and measure customer satisfaction on an ongoing basis to ensure
that any problems reported by customers, including government
stakeholders, are addressed upon receipt and resolved as quickly as
possible. Finally, according to the contract solicitation, the
contractor will be responsible for staffing, managing, and providing
resources for customer support 24 hours a day, 7 days a week.
Another key priority of the DTCI program management office has been to
establish plans and initiate efforts for assessing and managing
performance after contract award. Our prior work has shown that
assessing and managing contractor performance is important to ensure
that the business arrangement is properly executed. Specifically, DOD
has built performance indicators into the DTCI contract solicitation,
scheduled periodic program management reviews, initiated a process
improvement team, developed a quality assurance surveillance plan, and
proposed to use award fees as an incentive to promote desired outcomes-
-elements aimed at encouraging the delivery of services to meet or
exceed the terms of the contract. While these planned post-contract
award efforts are promising, the long-term success of DTCI will depend
on the extent to which DOD follows through on institutionalizing the
practices it has initiated to transform its freight transportation
system, as well as the contractor's performance during implementation
of the program.
Some of the key performance indicators that the contractor is expected
to track include on-time pickup and delivery, processing time for loss
and damage claims, information technology system availability, and
small business subcontracting goals. We observed that these indicators
are directly related to meeting the desired program goals such as
increasing efficiencies and reducing cycle time--the time from request
for movement to delivery. According to the contract solicitation, the
performance threshold for on-time pickup and delivery is 96 percent for
the first 2 years, increasing to 97 percent by the third year; and the
performance threshold for processing of claims and system availability
is 99 percent. The performance threshold for meeting small business
subcontracting goals is 20 percent of all subcontract dollars during
the first year, increasing to 25 percent by the third year.
Furthermore, DOD plans to conduct periodic program management reviews
at various points during the rollout of the program. Specifically,
after DTCI is implemented at the first three sites--Defense
Distribution Center in Barstow, California; Defense Distribution Center
in Corpus Christi, Texas; and Defense Distribution Center in Puget
Sound, Washington--the contractor, in collaboration with the DTCI
program management office and stakeholders, is expected to conduct a
thorough review, over a 30-day period, of those sites to determine
necessary adjustment to schedules, identify areas of improvement, and
develop methods to ease implementation at future locations. A second
review, again over a 30-day period, is scheduled after implementation
at the next three sites--currently planned for Defense Distribution
Center in San Diego, California; Defense Distribution Center in Red
River, Texas; and Defense Distribution Center in San Joaquin,
California. Subsequently, the contractor is expected to conduct program
management reviews on a monthly basis. During the monthly program
management reviews, a review and discussion of the government
assessment and the contractor's self-assessment for the previous month
is planned. The government intends to review metrics and performance
data supplied by the contractor as well as present the government's own
findings on contractor performance. According to program officials, the
reviews will also include a comparison of actual costs to projected
costs and a review of various performance indicators.
Also, as mentioned previously, the DTCI program management office is
establishing a process improvement team. This team plans to meet on a
monthly basis, in conjunction with monthly program management reviews,
and capture all process improvement requests through a DTCI Web site
into a process improvement database repository. The process improvement
requests may be prioritized by the originator of the request and that
priority should be based on potential resource savings to be realized
if the change is implemented. All process improvement requests will be
presented before the team, and the team will vote on whether to
implement them. Some of the questions that will need to be addressed
with each process improvement request include: actions that
precipitated the submission of the request, which stakeholders will
benefit and be required to work the change, the cost in time and
resources, the return on investment, and whether the proposed
improvement conflicts with the performance work statement requirements.
To assess performance, the quality assurance surveillance plan lays the
foundation for evaluating contractor performance while implementing the
DTCI performance work statement. The plan defines the performance
objectives and thresholds, the procedures for evaluating performance
and resolving issues, and the process to be followed to reduce
contractor payment for nonperformance of services. In addition to
enterprisewide performance objectives and thresholds, the contractor
will be held to site-specific objectives and thresholds for on-time
delivery and pickup. This plan also states that the contractor, at the
commencement of shipping, will need to compile data to review
performance, conduct trend analysis, and identify potential process
improvements. For example, the quality assurance personnel representing
the government shipper will review DTCI's shipments and make
comparisons between the scheduled pickup date and time with the actual
shipment information to determine the contractor's performance level in
relation to the performance threshold. During the first phase of
implementation, this evaluation is expected to be conducted on a
quarterly basis with report findings presented to the DTCI program
management office. In turn, the DTCI program management office will
share the information with the contractor to help focus management
attention on performance areas below contractual standards.
To motivate the contractor's performance, DOD has established an award
fee plan to provide a financial incentive to the contractor to achieve
program outcomes beyond the contract requirements. In examining DOD's
plans for including award fees in the DTCI contract, we found that the
award fee factors are linked to the outcomes outlined in the program's
performance work statement. In developing the DTCI award fee plan, the
DTCI program management office identified four areas as evaluation
criteria--implementation, information management, transportation
coordination services, and small business participation. Within each of
these areas, there are three levels of performance--satisfactory, very
good, and exceptional--under which the DTCI contractor's performance
will be evaluated.
Conclusions:
By incorporating the lessons learned from the prototype into its plans
for DTCI, DOD is continuing to make progress in improving its
transportation management. DOD also has recognized the challenges of
making fundamental changes to its current decentralized freight
distribution system and has adopted key practices that--with
appropriate follow through during program implementation--should enable
this organizational transformation to occur. Just as DOD has applied
the lessons learned from its own past experiences with the prototype,
the lessons that DOD learns from implementing DTCI and transforming the
freight transportation system could be useful to other DOD components
that plan to undertake similar types of acquisition and organizational
transformation efforts. However, without disseminating lessons learned
from DTCI's implementation, the knowledge of successes and problems
derived from the implementation of DTCI will be of limited use beyond
the program.
Recommendations:
To provide for effective dissemination of lessons learned from the
implementation of DTCI, we recommend the Secretary of Defense direct
the Under Secretary of Defense for Acquisition, Technology, and
Logistics, in conjunction with the Commander, U.S. Transportation
Command, to develop and implement a plan for sharing DTCI lessons
learned across the department.
Agency Comments and Our Evaluation:
In its written comments on a draft of this correspondence, DOD
concurred with our recommendation. DOD stated that it will include DTCI
lessons learned in an existing Web site maintained by the Defense
Acquisition University. We believe this action, if implemented, will be
responsive to our recommendation. DOD also provided technical comments
that we incorporated as appropriate. DOD's comments are reprinted in
enclosure II of this correspondence.
We are sending copies of this report to the appropriate congressional
committees. We are also sending copies to the Secretary of Defense; the
Deputy Secretary of Defense; the Under Secretary of Defense for
Acquisition, Technology, and Logistics; the Commander of the U.S.
Transportation Command; the Director of the Defense Logistics Agency;
the Secretaries of the Army, Navy, and Air Force; and the Commandant of
the Marine Corps. This report will also be available at no charge on
our Web site at http://www.gao.gov.
Should you or your staff have any questions concerning this report,
please contact me at (202) 512-8365 or solisw@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. Key contributors to this report
were Carleen Bennett, Susan Ditto, Chanee Gaskin, Dawn Godfrey, Tom
Gosling, Curtis Groves, Art James, Kevin Keith, and Marie Mak.
Signed by:
William M. Solis:
Director, Defense Capabilities and Management:
List of Congressional Committees:
The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate:
The Honorable Daniel Inouye:
Chairman:
The Honorable Ted Stevens:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Ike Skelton:
Chairman:
The Honorable Duncan Hunter:
Ranking Member:
Committee on Armed Services:
House of Representatives:
The Honorable John P. Murtha:
Chairman:
The Honorable C.W. Bill Young:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Enclosure I: Actions Taken by DOD to Incorporate Lessons Learned from
the Third- Party Logistics (3PL) Prototype Program into Its Plans for
the Defense Transportation Coordination Initiative (DTCI):
Role of the 3PL.
Lesson learned from the 3PL prototype: The 3PL prototype provided "one-
stop-shopping" for the coordination of freight transportation services,
enabling DOD transportation officers to spend less time tendering
shipments to carriers and more time planning their shipments and
carrying out other duties;
DOD actions in planning for DTCI: Under plans for DTCI, the 3PL will be
the single point of contact to complete all transportation services.
Instead of directly dealing with freight carriers, DOD transportation
officers will contact the 3PL, which will serve as the intermediary to
arrange for freight transportation.
Lesson learned from the 3PL prototype: Based on the 3PL prototype
contractor's perspective, DOD will need to delegate more authority to
the 3PL, placing the 3PL in a stronger position to negotiate and
execute with the carriers. In successful 3PL relationships, there is a
partnership between the client and 3PL where the 3PL is an extension of
the client in working with carriers, and actions it takes are done in
the best interests of the client;
DOD actions in planning for DTCI: Under plans for DTCI, carrier
management will reside solely with the contractor. According to the
performance work statement, the contractor shall establish, maintain,
and manage all necessary subcontracts with carriers that move freight
under this contract.
Lesson learned from the 3PL prototype: There should be a continuous
exchange of information between DOD and the contractor. The 3PL needs
to have a thorough understanding of the contract to operate more
effectively. In any 3PL environment, a spirit of partnership is
critical for operations as well as for smooth flow of information;
DOD actions in planning for DTCI: The DTCI program management office
has made information a priority of the program through several avenues.
The solicitation requires the winning contractor to hold a postaward
conference within 7 days after contract award, engage transportation
association leaders and industry partners for the purpose of sharing
information, conduct monthly program management reviews, and
participate as a member of the DTCI Process Improvement Team.
Lesson learned from the 3PL prototype: The 3PL prototype was too
restrictive to make best use of a 3PL's capabilities. The program, for
example, was restricted to a small number of sites in the southeastern
United States and included a limited volume of commodities. The 3PL
prototype also limited functions that use 3PL management, such as
inbound and outbound transportation, warehousing, and bill paying;
DOD actions in planning for DTCI: The plans for DTCI cover all Defense
Logistics Agency sites and 49 additional service sites across the
continental United States. While shipments will be restricted to
freight all kinds, program officials believe that the freight volume
will be sufficient to take advantage of the 3PL's capabilities. The
DTCI is structured for a 3PL to manage outbound freight transportation,
freight payment, and carrier management. DOD made a decision not to
include the warehousing function as this would have required A-76
studies to implement.
Program development and implementation.
Lesson learned from the 3PL prototype: Stakeholder buy-in and
collaboration is needed for successful implementation. All stakeholders
must support the program, and the support must come from the highest
level in the organization's hierarchy;
DOD actions in planning for DTCI: The DTCI program management office
has initiated several actions to gain and maintain buy-in from
stakeholders. The DTCI program manager and division chiefs host a
biweekly teleconference with all the service representatives and any
other key service stakeholders, along with sending out weekly e-mail
updates. The DTCI program management office has made several service
site and headquarters visits. The DTCI program manager briefs at senior
leader distribution governance meetings. The DTCI transition planning
team holds planning meetings to ensure stakeholder collaboration.
Lesson learned from the 3PL prototype: Successful program development
and implementation requires a thorough understanding of what 3PLs can
do. Experienced 3PL representatives should be included in the project
team. The 3PL prototype employed an integrated process team consisting
of transportation experts from DOD, the commercial sector, and
representatives from stakeholder organizations;
DOD actions in planning for DTCI: During program development, the DTCI
program management office worked with stakeholder organizations,
including the Defense Distribution Centers, the military services, and
the Surface Deployment and Distribution Command. The effort was also
supported by a management consultant and a commercial 3PL. Private
sector companies were engaged though industry days, requests for
information, and individual face-to-face meetings. For the
implementation phase, the DTCI program management office intends to
form an integrated government/contractor partnership for site
implementation.
Lesson learned from the 3PL prototype: Site visits should be conducted
with DOD and contractor personnel before start-up to ensure that all
sites understand the process and are ready to begin shipping. If face-
to-face site visits are not possible, a conference call should be
conducted to review any requirements and issues specific to the
shipping site;
DOD actions in planning for DTCI: DOD's schedule calls for a gradual
rollout, which it refers to as a "safe start" approach. Coordination
has been completed with all the stakeholders in determining the rollout
plan. Initial sites will be DLA Defense Distribution Centers with high-
volume shipping activity. The DTCI program management office has
established a transition planning team that has visited implementation
sites to provide information about DTCI processes and benefits. The
team will visit or conduct video teleconferences with all sites prior
to implementation at each site. According to program officials, these
visits will also help identify site unique requirements in order to
tailor implementation efforts at each location.
Lesson learned from the 3PL prototype: The first shipment should not be
released until all systems and processes have been tested and are
functioning properly. A poorly executed start-up can jeopardize the
success of the program. Both parties (the government and the
contractor) should ensure that their systems and processes are ready
before initiating the first shipment;
DOD actions in planning for DTCI: The DTCI solicitation specifies the
contractor shall establish information systems communications
integration prior to initiating shipments. The contractor will prepare
a test plan that must be approved by the DTCI program management
office. The final DTCI joint test plan is due no later than 30 days
after contract award. To accommodate any site-specific differences, the
contractor shall deliver site-specific test plan addendums no later
than 30 calendar days prior to implementation at each DTCI shipping
location.
Lesson learned from the 3PL prototype: Training of DOD transportation
officers should have been conducted in multiple sessions rather than
completed all at once. The transportation officers were expected to
learn several new processes and systems to operate within the 3PL
prototype. A phased training approach would help transportation
officers go through the transition more effectively without being
flooded with information and training;
DOD actions in planning for DTCI: According to the DTCI performance
work statement, shipper training will be provided on-site during Phase
I and on-site or regionally during Phases II and III. Training will be
conducted between 1 and 4 weeks before site implementation. The
contractor is expected to work with DOD to establish an on-going
training curriculum for government personnel that will be kept up-to-
date to reflect current operating procedures.
Lesson learned from the 3PL prototype: There should be on-site 3PL
representatives based at selected shipping sites. The criteria for
having on-site 3PL support would be large shipping volume or unique
shipping requirements that need special attention. The one DLA depot
out of four that had an on-site representative from the 3PL prototype
firm was extremely pleased with the support and service it received.
Benefits included claims processing and a reduced time and effort for
placing shipping orders;
DOD actions in planning for DTCI: Under DTCI plans for Phase I of
implementation, 3PL personnel will be on-site for at least the first 60
days. For Phases II and III, regional support is required. The
solicitation also requires permanent on-site personnel at some
locations.
Information technology systems and integration.
Lesson learned from the 3PL prototype: Use the 3PL's systems and
procedures to the maximum extent, including information systems;
DOD actions in planning for DTCI: A goal of DTCI is to learn from the
best commercial practices of the 3PL. This entails maximizing the use
of the 3PL's procedures and information systems. During the training of
DOD transportation officers, emphasis will be placed learning all the
applicable capabilities of the coordinator's information systems to
facilitate the incorporation of those systems into their daily
operations. The DTCI program management office also intends to use its
process improvement team to share and incorporate useful processes
throughout the enterprise.
Lesson learned from the 3PL prototype: The 3PL's Web-based tracking
system allowed shippers to track their shipments. Where operationally
and economically feasible, the contractor's systems should be used to
process shipment requests and track shipments. DOD personnel should be
trained on how to use the system;
DOD actions in planning for DTCI: The DTCI contract solicitation
requires the 3PL to provide a track and trace capability of materiel in-
transit through the contractor's Web-based system and through
transmission to the government's shipper systems. According to the
program office, this capability will enable DOD customers to track
shipments through the contractor's Web site, their service/agency
shipping system, or the Global Transportation Network. While
operational needs require DLA and service shippers to prefer the use of
their existing tracking shipment systems when available, the
coordinator's shipment system will be used whenever those systems are
not available. Also, the coordinator's system may become the preferred
method for tracking shipments due to constraints in the government
system. Use of these tools will be thoroughly covered in the training
of DOD transportation officers.
Lesson learned from the 3PL prototype: During the 3PL prototype, a Web-
based reporting tool was used to generate monthly Contracting Officer
Representative Reports, monthly Customer Satisfaction Reports, and
Service Exception Reports. The use of this tool should be continued;
DOD actions in planning for DTCI: Web-based reporting and the automated
capture of data for reporting is a requirement in the DTCI
solicitation.
Lesson learned from the 3PL prototype: Electronic data interchange
provides the capability to transmit shipment requests and receive
shipping information. In the past, the government has relied on
telephone, fax, and e-mail to transmit this information. The use of
electronic data interchange will speed up this process and reduce the
chance of data errors;
DOD actions in planning for DTCI: DOD transportation officers at DTCI
sites will be able to electronically submit their shipment requests to
the 3PL. The DTCI performance work statement defines the use of the
electronic data interchange interfaces.
Lesson learned from the 3PL prototype: During the early phases of the
3PL prototype, DOD personnel experienced problems using the information
technology systems because of the department's restrictive security
firewalls. This problem was subsequently resolved. A core systems
technical team should have been dedicated during the development stage
of the 3PL prototype. Early involvement of systems personnel in the
development team would have avoided, or greatly reduced, the amount of
time and effort required to resolve systems-related issues. In future
3PL arrangements, allocate sufficient time and resources for thorough
testing of the systems and interfaces before going live;
DOD actions in planning for DTCI: The DTCI program management office
established an information technology integration team to address
system integration issues. The team has developed an action plan and
meets monthly with systems personnel. In addition, according to the
DTCI performance work statement, thorough testing of the systems and
interfaces is required prior to initiating shipments. DTCI's
information technology integration team will work closely with the
selected contractor to ensure the necessary data links have been
connected and verified before site activation.
Performance and performance metrics.
Lesson learned from the 3PL prototype: While the 3PL prototype probably
improved customer service by reducing transit times and achieving more
reliable on-time delivery, such improvements could not be validated
through metrics. Lowering costs was also not a stated goal of the 3PL
prototype;
DOD actions in planning for DTCI: Key performance indicators including
on-time delivery, on-time pickup, and others have been built into the
DTCI performance work statement. In addition, DOD plans to track and
document cost savings achieved under DTCI.
Lesson learned from the 3PL prototype: Obtain agreement regarding the
data and methodology to be used to develop metrics before moving the
first shipment. In the 3PL prototype, reporting discrepancies could
have been avoided or minimized if both parties met early in the
project, and agreed to the data source and methodology;
DOD actions in planning for DTCI: The DTCI program management office
assembled a team of subject matter experts from key DOD stakeholders to
collaborate on the development and fielding of the performance work
statement. Performance indicators were identified that make up the
basis of the metrics that will be collected and evaluated during the
life cycle of the program. The quality assurance surveillance plan (and
Contracting Officer's Representative document) describes the process by
which the contractor's performance will be evaluated.
Lesson learned from the 3PL prototype: One military service noted that
certain high-priority aircraft spare parts were currently transported
using small-package express carriers and expressed concern that
consolidating these shipments under the 3PL could result in longer
transit times;
DOD actions in planning for DTCI: DTCI has provided exclusions within
the performance work statement that address the concerns of the
military service and other stakeholders. Small-package shipments have
been excluded from the DTCI program.
Lesson learned from the 3PL prototype: Definitions of service levels
should be clearly defined and understood by both the transportation
officers and the 3PL contractor to avoid confusion. DLA and the
military services require different types of transportation service.
DLA requires regular (daily), volume oriented service. Military
services require urgent service for critical spare parts with periodic
unit moves involving numerous truckload moves. During the 3PL
prototype, since the military services' requirement for urgent service
was not fully satisfied, the military services' transportation officers
perceived that their workload actually increased rather than decreased;
DOD actions in planning for DTCI: The DTCI solicitation is written as a
performance contract. The solicitation has defined expedited service
and surge requirements. The DTCI performance work statement is
structured to allow urgent deliveries using a "Mandatory Delivery
Date." The 3PL prototype was a firm fixed-price contract that limited
the contractor's ability to provide delivery if the service exceeded
the allowed price.
Lesson learned from the 3PL prototype: According to some military
services, smaller, low-volume sites did not receive acceptable levels
of service under the 3PL prototype;
DOD actions in planning for DTCI: The DTCI performance work statement
requires the contractor to provide an acceptable service to all
shipping locations, regardless of volume.
Lesson learned from the 3PL prototype: One military service expressed
some concern regarding performance and operational issues in the 3PL
prototype that included late freight deliveries and hazardous shipments
offered to nonqualified carriers;
DOD actions in planning for DTCI: In the DTCI performance work
statement, there are key performance indicators for on-time delivery
and the quality assurance surveillance plan specifies penalties for
failure to achieve. The DTCI performance work statement describes the
contractor requirements for offering freight to the carriers.
Business processes.
Lesson learned from the 3PL prototype: DOD's claims process for lost
and damaged goods was ineffective and confusing to users, and many
claims were probably not filed because of frustration with the
transportation discrepancy report system. The 3PL prototype improved
the claims process by making the use of transportation discrepancy
report system optional when filing claims;
DOD actions in planning for DTCI: Although the transportation
discrepancy report system will continue to be used under DOD's plans
for DTCI, the contractor will be required to accept, process, and
resolve claims within a specified time period.
Lesson learned from the 3PL prototype: One military service noted
problems that occurred during the 3PL prototype with the 3PL's
interface with PowerTrack (method of payment to contractor for freight
movements);
DOD actions in planning for DTCI: The DTCI performance work statement
states that the contractor's information systems must be able to
interface with PowerTrack.
Lesson learned from the 3PL prototype: In the 3PL prototype, the 3PL
process was not designed for shippers that do not have the capability
to order their own transportation services;
DOD actions in planning for DTCI: All shippers in DTCI have the
capability to order shipments using one of the government's electronics
systems. In addition, the performance work statement requires the
contractor to provide its own Web-based system as a backup capability.
Contracting.
Lesson learned from the 3PL prototype: The 3PL prototype showed that
acquisition of 3PL services could be acquired through a Federal
Acquisition Regulation (FAR)-based contract, in accordance with DOD
policy;
DOD actions in planning for DTCI: DOD's contract solicitation for DTCI
is FAR-based.
Lesson learned from the 3PL prototype: The contracting process needs to
be flexible to test or implement a 3PL. The contracting team must: have
experience with 3PLs, use commercial or 3PL contracting processes,
relinquish some control of the processes, and not be overburdened with
excessive workload to be innovative and responsive;
DOD actions in planning for DTCI: Market research was conducted for
DTCI to benefit from commercial 3PL experience. DTCI program management
office advisors supporting the DTCI acquisition have 3PL experience and
include a leading commercial 3PL firm. Further, the DTCI requirements
have been developed in a performance-based manner, encouraging the
offerors to submit their own approaches to meeting the DTCI objectives
by employing their own proven commercial best practices.
Lesson learned from the 3PL prototype: Proposed contract modifications
should be resolved and implemented quickly. It is impossible to
anticipate and include every requirement in the initial contract. But
when a situation occurs that requires a contract change, both parties
should resolve the issue and implement the change to the contract in an
expeditious manner;
DOD actions in planning for DTCI: U.S. Transportation Command is
building a robust capability within the DTCI program management office
to manage postaward contract activities and respond quickly to any
contractual issues.
Lesson learned from the 3PL prototype: The contract's structure should
allow the 3PL to identify cost savings and create incentives to share
those savings with DOD. To achieve cost savings and additional service
improvements, the 3PL prototype would have to be expanded to permit a
3PL to take advantage of its abilities to improve overall logistics
processes, like reducing inventories, and saving on total costs while
improving service;
DOD actions in planning for DTCI: While "gain sharing" may be used for
commercial 3PL arrangements, it is not an option available to DTCI
under FAR. The contract solicitation has cost savings goals identified
throughout the life of the contract and metrics for measuring the
coordinator's progress toward those goals. The cost-reimbursable
provisions of the contract solicitation allow the government to retain
savings achieved from the contractor's optimization and consolidation
efforts.
Lesson learned from the 3PL prototype: Use 3PLs to help write the
request for proposals;
DOD actions in planning for DTCI: The DTCI program management office
used a 3PL to help develop the request for proposals requirements. In
addition to having commercial 3PL expertise in developing the
solicitation, the contracting officer led extensive market research to
include industry interaction and collaboration on draft requirements.
Lesson learned from the 3PL prototype: Commit to a 6-month contracting
process;
DOD actions in planning for DTCI: The DTCI program evolved over a 2-
year period. The program was initiated in 2004, and the final
solicitation was distributed in the summer of 2006. As of early 2007,
the source selection process was ongoing.
Lesson learned from the 3PL prototype: Use a down-select process, then
write a contract;
DOD actions in planning for DTCI: U.S. Transportation Command is
evaluating proposals and intends to award a contract after conducting
discussions, both written and oral, with offerors whose proposals have
been determined to be within the competitive range.
Lesson learned from the 3PL prototype: Select a World-Class 3PL that
has done an implementation as large as the one pursued by DOD;
DOD actions in planning for DTCI: The 3PL's ability to implement DTCI
will be considered during the source selection process.
Lesson learned from the 3PL prototype: A 1-year timeframe is inadequate
to demand commitment or investment from the partners and to develop
effective communications processes. 3PLs want a minimum of 3 years to
enter into a 3PL relationship with a shipper. They prefer 5 years with
a 5-year option. 3PLs can invest in equipment, processes, and personnel
and expect a return on investment with a longer contract timeframe;
DOD actions in planning for DTCI: The DTCI solicitation provides for a
3-year base period with two 1-year options and two 1-year award term
options, for a total potential contract period of 7 years.
Lesson learned from the 3PL prototype: Allow for seasonal pricing in
the contract to give the 3PL greater flexibility in securing capacity
during periods of heavy demand. The spring and summer months are
"produce season" in the southeastern United States (the geographic
region where the 3PL prototype was implemented). During these months,
truck capacity is at a premium as most are being used to transport
produce. Since the 3PL was locked into the contracted rates, it had
difficulty in obtaining carriers to move some DOD freight at these
rates. Commercial best practices usually allow for seasonal pricing to
compensate for this spike in demand and supply of trucks in the market;
DOD actions in planning for DTCI: According to program officials, the
DTCI solicitation balances risk to the contractor by providing
significant historical workload data to include spikes due to seasonal
demands for the offerors to base their proposed rates. In addition,
proposed rates will be priced on a Not-To-Exceed basis, with actual
costs reimbursed on a direct cost basis allowing for some degree of
fluctuation (within the Not-To-Exceed limit) caused by foreseen
seasonal demands and other factors. The Not-To-Exceed rates will cover
seasonal pricing fluctuations.
Miscellaneous.
Lesson learned from the 3PL prototype: Address personnel reductions and
reassignments that may result from implementation of the program and
changes made from process improvements;
DOD actions in planning for DTCI: According to program officials, DTCI
is designed to be "personnel neutral," with no cost savings projected
as a result of personnel reductions. The change management plan and
communications plan are structured to carry this message forward from
the DTCI program management office.
Lesson learned from the 3PL prototype: Military services expressed
concern regarding management and award fees under DTCI coming from
their service budgets;
DOD actions in planning for DTCI: The DTCI program management office
has advised the services to plan for these costs in their fiscal year
2008 to fiscal year 2013 Program Objective Memorandum (POM). The DTCI
program management office also noted that in future years, these costs
should be offset by reduced transportation costs.
Source: GAO analysis.
[End of table]
[End of section]
Enclosure II: Comments from the Department of Defense:
Deputy Under Secretary Of Defense For Logistics And Materiel Readiness:
3500 Defense Pentagon:
Washington, DC 20301-3500:
May 2 2007:
Mr. William M. Solis:
Director, Defense Capabilities and Management,
U.S. Government Accountability Office:
441 G Street, N. W.,
Washington, DC 20548:
Dear Mr. Solis:
This is the Department of Defense (DoD) response to the GAO draft
report, GAO-07-675R, "Defense Transportation: DoD Has Taken Actions to
Incorporate Lessons Learned in Transforming Its Freight Distribution
System," dated April 11, 2007 (GAO Code 350880).
The Department has reviewed the subject GAO draft report and concurs
with the recommendation. A detailed response is enclosed.
Sincerely,
Signed for:
Jack Bell:
Enclosure:
As stated:
GAO Draft Report - Dated April 11, 2007 GAO Code 350880/GAO-07-675R:
"Defense Transportation: DOD Has Taken Actions to Incorporate Lessons
Learned in Transforming Its Freight Distribution System"
Department Of Defense Comments To The Recommendation:
Recommendation: The GAO recommends that the Secretary of Defense direct
the Under Secretary of Defense for Acquisition, Technology, and
Logistics, in conjunction with the Commander, U.S. Transportation
Command, to develop and implement a plan for sharing Defense
Transportation Coordination Initiative (DTCI) lessons learned across
the Department. (pg. 14/GAO Draft Report):
DOD Response: Concur. The Defense Acquisition University (DAU) already
has a "lessons learned" section within their "contingency contracting"
section of their website Hyperlink,
(https://acc.dau.mil/CommunityBrowser.aspx?id=18215). Action will
betaken to alter/expand the DAU website to include lessons from the
DTCI contract.
[End of section]
(350880):
FOOTNOTES
[1] Second destination transportation is the movement of freight among
and between depots, logistics centers, and field activities. It
excludes freight that is shipped from commercial suppliers to DOD
locations.
[2] A third-party logistics firm, also known as a 3PL, provides
logistics services to companies for part or all of a company's supply
chain management functions, such as transportation or warehousing.
[3] An indefinite-delivery, requirements-type contract provides for
filling all actual purchase requirements of designated Government
activities for supplies or services during a specified contract period,
with deliveries or performance to be scheduled by placing orders with
the contractor. Federal Acquisition Regulation (FAR) Subpart 16.503
(2006).
[4] "Freight all kinds" consists of those commodities that carriers
offer to transport at one inclusive rate or charge regardless of their
differing transportation characteristics or their classification
rating, except for excluded freight classifications.
[5] This figure, based on historic data, is the estimated total direct
freight costs during the third year of DTCI implementation.
[6] In 2005, DOD developed a supply chain management improvement plan
to address problems in this high-risk area and place it on a path
toward removing supply chain management from our high-risk list. The
plan lists 10 related initiatives, which include DTCI. For more
information on this high-risk area, see GAO, High-Risk Series: An
Update, GAO-07-310 (Washington, D.C.: January 2007).
[7] 2B Brokers, et al., B-298651, Nov. 27, 2006, 2006 CPD ¶178.
[8] PricewaterhouseCoopers, Third Party Logistics (3PL) Prototype TEST
- Management Reform Memorandum #15 - Final Report (Aug. 15, 2002);
Center for Transportation Research, National Transportation Research
Center, The University of Tennessee, Third Party Logistics (3PL)
Prototype Test Conducted by MTMC/DLA Business Case Analysis (Sept. 15,
2002); IBM Business Consulting Services, Addendum Report to Third Party
Logistics (3PL) Prototype Test, Management Reform Memorandum #15, Final
Report (July 29, 2005).
[9] We suspended audit work when the protest was filed on the contract
solicitation and resumed our work after the issuance of the protest
decision.
[10] Electronic data interchange is the business-to-business electronic
exchange of documents using standard formats that are widely recognized
both nationally and internationally.
[11] The Tailored Transportation Contract is an indefinite-delivery,
indefinite-quantity type contract with traffic lanes awarded to
multiple contract carriers where the shipment capacity may not
necessarily be guaranteed and the contract carriers can decline
transportation requests.
[12] According to DOD, a tender is an unsolicited rate provided by a
carrier that an agency can use to offer freight shipment services to
carriers; a contract based upon a tender is created only when the
agency and carrier agree to the shipment of services and a bill of
lading has been issued.
[13] GAO, Defense Transportation: Commercial Practices Offer
Improvement Opportunities, GAO/NSIAD-94-26 (Washington, D.C.: Nov. 26,
1993).
[14] GAO, Defense Transportation: Process Reengineering Could Be
Enhanced by Performance Measures, GAO/NSIAD-00-7 (Washington, D.C.:
Dec. 20, 1999).
[15] PricewaterhouseCoopers Draft Report, Third Party Logistics (3PL)
Feasibility Study (Dec. 23, 1999).
[16] The DTCI award term option plan describes the specific criteria
and procedures used to assess the contractor's performance and to
determine the amount of additional performance periods, if any, the
contractor may earn.
[17] GAO, Results-Oriented Cultures: Implementation Steps to Assist
Mergers and Organizational Transformations, GAO-03-669 (Washington,
D.C.: July 2, 2003).
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