The Navy has initiated a restructuring of the business area that, according to the Secretary of the Navy, is “akin to placing it in receivership.”

	Objective, Scope, and Methodology

The objective of our audit of the Navy ordnance business area was to assess the Navy’s efforts to reduce costs and streamline its operations. These comments are reprinted in appendix I.

	Navy’s Proposed and Ongoing Actions

The Navy has incorporated a goal to reduce annual costs by $151 million into its ordnance business area’s budget estimate and has identified the major actions that will be taken to achieve this goal. Specifically, the budget estimate indicated that between fiscal years 1996 and 1999, the business area’s civilian and military fiscal year end strengths will decline by 18 percent and 23 percent, respectively, and its annual costs will decline by $151 million, or 25 percent. Additional Cost Reductions Are Possible

The Navy’s planned restructuring of its ordnance business area will reduce overhead costs and is an important first step toward the elimination of the redundant capability both within the business area and between the business area and other organizations. The Army and Air Force do not believe they should subsidize the operations of a Navy base. Our analysis of available data indicates that, in general, the planned actions should result in substantial cost reductions and more streamlined Navy ordnance operations. We recommend that the Secretary of the Navy incorporate into the NOC’s detailed cost reduction plan (1) specific actions that need to be accomplished, (2) realistic assumptions about the savings that can be achieved, (3) milestones, and (4) clearly delineated responsibilities for performing the tasks in the plan; evaluate the cost-effectiveness of (1) consolidating all or most of the business area’s missile maintenance workload at one location and/or (2) transferring all or some of this work to public depots or the private sector; develop and implement policies and procedures for charging customers for ammunition storage services; evaluate the appropriateness of converting military guard positions to direct the NOC Commander to determine if it would be cost-beneficial to convert non-guard military positions to civilian status; and eliminate the excess ordnance engineering capability that previous studies have identified both within the NOC and between the NOC and other Navy organizations. However, Navy records show that 51,231 tons, or about 43 percent, of ammunition stored at weapons stations was not needed as of May 1997.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed financial and management issues related to the ordnance business area of the Navy Working Capital Fund, focusing on: (1) the Navy's proposed and ongoing actions to reduce the business area's costs; and (2) additional cost reduction opportunities.

What GAO Found

GAO noted that: (1) the Navy is in the process of developing the cost reduction plan GAO recommended in its March 1997 report and has proposed and begun implementing a number of actions to reduce its ordnance business area's annual operating costs by $151 million, or 25 percent, between fiscal year 1996 and 1999; (2) this is a significant step in the right direction and should result in substantial cost reductions and more streamlined operations; (3) GAO's review of the business area's operations and discussions with the Office of the Secretary of Defense (OSD) and Navy ordnance officials indicate that the Navy has both an opportunity and the authority to further reduce Navy ordnance costs; (4) specifically: (a) redundant ordnance engineering capability exists within the business area and other Navy organizations; (b) military personnel are performing work that could be performed by less expensive civilian employees; (c) redundant missile maintenance capability exists; and (d) no financial incentive exists for customers to store only needed ammunition (the business area's inventory records show that 43 percent of the ammunition stored was unneeded as of May 1, 1997) since they do not directly pay for storage costs; (5) while most of the planned cost reduction actions appear to be appropriate, it remains to be seen whether the business area will reduce costs by $151 million; (6) in addition, GAO's review of available data indicates that one of the cost reduction actions--the planned personnel reductions--may adversely affect the Concord Naval Weapons Station's ability to load ships during mobilization, thus creating potential readiness problems; and (7) these personnel reductions are likely to have little impact on the Navy, but could have a significant impact on the Army and Air Force, which would rely heavily on Concord during a major contingency operation.