DSB Studies Project Infrastructure Cost Savings From Outsourcing and Other Initiatives

The Office of the Secretary of Defense (OSD) requested that DSB identify DOD activities that the private sector could do more efficiently and to determine the expected savings from outsourcing. The report cited evidence from the Center for Naval Analyses (CNA) public-private competition studies of commercial and depot maintenance activities. The Board also noted that an Outsourcing Institute study found that the private sector saved about 10 to 15 percent by outsourcing but that the public sector savings from outsourcing would be higher because of the inefficiency of government service organizations. Opportunities Exist for Logistics Infrastructure Savings

Our reviews of best practices within the private sector and ongoing work at DOD indicate that DOD has significant opportunities for reducing logistics costs and improving performance by changing its business processes. DOD’s prime vendor program for medical supplies, along with other inventory reduction efforts, has resulted in savings that we estimate exceed $700 million. PA&E Analysis Raises Questions on DSB Savings Estimates

PA&E’s analysis of the DSB’s estimated $6 billion in annual logistics savings found that the estimate was overstated by about $1 billion and that another $3 billion in projected savings would be difficult to achieve or unlikely to be achieved. According to PA&E officials, DSB’s $6-billion savings estimate was overstated by about $1 billion because contract administration and oversight costs were understated and one-time inventory savings (spread over 6 years) was claimed as steady state savings. The remainder of the achievable savings have already been identified in DOD’s future year defense program. Specifically, we found that (1) the Board’s projected annual savings from reliability improvements are overstated by over $1 billion; (2) the DSB’s 25-percent savings rate from outsourcing appears to be overly optimistic; and (3) DSB, while recognizing it would be difficult to do so, assumed that DOD would overcome impediments that prevent the outsourcing of all logistics functions. We do not know by how much or whether these questions would change the $2 billion in savings that PA&E concluded were achievable. To the extent that competitive markets do not exist, the amount of savings that can be generated through outsourcing may be reduced. However, certain barriers, including legal and cultural impediments, must be overcome to fully implement DSB’s recommendations. Conclusions and Recommendations

We agree with DSB that there are many opportunities for significant reductions in logistics infrastructure costs. However, the Board’s projected savings are overly optimistic. We recommend that the plan establish time frames for identifying and evaluating alternative support options and implementing the most cost-effective solutions and identify required resources, including personnel and funding, for accomplishing the cost-reduction initiatives. This report is a step in the right direction and sets forth certain strategic goals and direction. Scope and Methodology

The scope of our review was limited to reviewing the Defense Science Board’s (DSB) projected $6 billion annual savings for the continental United States (CONUS) logistics.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the basis for the Defense Science Board's (DSB) estimate that the Department of Defense (DOD) could potentially save $6 billion annually by reducing its logistics infrastructure costs within the continental United States, focusing on: (1) the opportunities for logistics infrastructure savings; and (2) DOD's and GAO's analyses of the DSB's projected logistics infrastructure savings.

What GAO Found

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.