Brig Gen Timothy P. Malishenko, USAF
Commander Defense Contract Management Command
Defense Logistics Agency
Subcommittee on Acquisition and Technology
Committee on Armed Services
March 18, 1998
Good morning Mister Chairman and members of the subcommittee.
Thank you for the opportunity to testify today and present the views of the Defense Logistics Agency on acquisition reform initiatives. We particularly appreciate the continuing support from the Congress and the Senate Armed Services Committee, in general, and this subcommittee, in particular, in fostering a positive climate which allowed for the reform achieved during the past seven years in the way the department acquires its goods and services. Your vision to enable a more commercial-like procurement system to take advantage of available commercial technology has been the catalyst in allowing us to deliver combat-ready weapon systems and spare parts to the warfighters and combatant commanders faster and more efficiently than ever before. This subcommittee was instrumental in making the statutory changes to facilitate breaking down the barriers to civil/military integration. In fact, this subcommittee held the only hearings in 1993 on the section 800 Panel recommendations to streamline defense acquisition, which resulted in the Federal Acquisition Streamlining Act of 1994, and the Federal Acquisition Reform Act of 1995. Much progress has been made to date through the collaborative efforts of the legislative and executive branches, yet the journey to full implementation of acquisition reform is not complete, as there are many challenges and opportunities
The Defense Logistics Agency – Re-engineered to Improve Service and Reduce Cost
The Defense Logistics Agency (DLA), as a combat support agency for our armed forces provides service at the optimum value by leveraging our national buying capacity to obtain the materials needed to support and sustain our troops. Our goal is to provide that service at the best price, in the quickest manner and with the highest quality.
At the beginning of this decade, DLA embarked on a comprehensive reengineering effort. We radically redesigned our business practices, our trading partner relationships with our customers and our vendors. Central to the reengineering of business practices was the use of DLA’s national leveraged buying power to secure favorable business arrangements, buying commercial products to the maximum extent possible, adopting commercial business practices, and applying emerging technologies, such as electronic commerce to all our business practices. DLA is now recognized as a national leader in technology enabled business systems applications. In the area of contract management the DLA provides the Department of Defense a single face to industry and a key leadership role in accelerating civil military integration necessary to be successful in the future. These fundamental changes have resulted in dramatic improvements in customer satisfaction, better pricing, and enhanced capacity to support combat readiness.
Adapting Commercial Practices
DLA has developed several fundamental changes to the business of government. One of these new paradigms is called prime vendor contracting. These are technology-enabled national or regional leveraged buying arrangements. Prime vendor is an adaptation of a best industry practice of buying and distributing consumable products. Our first venture into this business arrangement was through our pharmaceutical prime vendor contracts. Here, customers may comparison shop through an electronic catalog, choose the item of their choice, receive confirmation for that order within minutes, and routinely receive the product in 24 hours. This practice has now been expanded to cover subsistence, medical/surgical supplies, facilities maintenance consumables, and fleet automotive repair parts.
Our subsistence prime vendor provides food products to troop dining facilities within 48 hours of ordering. It has reduced or eliminated conventional DoD intermediate dry and cold storage supply points and the associated inventories. Since its inception in 1993, the subsistence prime vendor has produced a 76% decrease in the amount of non-combat ration inventory held by DoD.
We have implemented a prime vendor project for Maintenance, Repair and Operations (MRO) materials support. This vendor provides those supplies, which are required to maintain facilities, including but not limited to: plumbing/HVAC/refrigeration, electrical, lumber, small tools, paint, hardware and assorted fixtures. All items to be supplied are commercial items. Customers can place orders through an electronic order entry system. They can take advantage of competitive pricing, 3 day delivery of routine orders, 24 hour service for emergency orders, and bills- of-material orders for specific projects to be assembled, held, and delivered 100% complete by the prime vendor wherever and whenever the customer requires.
The fleet automotive support initiative will provide prime vendor support for military bases automotive fleets. It will cover all automotive vehicles (autos, transport equipment), as well as construction equipment, and material handling equipment. Vendor coverage will include parts support, technical support, requirements forecasting, and inventory management.
The next generation of prime vendor we call virtual prime vendor (VPV). It is more commonly known as integrated supply chain management. VPV is a more comprehensive approach that addresses a wider spectrum of customer support needs. One vendor under a DLA long-term contract anticipates the customer’s needs and has supplies immediately available on demand. The VPV is responsible for providing total logistical support across traditional commodity/product lines by using state-of-the-art commercial business solutions. VPV functions can include forecasting requirements, purchasing, inventory control, engineering support, technical services, storage, and distribution functions. The VPV draws on a virtual inventory of its own stock, other vendor’s inventories, DLA corporate level contracts, DLA prime vendors and depot stock. The VPV integrates this supply chain providing tailored logistics support to a specific major customer and/or weapons system. The VPV also provides for national defense readiness and emergencies. Some of the benefits of using a VPV include reduced inventory, both wholesale and retail, faster delivery, direct visibility and access to commercial assets, reduced customer downtime for items awaiting out-of-stock parts, and value added services, such as no hassle warranty on returns, and technical support. DLA awarded the first of these VPV contracts in October 1996. Wherein the VPV is the distributor of items for the Warner Robins Air Logistic Center C-130 propeller maintenance shop, and the Naval Air Depot Cherry Point, North Carolina. This VPV operates a process-wide paperless system that eliminates inventory redundancies, simplifies procedures, provides on-demand supply support, and provides a reduced total cost method of operation. Reductions in inventory investment as result of these business practice changes are: $6.0 million, DLA; $2.3 million Air Force, and $2 million Navy and Marine Corps.
DLA has found that the laws and regulations that govern our activities since the implementation of the Federal Acquisition Streamlining Act and the Federal Acquisition Reform Act (also known as FASA/FARA) give us the latitude to take advantage of the efficiencies of the commercial business sector and ensure best-value support for our customers. It is important to recognize that the price the government pays for an item using such new business practices must be evaluated as the supplier’s total delivered product, which may include such services as forecasting, distribution, technical and engineering support, as well as immediate direct delivery to the customer. Simple comparisons with historic prices paid by the government for same/similar parts are often times not relevant without including these additional factors. We believe that our experiences at DLA represent tremendous opportunities for all, enabling dramatic improvements in customer satisfaction, making the business of government simpler and more business-like.
All of the new DLA business models provide for direct industry combat readiness support. The Defense Supply Center Philadelphia has pioneered a strategy called shared production agreements. These innovative agreements enable the government to assure national defense readiness without holding massive, expensive inventories. We work with a manufacturer, and one or more of its commercial clients. The parties agree to share production capacity during peacetime while maintaining cross product manufacturing capability and expertise. They agree to relinquish production capacity when either trading partner may need it. In our case, this means in times or war, surge, or national emergency, the manufacturer’s full production capacity can be readily available. This technique also allows increased access to vendor-held inventories for combat or national emergency needs.
Another practice used in our clothing business is called quick response, which is the retail industry’s name for agile or on-demand manufacturing to point of sale demand used by industry leaders such as Wal-Mart and Sears. Quick response is a total electronic end-to-end business system that uses electronic commerce technology to move information, money and merchandise. Actual demand data is transmitted to suppliers who adjust production accordingly and make delivery to the customer in as few as 72 hours.
DLA recently expanded operation of its "electronic mall". In 1993, with Executive Order 12862, the President called for a revolution in government’s customer service to deliver services equal to the best in business. In response, DLA has made changes to meet customer needs. Customers do not want (nor do they have the time and resources) to go from agency to agency to find the items they need for their missions. DLA provides one-stop shopping convenience for many of our customers, plus rapid delivery, contract administration and quality assurance services. DLA also maintains technical expertise and market leverage for many items, and provides the full range of items needed to support the military in times of national emergencies and for humanitarian relief. DLA is the only combat support agency in DoD that provides the surge and sustainment mission to our armed forces to ensure that the supplies and services are provided during national emergencies and during humanitarian relief efforts. The "electronic mall" currently can access more than 3.5 million items. It standardizes the registration, search, view, and ordering processes as well as payment. The "electronic mall", in actuality, converts customer orders to electronic requisitions which in turn, become either EDI orders to suppliers for direct delivery or material release orders to depots. It is a more sophisticated way to use the DoD supply system.
Accelerating Civil – Military Integration - the Single Process Initiative
Since December 1995, DLA’s Defense Contract Management Command has been facilitating DoD’s initiative to transition contractor facilities from multiple government unique management and manufacturing systems to common, facility-wide processes. This initiative builds upon the premise that the Department should capitalize upon and adopt existing commercial processes to reduce the cost supplies and improve DoD’s ability to tap into commercial technology. Using an administratively streamlined approach of a block change contract modification, the Single Process Initiative unifies requirements in contracts on a facility-wide, rather than contract-by-contract basis. SPI is key to achieving acquisition reform benefits in existing contracts. SPI encourages leaner and more cost effective and competitive industrial output. Changes have been made in such areas as quality systems, configuration management, welding, soldering and parts management. To date, 276 contractors have participated in the initiative, 870 processes have been modified with total cost savings/cost avoidance of over 355M. SPI offers several ways for both the contractor and the Government to benefit; lower product costs on future buys, savings negotiated into existing contracts, and lower overhead rates applied to future business. The value of SPI goes beyond dollars returned to DoD. It facilitates conversion to commercial practices, industry consolidations, and modernization. Participating contractors say SPI and the associated Management Councils composed of government and company representatives provide a needed mechanism for change.
Revolution in Business Affairs
The Defense Logistics Agency has been an active participant in the Department’s efforts to reduce infrastructure. Coupled with the aforementioned re-engineering efforts and adaptation of commercial practices has been an aggressive consolidation of activities and reduction of personnel. For example, since its formation in 1990 the Agency’s Defense Contract Management Command has gone from 11 Intermediate Headquarters to 3 Districts, reduced Contract Administrative Offices from 144 to 75 and increased the supervisory ratio from 6.5:1 to 13:1. Personnel have been reduced from 26,200 to 14,400. Comparable actions have taken place in other parts of the Agency.
The challenge to the Agency has been to improve efficiency while at the same time improving overall support to the warfighter. As you would expect, this new acquisition environment has presented our workforce new problems to solve and new practices to master. Delivering the necessary training and providing the necessary guidance to our workforce in this era of restrained budgets continues to be management’s challenge. Seeking more cost-effective training methods such as distance learning and computer-based training have been priorities. We have been working hard to ensure that we have the right talent to meet and exceed our customers’ needs.
The Defense Logistics Agency –Focusing for the 21st Century
Thank you for the opportunity to tell you about the Defense Logistics Agency’s activities in support of improving the DoD’s acquisition process. We are entering a new century that will provide the most significant period of change in our Armed Forces since World War II. As modern warfare increases in technological sophistication, speed and complexity, logistics and acquisition organizations and systems must change to keep pace. The Defense Logistics Agency is focused on: consistently providing responsive, best value supplies and services to our customers; serving as a catalyst for the Revolution in Business Affairs and acquisition reform; ensuring our workforce is enabled to deliver and sustain world class performance; rapidly exploiting technology to provide agile, responsive, interoperable solutions and aggressively pursuing partnerships with industry and our suppliers. We take our responsibilities very seriously and will continue to perform to the best of our abilities. Again, thank you.