Chapter 1: Adopting Best Business Practices

Over the past decade, the American commercial sector has reorganized, restructured, and adopted revolutionary new business and management practices in order to ensure its competitive edge in the rapidly changing global marketplace. It has worked. Today, American business is the envy of the world and productivity is at an all-time high. Now the Department of Defense (DoD) must adopt and adapt the lessons of the private sector if America's Armed Forces are to maintain their competitive edge in the rapidly changing global security arena.

Applying the lessons of the business world to the business of defense is a centerpiece of the Department's reform plan.

Electronic Business Operations

Today, DoD's business operations are literally awash in paper. Indeed, paper is not only driving the business culture of DoD, it is choking many essential systems. Figure 1a graphically represents today's paperbound contracting process. As many as 13 copies of a contract are printed, which are sent to multiple offices. In FY 1996, for example, the Defense Finance and Accounting Service (DFAS) Center in Columbus, Ohio, processed over 5.6 million contractor invoices, made payments against 387,000 major high-dollar contracts, and disbursed over $84 billion. Over the years, this paperbound system has created some 15 miles of paper files at our Columbus Center.

Electronic commerce and related technologies, including the Internet and World Wide Web, will allow DoD to drastically reduce the amount of paper received, processed, and stored in places like the Columbus Center and to realize much greater efficiency and economy in our business practices. In fact, DoD is actually a pioneer in new uses of electronic commerce and related technologies. From procurement to weapons program management, we are making strong progress in moving towards a paperless environment for many of our critical business functions but more is needed. We believe that a full commitment to electronic business operations will not only result in tangible savings, but will also change DoD's business culture, forcing managers to think differently and act more efficiently.

Contract Administration and Finance

Only a few years back, the entire DoD contracting process was largely paper-based. Today, while key phases of our contracting process remain too dependent upon paper, electronic commerce technologies such as Electronic Document Access, Electronic Document Management and Electronic Data Interchange have given us real hope for reducing this burden. These technologies give us the ability to electronically create, store, and retrieve documents and to share them with DoD users and trading partners needing access to them. Full implementation of these technologies will allow DoD to acquire and pay for goods and services faster and more cheaply.

The Secretary has decided that all DoD contracting for major weapons systems will be paper- free by the turn of the century. This initiative will include all phases of the contracting process, including contractor selection, contract writing, administration, payment and accounting, auditing, and contract reconciliation and close out. Right now there are over 31 different computer systems in DoD that conduct these various functions. To realize our goal of paper-free contracting, we are accelerating our efforts to reduce legacy systems, implement standard procurement and payment systems, and develop electronic linkages between all phases of the acquisition process. For the near term, the contracting system cannot be 100 percent paper free. A small number of paper documents will be required to satisfy legal requirements until validated electronic authentication procedures are in place (see box, "Security in Cyberspace").

The Department is also expanding its ability to provide online access to financial and other information to industry partners and the public, including a procurement database that will include past performance information and technical documentation such as drawings, specifications, and standards.

Another essential component of paperless contracting will be the full use of the capabilities offered by Electronic Funds Transfer (EFT). The electronic receipt and payment of transactions reduces manual input, disbursement costs, and backlogs while improving accuracy, speed, and overall customer service. We have already made real progress. In FY 1996, 57 percent of payments made under DoD's major contract payment system were made electronically, representing 81 percent ($54 billion) of the total contract dollars disbursed.

Figure 1a.

Today's Environment: Contracting Community

Figure1b.

Toward Paperless Contracting
Current System Interface Environment

Figure 1c.

EFT is also allowing DoD to realize other efficiencies beyond contracting administration. For instance, thanks to EFT more than 91 percent of DoD's more than five million civilian employees, service members and military retirees now have their pay directly deposited into their accounts. More than 70 percent of all travel payments are made electronically. By January 1, 1999, all DoD disbursements, with limited exceptions, will be made electronically.

Using Commercial Credit Cards

One of the most promising breakthroughs in moving towards paper-free finance is the introduction of the government purchase card the IMPAC card. The IMPAC card is a commercial VISA card issued to individual government offices and organizations for official purchases. The IMPAC card provides a less costly and more efficient way for DoD and other US Government organizations to buy goods and services directly from vendors instead of processing requests through government procurement offices (i.e., preparing requisitions, sending them to the procurement office, waiting for the procurement office to issue a purchase order, waiting even longer for delivery, and preparing receiving reports). Studies have shown that internal costs are often cut by more than half when an IMPAC card is used instead of a purchase order. And a Navy study found that delivery time was reduced from 30 or more days to only six days.

Just a few years ago, DoD's use of the IMPAC card was minimal. Even so-called "micro-purchases" under $2500 (which account for almost half of DoD's purchases) were processed with all the paperwork and scrutiny of big ticket items. But between FY 1994 and FY 1996, use of the IMPAC card for micropurchases has risen from 16 percent to 40 percent. The Defense Logistics Agency's (DLA) Defense Supply Center in Columbus, Ohio, for example, can now purchase all items in its parts catalogs using the IMPAC card and get discounts of between 20 and 40 percent when doing so. In fact, last year DoD employees used the IMPAC card for purchases totaling $2.2 billion (more than all other US Government departments and agencies combined) and saved the taxpayers $285 million dollars in the process.

Today, DoD offices use the IMPAC card to buy office supplies, tools, equipment, periodical subscriptions, and a variety of services. By FY 2000, DoD's goal is for the IMPAC card to be used for 90 percent of our micropurchases. IMPAC use is also being expanded by allowing its use to pay for goods and services exchanged between different governmental organizations and to pay for some commercial contracts. We anticipate that expanded use of the IMPAC card, together with other initiatives such as electronic catalogs and prime vendor contracts, will allow retail-level inventories to be reduced from $14 billion in FY 1996 to $10 billion in FY 2001.

Internet-Based Commerce

In the future, DoD like American business intends to conduct much of its commercial contracting and purchasing through Internet technology.

Computer-based purchasing represents the ultimate "democratization" of the acquisition process buying decisions are made by the people who need the products. With improvements in technology, particularly the Internet and the World Wide Web, computer users are now able to access information and data on products, often directly from the company itself, and agencies are able to develop interactive electronic catalog systems.

Thus, in the future, DoD acquisition professionals will establish broad purchasing arrangements and negotiate favorable contract terms and prices with vendors. Those vendors' items will then be made available online so that purchasers can browse through a vendor's electronic catalog or enter an electronic "mall" that provides "one-stop" shopping, with access to multiple catalogs and the capability to compare products, services, prices, delivery, and payment options.

For example, in the very near future, an office manager or a motor pool noncommissioned officer (NCO) will not have to go to a procurement office to buy a part or component, initiating a complex contracting process. Instead, that manager or NCO will simply call up a list of available sources on a computer terminal in his or her office and buy the item directly, with all of the conditions and discounts pre-negotiated. And in order to avoid a second bureaucratic process involving payment through a government finance office, all purchases through the electronic catalog will incorporate direct payment through the IMPAC card, avoiding the expense of traditional finance office operations. This process will save the Department huge processing costs while providing vendors on-the-spot payment.

DoD has already begun to realize this vision and is actually pioneering the use of electronic catalogs and electronic "shopping malls." DLA, for example, recently established an electronic commerce mall called "Emall." DLA's initial Emall, now online, provides "one-stop shopping" for DoD customers. Payment for supplies and services is done through normal billing processes or by use of a credit card. Starting in January 1998, the Emall will offer integrated search capability with a single online registration and ordering process. Customers will be able to order over four million DLA managed items and hundreds of thousands of commercial items from vendor catalogs, corporate contracts, and the Navy's information management technology catalog. Shoppers will be able to look for the best value, comparing quality, prices, and availability. The initial focus will be on base facility support items. Future enhancements will include adding more vendors and catalogs and integrating an easier search capability as we seek to continually improve logistics support to DoD customers. Preliminary estimates of net savings are tens of millions of dollars annually.

Paper-free Weapons Systems Support

As information technologies have revolutionized the business world and allowed many corporate activities and functions to become paper-free, DoD's task has been to determine which of our own activities and functions are most ripe for paper-free operations. In other words, where do we get the most "bang for the buck" in moving to a paper-free environment? One area that readily emerged from this inquiry is our management of the technical data supporting weapons systems. Thus, DoD is now in the process of creating a paperless environment for this technical data, including drawings, computer-aided design models, bills of materials, manufacturing information, engineering changes, and interactive electronic technical manuals.

Today 63 percent of DoD technical manuals and 48 percent of technical drawings are provided electronically. By January 1, 2000, we expect those amounts to reach 85 percent and 80 percent, respectively. Technical data is managed and stored at multiple repositories and can be accessed electronically to support the acquisition and manufacture of weapons systems components. DoD employees from different functional communities (acquisition, logistics, maintenance, etc.) and from different geographic locations can access the relevant information and work collaboratively, increasing productivity and efficiency. By integrating paperless technical data management with electronic commerce for business information, DoD will eventually be able to support all major weapons systems in a paperless environment, from the initial design phase through production, operation, and maintenance.

This strategy is now being implemented widely throughout DoD, and we are starting to see real benefits. For instance, the Joint Strike Fighter Program Office now operates in a paperless environment and all business with that office now takes place digitally using Internet capabilities. And the Program Manager for Combat Mobility Systems reports that cycle time for production contract awards has been reduced from 18 months to 4 months, the time to review drawings has been reduced from 2 to 3 weeks down to 3 to 12 minutes, and contract data requirements lists have been cut 81 percent resulting in an overall estimate of net cost avoidance of $1 million per year through 2004.

Internet-based Publishing

The Department has one of the largest printing budgets in the world, exceeding $440 million last year alone. We also spent an additional $170 million for paper, often printing large numbers of documents and forms and distributing them to everyone, whether they needed them or not. Periodically, replacement editions of publications are printed and distributed, even when only a few paragraphs need to be updated. To accelerate our move to paper-free business operations, DoD will increasingly rely on the concept of Internet-based publishing for many of its publications. Rather than printing and distributing numerous copies of documents, large and small, many of our publications will instead be posted on the Internet and "printed on demand" by the users that need them. This new approach will save DoD money and be more convenient for the users of the publications.

For example, the Department used to print a 15 volume, 70,000 page compendium of financial regulations. This summer DoD discontinued these publications and in the future they will be made available only through the Internet. If a local office needs a printed copy of a specific regulation or instruction they will print a copy using the office's own computer. The user will also have greater assurance that the regulation is current since updated editions are immediately available.

Real progress is already being made. This past year, for example, almost all DoD Directives and Instructions were posted on the World Wide Web. DoD procurement regulations, the largest body of DoD regulations, are also available on the Web and provide a link to the Federal Acquisition Regulations at the General Services Administration.

By July 1, 1998, DoD will make all DoD-wide regulations and instructions available only through Internet or CD-ROM and discontinue mass paper printing.

DoD has also moved to electronic forms for 50 percent of all DoD forms (and 100 percent of government-wide forms used by DoD). Blank forms are no longer printed, but are available on the Web instead. They can be completed and processed, without ever having to be printed on paper.

The Public Affairs secretariat of OSD is leading the way to demonstrate the economies of Internet publishing. Starting January 1, 1998, the Current News and Research Service, the branch of Public Affairs that publishes the Early Bird, will discontinue answering research inquiries that can be readily satisfied by using online commercial news and research services. Printing and distribution of the Current News Supplement to the Early Bird and Radio-TV Dialogue will also be discontinued. Instead, the Early Bird will contain a page noting defense-related stories that are available on the Internet. Public Affairs will also discontinue publishing and distributing paper copies of Defense Magazine and Defense Issues, both of which are now available on the Internet.

The military services and defense agencies are also moving towards a paperless environment. For example, the Air Force recently conducted a review of its policies, regulations, and directives, reducing some 47,000 hard-copy pages of policy and procedures to 14,000 pages available exclusively on the Internet and CD-ROM.

Despite the considerable progress DoD is making in moving towards a paperless environment across a vast array of functional areas, much more is needed. Ultimately, our biggest challenge may not be technical, but psychological. Old habits are hard to break. Many of us still want something in our hand to read. But just as most of us have dispensed with our old typewriters and learned word processing, we in DoD are now learning to think, create, and manage in the new era of paperless operations and reaping the corresponding gains in productivity and efficiency.

Prime Vendor Contracting

Following the pattern developed by industry, the Department has adopted an entirely new approach to the procurement of readily available items, such as medicines and food products. In the past, DoD would buy huge stocks of medical supplies and store them at individual hospitals and clinics. Under this system, we not only spent a great deal of money buying the stocks in the first place, we also had to pay considerable handling and storage costs. Invariably some of the stocks would not be used before their expiration dates were reached, resulting in further inefficiencies and losses. Starting in 1993, DoD began shifting over to a so-called "prime vendor" process where, for example, hospitals are given a list of products available from local vendors that have pre-negotiated terms and prices. Items ordered one day are delivered the next, eliminating the need to maintain stocks and the cost of managing warehouses.

The prime vendor process takes full advantage of private sector distribution capabilities and electronic data processing to supply DoD customers. A single vendor (the prime vendor) buys inventory from a variety of suppliers and the inventory is stored in commercial warehouses. The customer orders supplies from the prime vendor, using electronic ordering systems. The supplier then ships directly to the DoD component, as needed, within a specific geographic area. This process reduces delivery time to the customer and, by using the private sector's storage and distribution system, reduces the Department's inventories and associated warehousing and redistribution costs.

We are already reaping the benefits of prime vendor contracting in some key areas. For example, using commercial practices such as the prime vendor concept for pharmaceutical and medical/surgical supplies, food and food service supplies, and equipment and construction supplies, DLA has eliminated $1.6 billion in inventory since 1993. Purchase, storage, and distribution costs have been reduced by over $700 million and response time is 75 to 90 percent faster. Specific examples of the benefits of prime vendor contracting include:

• Delivery times for pharmaceutical and medical items have been reduced from about one month to one day.
  
• Medical prime vendor costs for the 16 highest selling pharmaceutical items in 1995 were $37.7 million lower than 1993 prices of the same items issued from stock.
  
• Walter Reed Medical Center reduced its medical on-hand inventory by 83 percent, closed six warehouses, and reported over $7 million in recurring annual savings.
  
• Fort Lee reduced food inventory by $553,000 and closed a warehouse.
  
• Camp LeJeune eliminated over $750,000 in food inventory and canceled construction of a cold storage warehouse.
  
• Fort Rucker reduced food inventory by $264,000.

When the prime vendor program is used in combination with the Internet and the IMPAC card, there is the potential for even greater efficiencies. DLA recently established a prime vendor concept for maintenance, repair, and operating (MRO) materiel support. Now, instead of placing requisitions and receiving shipments from a DoD warehouse, orders will be placed over the Internet directly to the vendor with delivery within 72 hours. This initiative has captured the "best in class" industry standards for delivery, returns for excess material, surge capabilities and customer service. The MRO program will allow DoD to reduce base level inventories and contracting workload and to shift resources to the facilities maintenance mission. The program incorporates the use of the IMPAC card and will, therefore, also save substantial financial processing costs. This initiative will be implemented regionally and by the middle of FY 1999 will be available nationwide.

To date, some 90 percent of all pharmaceutical supplies are purchased through prime vendor contracts. In addition, 95 percent of CONUS subsistence for dining halls, both ashore and afloat, are purchased through such contracts. DLA is now extending use of the prime vendor concept to office supplies and facilities maintenance supplies. DoD is also examining ways to extend the concept to automotive supplies, such as tires, batteries, and hardware. The goal is to increase the use of prime vendor contracts from 32 percent to 40 percent of DLA's sales (to DoD and other federal agencies) by FY 2000.

The prime vendor program is key to achieving the following DoD goals:

• adopting best practices.
• relying on the commercial infrastructure whenever possible.
• improving responsiveness to the needs of the warfighters.
• attaining overall savings to the taxpayer.

Consolidating Logistics and Transportation

Logistics is another functional area where DoD stands to realize great benefits from reengineering.

Logistics has long been the linchpin of a nation's military capabilities. Identifying a force's logistical needs and devising and executing a strategy for meeting those needs is often the crux of how effective that force will be in combat. Today, our Military Services are well on the way to building 21st century weapons. But the overall effectiveness of our forces will be severely constrained if they remain immobilized by a sclerotic arterial network of a 20th century, paperbound logistics system.

Again taking our lead from the private sector, DoD is in the process of applying the latest advances in information technology to the business of supplying our troops. Key to our new system is the concept of "just-in-time" logistics. Pioneered by private industry, just-in-time delivery results from merging many warehousing and transportation functions, which eliminates the need for stockpiling raw material or finished subcomponents. Instead, established relationships with vendors and transportation companies allow products to be delivered just-in-time for when they are needed, instead of being stored by the customer just-in-case.

Just-in-time logistics is revolutionizing the private sector and can do the same for DoD. The Department has made a commitment to provide total visibility into its equipment, supplies, and spare parts, all the way from the warehouse in the United States to the foxhole in a distant theater. Utilizing modern inventory and transportation-monitoring equipment and techniques, we plan to have in place a system that will track every piece of equipment, every supply shipment, and spare parts requisition on a continuous basis. Electronically linking logistics data from the Services and various DoD components, the system will provide full, remote visibility of supplies in-storage, in-process, and in-transit. Forward-deployed logisticians need no longer place duplicate orders for equipment, or stockpile needless supplies fearing a lack of critical supplies at the key moment. The result will be fewer duplicate requisitions, bottlenecks, and unnecessary purchases. Prototyped in Bosnia, this new system of total asset visibility will permit greater efficiency in scheduling transportation, smaller inventories of supplies and spare parts, and greater confidence by warfighters that critical supplies and spare parts will be in-theater on time. In wartime it will also enable the right supplies to get to the right troops more quickly and enable supplies en route to one theater to be redirected to a second theater, if needed. This program has been fielded to EUCOM, CENTCOM and ACOM and is scheduled to become fully operational in 2000.

Travel Reengineering

In 1994, a DoD task force found that the Department's official business travel system served neither the customer nor the Department well, but cost the taxpayer plenty. The process was severely fragmented and paper based, characterized by multiple levels of approval and control. With 230 pages of travel regulations, the seven million trips made per year by DoD personnel were very expensive to process. The nearly ten million vouchers processed government-wide in 1995 produced as many as 390 million copies of travel related paper documents, costing millions of dollars to produce and store. Compounding the problems, office procedures for travel included up to 25 separate steps taking hours of time for each traveler (see Figure 1d). The administrative cost for DoD to process these vouchers constituted 15 to 30 percent of the direct cost of travel, wasting hundreds of millions of dollars.

Figure 1d.

Starting next year the Department will adopt a new process for business travel that incorporates state-of-the-art business procedures and techniques (see Figure 1e). This new process draws on lessons learned from some 25 pilot projects over the past year designed to test this new approach. These pilot locations were carefully monitored to develop a performance and cost baseline. After six months of operation under the new test system, the performance and cost of these pilots were measured and compared to the baseline, with enormously promising results. Customer satisfaction improved dramatically, while improvements in individual key areas (easier rules, quicker payment, greater respect for customers, and less administrative burden) averaged close to 90 percent. At the same time, costs fell 65 percent.

Figure1e.

Figure 1f.

The new system simplifies the rules, decentralizes authority to approve travel and claims, and builds internal controls into customer-friendly software. The 230 pages of arcane and often opaque regulations have been reduced to 17 pages of plain English. The software creates a single trip record for approving travel, making travel arrangements, and paying and accounting for claims. Implementation of the new defense travel system for temporary duty travel will begin in April of next year and is scheduled to be implemented throughout DoD by October 2000.

Official travel and getting reimbursed for it is something that almost every DoD employee experiences during the work year. The new and completely paperless travel system emulates the best business practices of the private sector and will go far towards eliminating the often Byzantine procedures that employees were subjected to in the past. It also has the potential to save several hundred million dollars annually.

Household Goods Transportation

The Defense Department has extensive requirements to move military and civilian personnel every year. Last year DoD paid to move almost 800,000 military families, at an estimated cost of $2.8 billion. Yet despite the fact DoD moves more household effects than any US corporation, the system we have created to do the moving has given our personnel some of the worst service in the nation. Of all DoD moves, 25 percent end up with damage claims, compared to 10 percent of moves undertaken for the private sector. Best-in-class movers have customer satisfaction rates of 75 percent, compared with a 23 percent satisfaction rate for DoD member moves.

These gross discrepancies are a direct result of the "lowest bidder" system which does not allow for quality or past performance to factor into the selection system. Hence, the system rewards the contract to the lowest bidder, but too often rewards the customer with booby prizes: delayed pickup and delivery, gross incompetence, damaged goods, and a complicated and ineffectual claims process. Horror stories abound throughout the Services: the serviceman who had his furniture sawed in half on his front lawn to make it fit into the moving van; the Army family on vacation in between postings who discovered their household effects for sale in a flea market; the Army Colonel whose sofa which was supposed to be in storage while he was posted overseas, but instead was in the motorpool drivers' lounge for two years.

We must do better. Having a fair, customer-oriented moving system is an important quality of life issue for DoD. Service members and their families deserve and expect the same quality of moving service enjoyed by private citizens. There is no reason why they should not have it. Consequently, the Department is in the process of reengineering the system for the movement of personnel and their household goods. We need to improve service, simplify the process, and reduce overall costs to the Department. The reengineered process will be based on best business practices and moving companies will be carefully evaluated according to a variety of factors, including past performance.

Figure 1g.

Figure 1h.

*Using Relocation Company

Two specific initiatives that will help us achieve our goals are Member-Arranged Moves and an improved process for Do-It-Yourself (DITY) moves.

Member-Arranged Moves will allow service members to select from a list of local carriers instead of the present practice of assigning a carrier based on a rotating list. Offering the members this choice will provide them with a move that better fits their specific needs, gives them more control over the move process, provides a better quality move, and reduces damage and claims. Features of the program include: fair payment for quality service, a toll-free help line, in-transit visibility, a pager provided to service members so they can be notified of delivery, payment via IMPAC card, full replacement cost protection, direct claim settlement with the carrier, and tailored counseling. Customer surveys will evaluate carriers for on-time pickup, on-time delivery, loss, damage, and overall customer satisfaction.

Military personnel are authorized to move their own household goods under the DITY move program. While some 150,000 military personnel utilize the DITY program every year, the system is encumbered by frustrating rules and procedures. If a soldier wants to use this program, he or she first must go rent a truck, drive that truck empty to a public weighing station, confirm its empty weight, drive home and load up the household goods, return to the weighing station to weigh the now-filled truck, return to base to the travel office to present the weight tickets, and then drive to the local finance office to be reimbursed. To make matters worse, the soldier is then reimbursed only 80 percent of the cost the government would have expended to move the same cargo. In other words, military members who are willing to move themselves and save the government money are discouraged by frustrating procedures and inadequate financial incentives.

The Secretary has ordered a streamlining of these procedures to eliminate needless bureaucratic steps. A thorough streamlining will require minor legislative changes. To encourage more DITY moves, the Department intends to increase the reimbursement rate to 95 percent.

Table of Contents || Message from the Secretary

Chapter 1 || Chapter 2 || Chapter 3 || Chapter 4

Appendices A & B || Appendix C