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Transition Series - National Security Issues GAO/OCG-93-9TR December 1992


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_______________________________________________________________________________



CONTENTS



National Security Issues

Reassessing Military Roles and Missions 

Managing the Downsized and Restructured Force 

Reassessing U.S. Commitments, Forward Presence, and Security Assistance

   Programs

Controlling the Spread of Weapons of Mass Destruction 

Reforming Weapons System Acquisition While Preserving the Industrial Base 

Addressing Environmental Challenges 

Following Through on Inventory and Other Management Initiatives 

Improving Financial Management 

Related GAO Products 

Transition Series 

      - Economics 

      - Management 

      - Program Areas











_______________________________________________________________________________



Office of the Comptroller General

Washington, DC 20548 



December 1992 



The Speaker of the House of Representatives

The Majority Leader of the Senate 



In response to your request, this transition series report discusses major

defense policy, management, and program issues facing the Congress and the new

administration. These issues involve

(1) reassessing military roles and missions; (2) managing the downsized and

restructured force; (3) reassessing U.S. commitments, forward presence, and

security assistance programs; (4) controlling the spread of weapons of mass

destruction; (5) reforming weapons system acquisition while preserving the

industrial base;

(6) addressing environmental challenges; (7) following through on inventory

and other management initiatives; and (8) improving financial management. 



As part of our high-risk series on program areas vulnerable to waste, fraud,

abuse, and mismanagement, we are issuing related reports; _Defense Weapons

System Acquisition_ (GAO/HR-93-7, Dec. 1992); _Defense Inventory Management_

(GAO/HR-93-12, Dec. 1992); and _Defense Contract Pricing_ (GAO/HR-93-8, Dec.

1992). 



The key GAO products upon which this transition series report is based are

listed at the end of the report. 



We are also sending copies of this report to the President-elect, the

Republican leadership of the Congress, the appropriate congressional

committees, and the Secretary-designate of Defense. 



Signed: Charles A. Bowsher 



 



_______________________________________________________________________________



NATIONAL SECURITY ISSUES 

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At the time of our 1988 transition series, the defense budget had started to

decline from its peak in the mid-1980s, and relations with the Soviet Union

were allowing the United States to look for ways to further reduce defense

spending. There was no hint, however, of the momentous changes that were about

to take place. In 1989, the Berlin Wall fell, and the Warsaw Pact crumbled as

a military force. In 1990, Iraq invaded Kuwait and triggered Operations Desert

Shield and Desert Storm. In 1991, an attempted military coup in the Soviet

Union failed and hastened the dissolution of the country into

15 separate republics. There was general agreement that the Cold War was over. 



In response to these events, the Department of Defense (DOD) has begun to cut

its forces and is now moving toward a 25-percent reduction by 1997. DOD is

halfway toward reducing military and civilian forces by 800,000. It is

proposing to pull about half of its forces out of Europe and is closing many

bases around the world and at home. Even with these cuts, the defense budget

is still targeted at over $275 billion in fiscal year 1997. Many in the

Congress argue that these cuts are not enough, that they do not fully reflect

the dramatic changes that have taken place in the world, and that they will

result in a force that is just a smaller version of the Cold War force. The

major issues cited in this transition series report revolve around this

debate. How much can the United States reduce its force? How much can be

saved? What shape should the new force have? 



Reducing defense spending will be complicated by a number of financial issues

that are currently not fully recognized in DOD's spending plans. There is a

significant mismatch between the $1.4 trillion fiscal year 1993-97 defense

spending plan and budget realities. The spending plan does not recognize (1)

over $35 billion in potential weapons cost growth, (2) about $12 billion in

congressional actions delaying some proposed program terminations, (3) an

estimated $5.4 billion in funding for defense conversion to commercial

activities, and

4) $60 billion in additional cuts proposed by the President-elect. In

addition, the spending plan assumes $53 billion in management savings, the

majority of which may not be achieved, and $5 billion in base closure savings

that will not be realized during the period. As a result, DOD may be faced

with additional program reductions of over $150 billion. 



Additional items will add pressure for more defense spending in the longer

term. For example, cleaning up hazardous waste on defense property is now

estimated at a total of $24.5 billion, and disposing of chemical weapons will

cost at least $8 billion. Both these estimates are expected to grow. 



In addition to these new issues, we also cite some of the same issues that

were present in 1988. At that time, we highlighted inventory management and

weapons acquisition as two areas needing focused management attention. The

Department has taken major steps over the past 4 years to tackle the numerous

problems we cited, and if properly implemented, these initiatives will go a

long way toward improving the efficiency and effectiveness of these

activities. Because of the resources consumed by these functions and their

importance to maintaining defense forces, we continue to highlight them this

year and urge that the Congress and the new administration go even further in

making fundamental reforms. 



In 1988, we also pointed out efficiencies that are possible through a careful

examination of military service roles and missions. Little was done to address

that issue, and this same concern was expressed by the Congress last year when

it called on DOD to do such an analysis. We again believe that this analysis

will be crucial to streamlining our military forces for the post-Cold War era.

We also cautioned in 1988 of the dangers of recreating the "hollow force" that

existed in the post-Vietnam era by cutting readiness and training too deeply

and too fast. Performance in the Persian Gulf War indicated that readiness was

at very high levels, but as deep cuts in the budget are proposed, the same

danger exists during the 1990s. 



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REASSESSING MILITARY ROLES AND MISSIONS 

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The end of the Cold War has materially altered the international security

environment--setting the stage for the most fundamental and potentially

far-ranging reexamination of the nation's defense policy and structure in 40

years. Instead of the global threat from the Soviet Union, the United States

now faces potential regional threats around the world, many of which cannot be

fully anticipated. Policymakers are confronted with complex and difficult

choices as they attempt to achieve a critical balance between the need to

protect national security interests and the affordability of programs to that

end. The complexity and difficulty of the choices will be compounded by the

huge federal budget deficit and emerging but unpredictable threats to U.S.

interests. 



The Congress has directed the Joint Chiefs of Staff to examine the roles and

missions of the armed services to eliminate unnecessary redundancy and

duplication. Making changes will require taking on entrenched bureaucracies in

the Pentagon and power centers in the military services, as well as prevailing

cultural attitudes--both internal and external to the defense establishment.

Our work has shown, for example, that individual services have developed and

acquired weapons systems to meet particular missions without adequate

consideration of other services' capabilities. Close air support systems and

antiarmor systems developed by the Air Force, the Army, and the Marines are

two examples. 



A reexamination of military roles and missions appears to offer many

opportunities to provide a more cost-effective means of meeting defense needs

that exist today. In the area of conventional warfare, for example, DOD should

consider whether the current number of Army light infantry and Marine

divisions is more than what is necessary to meet expected threats.

Opportunities also exist for placing less reliance on carrier battle groups by

changing the way they have been historically deployed. Increasing the use of

alternative naval forces, such as surface action groups and amphibious ready

groups, may reduce the demand for the much more expensive carrier battle

group. 



Scrutiny also needs to be given to strategic roles and missions. Our recent

analysis of the performance of the strategic nuclear triad's weapon systems

should help policymakers weigh options and costs and make critical choices

about future requirements for deterrence. We found that sea-based strategic

weapons are more cost-effective and less vulnerable than the other two

strategic legs. We also found that the B-2 is extremely costly, at over $2

billion apiece, and of questionable value as a strategic bomber. The B-1B and

the B-52 will continue to remain a viable strategic bomber force for years to

come. 



In the post-Cold War era, the military services will be challenged to perform

new and enhanced missions in such areas as peacekeeping, narcotics

interdiction, and disaster relief. United Nations' requests for DOD

assistance--including supplies, military airlifts and sealifts, logistics, and

personnel--for peacekeeping operations have increased substantially in the

past

2 years and may likely continue in the near future. Similarly, DOD's

involvement in narcotics control and the agency's assistance in drug

interdiction efforts have expanded considerably: DOD's contribution rose from

$300 million in fiscal year 1989 to $1.2 billion this year. DOD has also

increased its involvement in providing humanitarian and disaster assistance in

such places as Somalia and Bangladesh as well as within the United States. The

value of these missions, as well as the resources devoted to them, must be

assessed in the context of the military's more traditional role of protecting

the nation. 



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MANAGING THE DOWNSIZED AND RESTRUCTURED FORCE 

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In response to budget constraints and a decreased post-Cold War threat,

difficult decisions must be made about how best to structure, train, support,

and maintain a smaller, increasingly U.S.-based force so it is highly ready,

sustainable, and capable of responding to a crisis on short notice. DOD's

challenge will be to maintain high levels of military capability while at the

same time significantly reducing the number of both military and civilian

positions. 



To implement the new security strategy announced in February 1991, DOD has

developed a base force concept, which calls for a reduction in military forces

by 25 percent by 1997. The Congress will likely debate whether further cuts in

military forces below the base force are possible because of the decline in

the Soviet threat. A major concern is whether further cuts will result in a

repetition of the "hollow Army" of the l970s and will leave the United States

unable to effectively protect national security interests in a still dangerous

world. Policymakers will have to balance these concerns as forces are

eliminated and restructured and capabilities are assessed against potential

regional threats. 



A key issue in the defense arena will be how many and what kinds of forces

should make up U.S. military forces. In particular, scrutiny should be given

to the mix of active and reserve forces. Consideration needs to be given to

whether (1) certain missions can be transferred from the active forces to the

less expensive reserves, (2) a greater number of support forces are needed in

the active forces, and (3) some reserve units are not needed and can be

deactivated. At the same time, the Army could expand the use of certain

reserve support forces in its contingency force and should examine each of the

elements of the force structure being withdrawn from Europe to determine

whether any of these units' missions could be shifted to the reserves. 



Furthermore, in light of the Gulf War and the new security environment,

sustaining U.S. forces will require a reexamination of critical issues. DOD's

forces must be restructured and reduced without sacrificing the U.S. capacity

to respond in time of crisis. Key issues include 



-- the capability for airlift and sealift that is needed to quickly respond to

   regional crises anywhere in the world,

   

-- the need to continue existing land and sea prepositioning strategies,

   

-- the extent to which high levels of readiness and overall military

   capability are being maintained, and

   

-- the extent to which U.S. forces will depend on support and sustainability

   resources from allies. 



Planning for and managing reductions in the number of civilian and military

personnel and their accompanying adjustment and assistance programs will also

be of critical importance. DOD is just over halfway toward meeting its goal of

eliminating nearly 

00,000 active duty and civilian jobs from the peak strength levels it reached

in fiscal year 1987. Further reductions are expected as a result of additional

base closures and other budgetary trade-offs. These cuts will continue to

affect local communities and military and civilian personnel who are making

the transition into the civilian work force. The Congress has authorized

special funding for community adjustment and assistance programs. Our work

indicates that DOD needs better plans for reducing its work force, especially

its civilian work force, to ensure it retains the right skills. 



_______________________________________________________________________________



REASSESSING U.S. COMMITMENTS, FORWARD PRESENCE, AND SECURITY ASSISTANCE

PROGRAMS 

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The end of the Cold War requires a reassessment of the U.S. military presence

overseas, of host government contributions to the United States for

maintaining its forces, and of military assistance programs provided to U.S.

allies. DOD proposes cutting forces in Europe from over 300,000 in 1989 to

150,000 by 1995. The Congress has mandated deeper cuts, down to 100,000, by

1996. Determining the right size and composition of overseas forces will be a

major challenge. U.S. forces stationed in Europe and the Far East will be

affected by such factors as threats, allied capabilities, new status of forces

agreements, and the willingness of allies to increase their contributions to

the defense burden. The North Atlantic Treaty Organization (NATO) is

reconsidering its mission and structure and the future role of U.S. forces.

Also, proposed changes to the NATO members' status of forces agreement with

Germany could directly affect the training and operational readiness of U.S.

and other NATO forces. These new changes will influence decisions affecting

the size and composition of U.S. forces deployed to Europe. Similar concerns

must be addressed for U.S. forces stationed in the Far East. 



Congressional concerns about increased allied burden sharing will continue.

Our work in NATO, Japan, and Korea shows there are further opportunities for

host country contributions to the United States to offset the costs of

stationing U.S. forces. For example, increases in South Korea's contributions

for depot maintenance, war reserves, indigenous labor, and military

construction could save the United States $500 million or more annually. 



U.S. security assistance programs, including foreign military equipment sales,

training, and economic support fund activities, provided billions of dollars

to foreign countries during the Cold War. The fall of the Berlin Wall, the

communists' loss of power in Central and Eastern Europe, and the dissolution

of the Soviet Union have eliminated the Cold War rationale for the U.S.

foreign assistance programs. The radically changed environment has resulted in

some modification to security assistance goals, with new or added focus on

providing aid for establishing democratic institutions and civilian control

over the military, on stabilizing regional tensions, and on combating illegal

drug trafficking. 



While there have been some changes in our security assistance programs, we

recently reported that a limited number of traditional recipients continue to

receive the majority of security assistance. The two main recipients, Israel

and Egypt, have been provided massive economic and military aid since the Camp

David agreements in 1978, which among other things, called for a peace treaty

between the two countries. Rounding out the top six recipients are Greece,

Turkey, Portugal, and the Philippines, all receiving substantial security

assistance funds as part of their base rights agreements with the United

States. Even though bases in the Philippines were recently closed, in fiscal

year 1993 these six countries will receive $6.2 billion, or 83 percent, of the

total $7.5 billion in U.S. security assistance funding. 



The challenge to the Congress and the new administration will be to determine

U.S. security priorities and the corresponding size and shape of a security

assistance program that will be flexible and adaptable in a world with

divergent regional threats. 



_______________________________________________________________________________



CONTROLLING THE SPREAD OF WEAPONS OF MASS DESTRUCTION 

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Concerns about the effectiveness of existing controls over the proliferation

of weapons of mass destruction have been heightened by post-Gulf War

revelations about Iraq's nuclear weapons program, uncertainly over the

security of nuclear weapons material in the former Soviet Union, and Chinese

transfers of nuclear and missile technology to the Middle East. These events

highlight shortcomings in the international community's ability to detect

clandestine weapons programs and control the transfer of the equipment,

material, and technology necessary for weapons proliferation. Halting weapons

proliferation in the 1990s will require increased international cooperation to

strengthen verification of existing agreements, to control international

technology transfers, and to dispose of Cold War nuclear and chemical weapons

stockpiles in the former Soviet Union. Through various programs and

initiatives managed by the Departments of State, Defense, Commerce, and Energy

and the Arms Control and Disarmament Agency, the United States has an

important leadership role to play in each of these areas. 



The new administration and the Congress will face difficult issues concerning

the existing nonproliferation treaties and regimes such as the Nuclear

Nonproliferation Treaty, the Missile Technology and Control Regime, and the

Australia Group on chemical weapons. Among these issues are (1) how to

increase participation in these regimes by potential "problem states," (2)

whether to adopt more intrusive verification procedures to determine

compliance, and (3) how to strengthen enforcement. Policymakers will also have

to determine how best to help former Soviet republics in the timely

dismantlement of their nuclear and chemical weapons and missile delivery

systems. Although more than $800 million has been authorized to assist this

effort, it is unclear whether the funded activities will accelerate the

dismantling process. 



To improve the effectiveness of export controls in this changing security

environment, the U.S. government first needs to continue its efforts to

strengthen multilateral export control regimes, to include initiatives to

broaden participation, and to coordinate and share information about export

control decisions. On a bilateral basis, the United States should also work

with the states of the former Soviet Union and the Warsaw Pact to ensure that

they set up and maintain effective export control systems. 



The Departments of Commerce, State, and Defense, with input from the

intelligence community and the Department of Energy, all have responsibilities

for developing and administering controls over dual-use items--those with both

military and civilian uses. Similarly, two agencies--the Commerce Department

and the Customs Service--share primary responsibility for preventing or

detecting the illegal export of controlled items. This is an appropriate time

for the administration to reassess the roles of these agencies and the various

interagency coordinating mechanisms that are currently in place. 



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REFORMING WEAPONS SYSTEM ACQUISITION WHILE PRESERVING THE INDUSTRIAL BASE 

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The research, development, and procurement of weapons systems account for

about 30 percent of all defense spending. DOD is pursuing close to 100 major

weapons system acquisitions at a projected research, development, and

procurement cost of over $1 trillion. Over the years, such expenditures have

produced many of the world's most technologically advanced and capable weapons

systems. Nevertheless, the manner and process in which weapons requirements

are determined and weapons are acquired have often proved costly and

inefficient--if not wasteful. The combination of unrealistic spending plans,

costly weapons requirements, overly optimistic cost estimates, and high-risk

acquisition schedules has resulted in an annual budget cycle of weapons cost

overruns that require increased funding or program adjustments that reduce,

delay, and/or stretch out the programs. 



A gap between DOD's future year spending plan and available funds amounts to

billions of dollars. DOD's tendency to overestimate the amount of future

funding available for planned programs and the agency's tendency to

underestimate program costs result in more programs being started than can be

executed. DOD's attempts to narrow the planning-funding mismatch will be

hampered if assumed savings are not realized and program costs increase beyond

planned levels--a historically frequent occurrence. For example, DOD's

projected savings of over $100 billion from weapons systems terminations and

new acquisition approaches has been reduced by $12 billion in programs

restored by Congress and $5.4 billion for defense conversions to commercial

activities. Greater defense funding cuts will further hurt efforts to bring

plans in line with funding levels and will seriously challenge policymakers in

determining how many weapons programs we can afford. 



Past efforts to reform the acquisition process have not eliminated these

problems. A prevailing culture that depends on generating and supporting new

weapons acquisitions has defeated past reform efforts. DOD must rededicate its

efforts to improving weapons acquisition. This will require top management

commitment and further movement toward centralized management and

consolidation of acquisition roles, missions, and support functions. Clear

accountability for implementing reforms is also critical. 



Overpriced defense contracts and improper influence in the contracting process

are two highly vulnerable areas subject to fraud and abuse. Vulnerabilities

related to inadequate cost estimating, defective pricing, and improper

contracting practices cost the taxpayers billions of dollars more than

necessary for goods and services purchased. 



Details on our concerns about DOD's annual expenditure of billions of dollars

on weapons system research, development, acquisition, and vulnerability to

contract fraud and abuse are available in our high-risk reports. 



As the defense budget is reduced, policymakers will face a number of critical

issues related to preserving technological leadership and ensuring the

existence of the industrial base capabilities required to meet U.S. national

security needs. The issues include (1) defense industrial restructuring and

adjustment to a declining defense market; (2) the impact of relying on foreign

sources for critical technology and products to meet defense needs; (3) the

impact of foreign investment in key industries supporting defense; (4) and the

impact on U.S. competitiveness of technology transfer to other countries

through various government programs, including arms sales and weapons

coproduction agreements. Our work shows that DOD needs to take a more active

role regarding each of these issues. 



DOD has taken the position that free market forces generally will guide the

restructuring of the defense industrial base. The agency has also stated that

its ability to meet future national security needs will depend largely on the

ability of individual companies to shift from defense to commercial production

and then back again, as required. DOD should adopt a more realistic strategy

for ensuring that government decisions and industry adjustments will result in

the industrial and technological capabilities needed to meet future U.S.

national security requirements. The current strategy does not adequately

recognize that DOD will continue to make budget and contract award decisions

worth many billions of dollars annually to develop and acquire weapons and

other military equipment. These decisions greatly affect, directly and

indirectly, the structure of the defense industrial base. 



In addition, free market restructuring is often motivated by short-term

considerations such as profit, rather than by considerations of how well the

changes in the defense industry will serve long-term U.S. national security

needs. Moreover, many defense companies may lack the experience and

specialized knowledge to shift to commercial production successfully. In May

1992, DOD reiterated its free market strategy but stated its intention to

assess and monitor the industrial base and to take action to preserve a needed

critical capability in those "exceptional situations" when the capability may

be lost and cannot be recovered in time to meet an emerging threat. It remains

to be seen how well this approach will be implemented. However, unless DOD

takes a more active role than it currently envisions in ensuring the existence

of the critical capabilities most likely to be needed in the future, it risks

losing these capabilities. 



DOD also needs to take a more active role in assessing U.S. reliance on

foreign sources and foreign investment relating to the defense industrial

base. DOD has not systematically maintained data on firms that provide

specialized technology to meet its critical needs. As a result, DOD generally

does not know the extent to which it uses or depends on foreign technology and

products to meet such needs. DOD also lacks agreed-upon criteria for assessing

the national security risks posed by dependencies. The lack of criteria

impairs the ability of DOD to determine the actions it could or should take to

reduce these risks. In addition, no federal agency or process systematically

tracks foreign investment in companies that are primarily commercial but whose

leading-edge technologies are important to U.S. leadership in defense

technologies. 



Similarly, DOD and other agencies involved in technology transfer programs,

such as arms sales, coproduction, and codevelopment, need to place a higher

priority on determining the long-term impact of such activities on U.S.

competitiveness and the industrial base. No government entity collects data on

these arrangements, even though many of these activities are believed to

adversely affect the competitive position of U.S. companies and possibly to

undermine U.S. security interests. 



_______________________________________________________________________________



ADDRESSING ENVIRONMENTAL CHALLENGES 

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DOD faces several environmental challenges in the 1990s. In addition to having

to comply with U.S. and foreign environmental requirements, to minimize

pollution, and to comply with clean air and water legislation, DOD is

confronted with a major task--cleaning up hazardous wastes. The annual cost of

this task has increased from $86 million in 1984 to an estimated $1.6 billion

in 1993. DOD does not know how much cleaning up environmental damage will

cost. Estimates have increased to $24.5 billion from the $5 billion to $10

billion anticipated in 1985. This latest estimate is likely to increase

because DOD has not yet identified all of the contaminated sites and the

extent of contamination to be cleaned up. 



DOD has made significant strides in its recognition of such problems and in

its efforts to address them. The increasing resources DOD devotes to cleaning

up its contaminated areas and its initiatives to reduce pollution from current

operations and weapons systems signal a new cultural attitude. The

improvements notwithstanding, we believe that DOD does not yet fully recognize

the magnitude of the task before it, including long-term cleanup costs. 



One key to success in meeting this challenge will be information--on the

nature of the pollution that must be cleaned up, on the location of the

contamination, on the technologies available to do the job, on the costs of

remedial actions, and on the progress of cleanup programs. We recently

reported on the lack of sufficient information on, for example, DOD's

underground storage tanks and the costs of reimbursing contractors for cleanup

efforts. As an initial priority, DOD needs to consider the types of

information needed by its decisionmakers and improve the availability and

quality of such data. 



Another issue facing DOD is the destruction of existing stockpiles of chemical

weapons. Estimates to dispose of these weapons have increased from $1.7

billion in 1985 to almost $8 billion as of March 1992. DOD recently advised

the Congress that additional costs should be expected. 



_______________________________________________________________________________



FOLLOWING THROUGH ON INVENTORY AND OTHER MANAGEMENT INITIATIVES 

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DOD is one of the largest, most diverse, and most complex organizations in the

world. Over the years, DOD has responded to external and internal calls for

streamlining its organization and for promoting efficiency and effectiveness.

The 1986 Goldwater-Nichols Act can be credited for, among other things, the

increased coordination that is beginning to become apparent within the

military establishment--as witnessed, for example, in the successful joint

operations in the Persian Gulf. At about the same time, the Packard Commission

came out with a report whose recommendations sparked a series of efforts aimed

at improving the Department's organization and management. The _Defense

Management Review_ report, issued in July 1989, is intended to address a

number of actions to modernize the Department's operations and to save

substantial sums, while maintaining the essential strength and readiness of

the armed services. Following through with these initiatives must remain a

high priority if promised savings are to be achieved. 



The sheer size of the Department, coupled with the complexity of its programs

and components, presents a Herculean challenge to those charged with

substantially improving Defense management overall. One of the main issues

involves developing and fostering changes in management philosophy and

organizational culture. An organization's culture has a strong influence on

the behavior of its members and the success of the organization as a whole.

Improvements in the area of inventory management, for example, will depend in

large measure on leadership-inspired cultural changes, such as going from a

"having more is always better" way of thinking to a "having what is needed

when and where it is needed" philosophy. 



DOD's supply inventory contained millions of items worth close to $100 billion

as of September 30, 1991. We estimate the cost of excess supplies is $40

billion. In the past, DOD has not emphasized economy and efficiency in

purchasing, maintaining, and distributing these supplies. However, it has

recently initiated some projects based on the use of commercial distribution

systems and other commercial practices to address these problems. These

efforts need to be expanded throughout the supply chain. Even then, they will

not be fully successful until DOD puts in place computer and data systems to

aid in managing the supply system. Sustained top management commitment to

fixing inventory management problems is critical. For a further discussion of

inventory management problems, see our high-risk report. 



Another DOD initiative involves the consolidation of supply depots under the

Defense Logistics Agency. If properly combined with other Department

initiatives, this effort could result in more efficient and cost-effective

operations. However, consolidation alone will not achieve these objectives

unless it is accompanied by a stock positioning plan that is well thought

out--one that takes into account the impact of the inventory reduction plan,

of the reduced demand caused by reductions in the military force structure,

and of the inventory reductions associated with adopting commercial "quick

response" practices. 



Another initiative is the improvement of DOD's business processes, such as

financial and personnel management, through the establishment of the Corporate

Information Management (CIM) System. This initiative is expected to provide

about $36 billion in savings. In the short term, the CIM system is to reduce

or eliminate information systems that perform the same function. In the longer

term, the CIM system is to (1) implement new or improved business practices

(in, for example, the way DOD buys and distributes supplies); (2) create

uniform business processes for common functions;

3) improve the standardization, quality, and consistency of data from defense

management information systems; and 

4) develop standard information systems to meet common functional

requirements. On the basis of DOD's past experience, we believe it will be

difficult to achieve the savings promised by the CIM system. 



In addition, DOD is projecting $5 billion in savings in the next 5 years as a

result of base closures. Our work, however, raises serious questions on

whether these savings will be realized. 



The Defense Business Operations Fund was established in fiscal year 1992 to

place industrial funds, stock funds, and other defense support functions under

centralized overview and control. DOD estimates that the Fund will have sales

of goods and services of about $81 billion in fiscal year 1993. Two of the

basic objectives of this initiative are to capture all the costs of operating

a business area and to charge customers the actual cost of the goods and

services they received. While achieving these objectives could establish a

more businesslike operation, key policies and systems involving standard cost

accounting, rate-setting, cash management, capital asset accounting, and

intrafund transactions have not yet been fully developed. DOD must strongly

commit itself to managing the Fund if the potential financial and management

benefits are to be achieved. 



_______________________________________________________________________________



IMPROVING FINANCIAL MANAGEMENT 

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To control costs, it is first necessary for managers to determine what the

costs are. Currently, DOD is unable to do this for many of its activities

because its financial systems and practices are out of date, inaccurate, and

unreliable. Consequently, the kind of relevant, credible financial information

that program managers, commanders, and top executives need to reduce costs and

measure performance is often not available. 



Achieving compliance with the Chief Financial Officers' Act of 1990 (which the

Congress enacted to improve financial management governmentwide) could

significantly help DOD reach its goals. The act's provisions are consistent

with DOD's financial initiatives. The act further requires financial audits

for numerous government activities that control hundreds of billions of

dollars in assets. However, our recent financial audits of the Air Force and

the Army have shown that the military services are still unable to produce

financial statements that are sufficiently reliable for an auditor to express

an opinion on them. For example, we identified over $200 billion in

adjustments needed to improve the accuracy of Army and Air Force financial

reporting. Accordingly, the statements' usefulness to government

decisionmakers and the public is therefore limited. 



DOD is primarily relying on long-term initiatives to provide solutions to its

financial management problems. However, DOD also needs to make short-term

improvements in internal controls and in the quality of financial data in its

existing systems. Making fundamental, comprehensive improvements in DOD's

financial operations will require personnel at all levels to adopt priorities

and business practices that have not previously been in place within DOD.

Changes on this scale will require sustained personal attention and leadership

from top officials, including the Secretary of Defense, and a willingness to

look beyond DOD to supplement its existing financial management expertise. 



_______________________________________________________________________________



RELATED GAO PRODUCTS 

-------------------------------------------------------------------------------



_Acquisition Management: A Rare Opportunity for Lasting Change_

(GAO/NSIAD-93-15, forthcoming). 



_Defense Contract Pricing_ (GAO/HR-93-8, Dec. 1992). 



_Defense Inventory Management_ (GAO/HR-93-12, Dec. 1992). 



_Defense Weapons System Acquisition_ (GAO/HR-93-7, Dec. 1992). 



_Triad Project Summary_ (GAO/PEMD-92-36R, Sept. 28, 1992). 



_Financial Management: Immediate Actions Needed to Improve Army Financial

Operations and Controls_ (GAO/AFMD-92-82, Aug. 7, 1992). 



_Russian Nuclear Weapons: U.S. Implementation of the Soviet Nuclear Threat

Reduction Act of 1991_ (GAO/T-NSIAD-92-47, July 27, 1992). 



_NATO: A Changing Alliance Faces New Challenges_ (GAO/NSIAD-92-252, July 22,

1992). 



_Technology Transfer: Japanese Firms Involved in F-15 Coproduction and Civil

Aircraft Programs_ (GAO/NSIAD-92-178, June 10, 1992). 



_Major Acquisition: DOD's Process Does Not Ensure Proper Weapons Mix for Close

Support Mission_ (GAO/NSIAD-92-180, Apr. 17, 1992). 



_Hazardous Materials: Upgrading of Underground Storage Tanks Can Be Improved

to Avoid Costly Cleanups_ (GAO/NSIAD-92-117, May 13, 1992). 



_National Security: Perspectives on Worldwide Threats and Implications for

U.S. Forces_ (GAO/NSIAD-92-104, Apr. 16, 1992). 



_National Security: Papers Prepared for GAO Conference on Worldwide Threats_

(GAO/NSIAD-92-104S, Apr. 16, 1992). 



_Operation Desert Storm: Army Had Difficulty Providing Adequate Active and

Reserve Support Forces_ (GAO/NSIAD-92-67, Mar. 10, 1992). 



_Financial Audit: Aggressive Actions Needed for Air Force to Meet Objectives

of the Chief Financial Officers Act_ (GAO/AFMD-92-12, Feb. 19, 1992). 



_Foreign Investment: Issues Raised by Taiwan's Proposed Investment in

McDonnell Douglas_ (GAO/NSIAD-92-120, Feb. 6, 1992). 



_Hazardous Waste: DOD Estimates for Cleanup of Contaminated Sites Improved but

Still Constrained_ (GAO/NSIAD-92-37, Oct. 29, 1991). 



_Military Presence: U.S. Personnel in the Pacific Theater_ (GAO/NSIAD-91-192,

Aug. 20, 1991). 



_Drug Control: Status Report on DOD Support to Counternarcotics Activities_

(GAO/NSIAD-91-117, June 12, 1991). 



_Defense Budget and Program Issues Facing the 102nd Congress_

(GAO/T-NSIAD-91-21, Apr. 25, 1991) 



_Industrial Base: Significance of DOD's Foreign Dependence_ (GAO/NSIAD-91-93,

Jan. 10, 1991). 



_Army Force Structure: Lessons to Apply in Structuring Tomorrow's Army_

(GAO/NSIAD-91-3, Nov. 29, 1990). 



_U.S.-NATO Burden Sharing: Allies' Contributions to Common Defense During the

1980s_ (GAO/NSIAD-91-32, Oct. 23, 1990). 



_Department of Defense: Improving Management to Meet the Challenges of the

1990s_ (GAO/T-NSIAD-90-57, July 25, 1990). 



_Military Presence: U.S. Personnel in NATO Europe_ (GAO/NSIAD-90-4, Oct. 6,

1989). 



_Defense Issues_ (GAO/OCG-89-9TR, Nov. 1988). 



_______________________________________________________________________________



TRANSITION SERIES 

-------------------------------------------------------------------------------



===============================================================================

ECONOMICS 



_Budget Issues_ (GAO/OCG-93-1TR). 



_Investment_ (GAO/OCG-93-2TR). 



===============================================================================

MANAGEMENT 



_Government Management Issues_ (GAO/OCG-93-3TR). 



_Financial Management Issues_ (GAO/OCG-93-4TR). 



_Information Management and Technology Issues_ (GAO/OCG-93-5TR). 



_Program Evaluation Issues_ (GAO/OCG-93-6TR). 



_The Public Service_ (GAO/OCG-93-7TR). 



===============================================================================

PROGRAM AREAS 



_Health Care Reform _ (GAO/OCG-93-8TR). 



_National Security Issues_ (GAO/OCG-93-9TR). 



_Financial Services Industry Issues_ (GAO/OCG-93-10TR). 



_International Trade Issues_ (GAO/OCG-93-11TR). 



_Commerce Issues_ (GAO/OCG-93-12TR). 



_Energy Issues_ (GAO/OCG-93-13TR). 



_Transportation Issues_ (GAO/OCG-93-14TR). 



_Food and Agriculture Issues_ (GAO/OCG-93-15TR). 



_Environmental Protection Issues_ (GAO/OCG-93-16TR). 



_Natural Resources Management Issues_ (GAO/OCG-93-17TR). 



_Education Issues_ (GAO/OCG-93-18TR). 



_Labor Issues_ (GAO/OCG-93-19TR). 



_Health and Human Services Issues_ (GAO/OCG-93-20TR). 



_Veterans Affairs Issues_ (GAO/OCG-93-21TR). 



_Housing and Community Development Issues_ (GAO/OCG-93-22TR). 



_Justice Issues_ (GAO/OCG-93-23TR). 



_Internal Revenue Service Issues_ (GAO/OCG-93-24TR). 



_Foreign Economic Assistance Issues_ (GAO/OCG-93-25TR). 



_Foreign Affairs Issues_ (GAO/OCG-93-26TR). 



_NASA Issues_ (GAO/OCG-93-27TR). 



_General Services Issues_ (GAO/OCG-93-28TR). 








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