A Simple Way To Reduce Defense Overhead Expenses

Most approaches to reforming the byzantine and costly defense acquisition system are either apocalyptic or complicated and too slow to have appreciable impact, if they ever do. Under the apocalyptic heading are proposals such as that by the former Chairman of the Defense Business Board to make a bonfire out of the current 4,000 pages of federal acquisition regulations and defense supplements and start over. An example of too complicated and slow moving is the current Pentagon program called Better Buying Power.

A simple way to improve how the Pentagon operates while lowering back office costs is by employing best commercial practices. This doesn’t even require instituting new regulations and procedures. Simply making greater use of existing authorities, policies and practices would save billions of dollars a year.

Here is one example. Back in the 1990s, the U.S. Department of Defense’s (DoD) process for transportation service payments depended upon inefficient manual processes: transportation officers relied on paper bills of lading, suppliers mailed paper invoices to the paying office, and payments were calculated and entered into the system by hand. Incomplete or missing documents led to late payments, incurring significant interest penalties for the DoD. In addition, there was limited communication between financial and transportation personnel. In 1999, the DoD went commercial, at least in part, launching a Third-Party Payment System initiative to streamline its documentation, payment and accounting processes for transportation services. The Pentagon selected a private, commercial third party to design and manage its payment processes. This system provides online, real-time information and payment visibility and timely transfers of funds to logistics providers. The commercial vendor, operating on behalf of DoD exactly the way it does for any commercial logistics client, collects data from both the Pentagon and its suppliers, creates a single electronic document available to all parties and provides a collaborative platform for exception management and dispute resolution.

This system significantly shortened the payment cycle, enhanced customer relations and improved the DoD’s resource management. Even better, because the commercial vendor charges the participating private logistics providers a small fee for its services, the system was implemented at no cost to the government. The private companies contract with the system because they get assured payments much more rapidly than they had under the old system. Since implementation, the DoD has saved millions of dollars through operational efficiencies. Moreover, the Pentagon was able to close several finance centers and reduce manning levels by over 600 personnel thereby saving tens of millions of dollars more each year in overhead costs.

However, only a portion of DoD’s freight payments go through this Third Party system. The Army’s Surface Deployment and Distribution Command (SDDC) spends nearly $10 billion in annual contract payments to private logistics providers, only half of which is under the private payment system. If it all became part of this system the Pentagon could save millions more and get enhanced efficiencies at the same time. So why hasn’t SDDC done so? No reason except perhaps that such a move would result in a smaller government workforce and reduced budget at SDDC and senior bureaucrats don’t like that.

It is clear that the federal government does a lousy job of managing supply chains. It needs to accept this reality and contract out for such services. This would result in billions of dollars in annual savings. If Defense Secretary Hagel wants to make good on his vision of streamlining the Pentagon’s back office operations and also save money, here is one place he could start. Just say the word, Mr. Secretary.