Dominant Logistics
Vol. II: PRE-Transformation - A Department of Logistics
The current cliche regarding military reform is the concept of transformation. Many insist that we must transform the military in order to meet the changing needs of defense. While this is true, there are problems of much greater import that must be dealt with before any transformation process can be undertaken effectively. We must transition the force to meet future needs but this cannot be accomplished without transforming the bureaucracy that dominates the force during peacetime.
When most people think of the term "military waste" they immediately levitate towards topics like procurement programs such as the F/A-22, the V-22 Osprey, and similar programs where costs are very high and little benefit is seen. While this may be accurately described as waste, this is merely a drop in the bucket when compared to the tens of billions being wasted every year sustaining a bureaucracy that is literally out of control. The situation has gotten so bad that not even the GAO has been able to devise a means by which to evaluate the bookkeeping of the Department of Defense.
To resolve the current situation, the best hope for taxpayers lies within a business management concept known as the profit center. A profit center is a department within the organization that functions as a sort of company within a company. It maintains its own books and has revenues and expenses, just as a company does, for providing various goods and services to the larger organization. In essence, it provides the organization with an effective means for managing and controlling support costs so that the organization may focus its efforts on its overall mission.
As a profit center, the department has options for providing goods and services. It can perform the tasks with its own personnel, it may pay other departments within the organization to perform the task, or it may hire out the task to a third party. Even within the organization, other departments must pay the profit center for the goods and services it provides. In the end, the profit center model is designed to strike the best balance achievable between providing the best goods and services available and keeping costs under control.
What I am proposing is to take all of the support tasks involved in keeping our military as a functioning department of government and merging them within a separate organization as a profit center to be called the Department of Logistics. Some functions within the military already operate as profit centers, such as the exchange system, so we aren't reinventing the wheel here, only expanding it to cover all of the various support missions that are involved in the Department of Defense. In essence, this plan is to allow the various branches of service to focus on their primary mission, defending the nation, while the menial support roles are managed by the DOL.
Profit Center Examples
Perhaps the best example of where military resources are being wasted in garrison support lies in the huge exchange system that provides so-called services to those stationed at military bases. Where a normal city in the United States has stores, restaurants, and shops to meet their needs, the military has a DOD-controlled exchange system that manages all of these needs. By some estimates, the U.S. DOD-managed exchange system is the largest commercial goods and services retailer in the entire nation. And that's all well and good, but what does this have to do with defense?
Yes, the exchange system sustains itself financially but it is also quite limited in the services it provides and its income is virtually guaranteed as there is no competition. You can go to just about any small town in America (population 10-25 thousand) and find two to three times the available goods and services provided by the DOD exchange system. And even though the exchange system isn't a financial burden on a technical level, it is still being managed and controlled by personnel on the DOD payroll. Instead of a market being influenced by the consumer, we have a provider dictating the market to those who are quite literally forced to use it. The biggest difference here is that where Walmart pays taxes for the property from which it operates, the DOD exchange system has no such bills to pay. Do the post exchanges have to pay for water, sewer, and electrical services provided by the DOD infrastructure? While I honestly don't know the answer to these questions, they highlight further burdens that the exchange system place on the DOD - even if the exchange system DOES pay these bills, the military is still faced with the burden of providing the services.
And what about some of the more ridiculous exchange activities like the operation of golf courses, the renting of outdoor recreational gear, the gas stations and barber shops - yes, these services are needed but these same services are available in every other city in this country through the market. Why must the DOD be forced to manage and operate these facilities themselves when quite obviously the commercial sector could meet these needs if the DOD allowed? And the "base security" argument doesn't fly here as most posts allow civilian taxi cabs and food delivery services to operate unhindered.
Converting these support operations into the DOL profit center concept would work in a very different manner. To begin with, the installation would be "owned" by the DOL with fees such as rent and utilities paid for by the branch keeping forces at the installation. Local services would become a competition between DOL and the commercial sector with the branch of service choosing who they would like to provide the services. If they don't like what the DOL has to offer, they would be free to bring in a commercial entity to provide the service as the branch is paying for the land and utilities. In essence, the DOL would operate as a sort of "city council" for the installation with the branch of service being the respective tenants in the "city."
Another of the larger DOD wastes is the garrison and VA medical infrastructure that is predominantly maintained and managed by the DOD. While it is true that VA controls its own medical facilities, it is also true that these facilities are used by active and reserve military members in addition to veterans and is thus a DOD burden as well. If you ever thought that the government should provide health care to all, I highly recommend spending some quality time at ANY VA medical facility and this crazy notion will be dispeled rapidly.
In our DOL profit center model, these services may continue to come from the DOL but the services would have the option of contracting out to HMOs or other medical providers in a given area. Instead of the "free" medical services provided to the military, the branch would be required to pay for the services from either the DOL or a private contractor. Other roles that would be handled by the DOL profit center would include:
Each of these individual areas would function as a profit center within the overall DOL profit center. For example, the Contracting, Procurement, and Purchasing Services office would be responsible for those roles for each branch of service. They would then be responsible for obtaining the given service requested by the military branch, as an example we'll use mail service for no particular Army installation. The Army pays CPPS a fee to find them the best deal. Competing to provide the service will be the DOL Mail Services office, the U.S. Postal Service, and any civilian companies interested in fulfilling the contract.
Department of Logistics Operations
The DOL would have no operating budget whatsoever - their operations would be run exclusively from revenues collected for providing goods and services. They would function no differently than a typical corporation and just as with a private corporation, their contracts and transactions would be subject to public scrutiny. They would also be required to undergo regular audits as with any other corporation. In this case, the corporate "shareholders" are the taxpaying public.
To get all DOL employees active in improving efficiency and performance, a bonus system would be utilized. Departments within the DOL would be eligible to receive annual bonuses on a scale of the profits derived from that department. As long as the DOL collectively makes a profit, the employees of the profit-making departments would receive a bonus (no bonuses to the departments that fail to make a profit). This is consistent with other DOD programs where employees may receive bonuses for efficiency improvements. Bonuses would not be scaled to pay grade - everyone in the profit-making department would get the same bonus. Also, since the branches of service are the customers in this case, they should have some say as to whether or not the bonuses are deserved or if they deserve a refund for poor service or price gouging. This maximizes the incentives for lower level employees to support the efficiency goals while providing the best service possible. With this model, waste, fraud and abuse are no longer abstract annoyances - they are money that would otherwise be going into the employees pocket so they have an incentive to stop the abuse.
With the profit center model, even the payroll would come from organizational revenues and not from direct government funds. This is necessary to eliminate the military tradition of hitting up the free labor pool, where unscrupulous officers expand their staffs for free since it all comes from one big payroll budget. This is how we've ended up with literally hundreds of thousands of military personnel stationed in the Washington D.C. area while virtually every front line unit of every branch struggles to fill out their ranks. With this program, if some high ranking pencil pusher wants another secretary, he has to pay for it, just like in the real world. Similar changes would occur with those senior brass who love to fly over their fiefdoms in helicopters they don't have to pay for, burning fuel that was meant for training. Instead of burying these escapades in huge budgets, they will have to purchase these services outright from the DOL out of THEIR OWN budget and not another unit's operating and training funds.
Now, where things start to get interesting is where each of the departments within the DOL profit center is now also free to provide these services to other organizations for the same fees being charged to the branches of service. This is where major financial gains become possible and it relates to a topic called service density. In any service industry, there is a specific area in which providing the service is economically viable. The more business you have inside that area, or the more "dense" the area is, the more profitable providing the service becomes. As your service area stretches out further and further, becoming less dense, the services become more and more expensive to support because of the distances that must be travelled to provide the service. For the DOD, this is particularly difficult to manage as there are military forces literally spread throughout the world. But even in the most remote locations, there is some civilian infrastructure requiring support as well and this is where we can make our gains. Let's consider the example of food services.
Every military mess facility requires substantial quantities of institutional food and service products like napkins, cleaners, hair nets, etc. But these same items are also required at every hospital cafeteria, school cafeteria, business cafeteria, and other venues where institutional food products are used. With the profit center model, we have two options available to us. We can tap into the local resources and hire a civilian company to expand their food services into the military installation, or we can allow the civilian resources to tap into the DOL infrastructure to lower their own support costs while paying a modest fee to DOL for the service. In either case, both parties can lower their overall costs by utilizing a shared infrastructure to improve their service density - instead of both parties each bringing in one truck of food and supplies, a larger truck is shared by both.
Similar gains can be made in a wide variety of areas including secretarial services, storage services, transportation services, and bookkeeping services. Anywhere the military goes, these services are already present and thus we can share our support infrastructures with the local networks to reduce costs. And unlike the current situation, the DOL will be required to compete on the open market to provide the best services at the lowest costs, with the branches of service being the paying customers.
Increasing Accountability
The military is required by law to document its finances to Congress. One of the more open secrets about the military is that it has been unable to do this for years. It can give an estimate as to where its money has gone, but when everything is said and done, the DOD tends to lose track of millions, and in some cases billions, of dollars every single year. To put this into perspective, in some years, the DOD will lose track of more money than most nations of the world spend on defense in the same year. For the most part, the GAO has given up on trying to square away the DOD's books as it simply cannot be done. Much of this is due to a near total absence of anything resembling real internal accounting.
The internal accounting methods of the DOD are a lot like Bill and Hillary Clinton: From a distance, things look okay; move a little closer and they don't look so good; get in real close and you start feeling the need to hide your children because something just isn't right but you're not sure what it is and a peculiar stench seems to be hanging in the air. Where Bill needs to know what you mean by "is", the DOD needs to know what you mean by "accounted for." The DOL profit center model is specifically designed to end this problem.
When dealing with someone else's money, the average person will care but they aren't going to lose sleep about it. When dealing with money from their own pocket, blood can get shed. With the profit center business model, internal accounting literally means the difference in the employee's checkbook as the profitability of the department determines bonuses. Documenting the transactions and supporting the work with the appropriate paper trail are no longer requirements from the boss; they are the difference between getting a bonus and not getting a bonus.
With the combination of the bonuses and the profit center model, we are forcing the DOL to adhere to what are known as Generally Accepted Accounting Principles (GAAP). In order to document a profit, and hence be awarded a bonus, the department must be able to fully document all expenses and all revenues. Failure to do so in a means consistent with requirements of the GAO and GAAP means no bonus. Paying attention to the details can literally mean thousands of dollars in your pocket - this is about as good an incentive as can be made.
Transitioning to a DOL Profit Center
As with so many other things military, the first step is always the most difficult. There must be an effort to establish a separate department within the DOD to serve as a Joint Department of Logistics. It's overall purpose is to manage the support operations for the collective force so that each branch can focus on its respective mission and purpose. This department must be represented amongst the Chiefs of Staff even though it is operating as a profit center within the overall DOD. As with the other departments, the DOL must have a civilian secretary, but this person should serve similarly to the Chairman of the Federal Reserve. Instead of limited terms, the DOL secretary should be appointed for lengthy terms of ten years in order to sustain operational continuity.
The first step is to transition all military garrison facilities to the DOL and begin the process of zoning and assessment. The current monetary values assigned to these facilities can be used to determine the initial "tax" paid to the DOL but this will change as zoning and assessment is completed. In all likelihood, this process will take about 2-4 years to complete in its entirety. Those areas that DOD does not wish to pay for can then be used by the DOL to bring in other facilities that are willing to pay the "tax" for the land in exchange for the opportunity to operate on the base. This will primarily be retail organizations.
Concurrent with this step will be the development of the various bookkeeping services of the DOL. This will literally involved taking units out of the current military branches and putting them in the DOL along with their respective jobs. Branches within DOD will be required to pay DOL fair market value for these services although these rates will change as units become consolidated and technologies to improve efficiency are applied. Military members serving within the DOL will still receive pay and benefits equal to those in their respective branch, but they will still be entitled for the DOL bonus program as well to compensate for dealing with the transition. Moreover, they will no longer be subject to constantly having to relocate due to changing military requirements.
As the DOL begins to have some revenue sources, they can start the process of reallocating the Combat Service Support elements that they will be responsible for, such as water purification, field kitchens, field hospitals, and temporary housing systems. Again, this is simply a matter of units being moved from the current branches of service to the DOL. Where they are needed, the DOD can lease these systems and personnel from the DOL as can disaster relief organizations and aid organizations.
So we end up with a four step process to transition. We start with the changes at the top level to establish the department, then we transfer the property and its related functions, followed by the garrison support activities and finally the higher level Combat Service Support activities. And since the current DOD books are garbage, we really are just starting over with a fresh slate as the DOD transfers the materials over to the DOL.
The DOL Profit Center in Action
This stuff is relatively deep for those who aren't into the management side of logistics or other businesses so let's look at some general examples of how all of this comes together in the end. At first glance, the profit center concept looks like it will make things worse and not better but as one's understanding of the concept increases, this outlook improves dramatically. It's a system that works well for private business and can be very effective for managing the support costs of the DOD.
Example #1 - Garrison Exchange Activities
For the sake of argument, let's say that the typical installation costs about $50million per year to operate. Currently, every dime of this comes from Congress. With the new design, some land on each installation will be available for commercial activities. The DOL will negotiate contracts with companies like WalMart, Target, Pizza Hut, KFC, Sears, JcPenny, and similar companies who would then open up locations on post. The DOL will have a background checking service to make certain employees are good to go (it will provide this same service to the DOD and others) and then these companies can operate on base. They will then have to pay fees to the DOL for land use as well as for utilities. So our costs will increase slightly for the DOL overhead and increased utility usage but now we also have substantial additional income. Our costs may go to $55million per year but our revenues will increase from $0 to about $10-15 million lowering the costs to the military by about $5-10 million per installation plus the DOD no longer has to deal with the headache.Example #2 - Housing Activities
Existing housing facilities will be transferred to the DOL and the branches will be paying the DOL the money for rent and utilities. If the housing costs exceed what the DOD is willing to pay, the DOL has the option to either close down the housing or demand more funding from the Congress. Instead of a generic base construction budget that typically gets squandered on useless projects, the DOL is only going to use the funding where they can financially achieve a gain as they cannot afford to waste it being dependent on profit for operating funds. This may result in tearing down existing base housing and paying servicemembers are more appropriate wage to cover the difference. Similarly, when forces are used for long term efforts abroad, the DOL will have temporary housing systems available for lease by the service.Example #3 - Transportation
The DOL will be receiving the transportation assets of the higher level CSS formations and these will be available to serve the force as well as other government operations. For example, if the President is going abroad, a given quantity of materials such as his armored limosine must go with him. The DOL would be paid form the appropriate budget to provide this service or they may contract the trip out to a private carrier if that is more cost effective. Similar options will be available for ground transportation assets. So we get a situation where either some other organization will be paying a portion of what would otherwise be military operating costs, or we may simply pass the costs along to a private company altogether. Either way, DOD would no longer be stuck with the tab for politicians wanting to look like royalty in private aircraft.
These are just some of the possible examples but obviously, there would be many given the breadth of activities that will be handled by the DOL. In the end, this is all about freeing up the DOD to focus on war fighting. It's all well and good to be lightening the force and adding new technologies but when we are pouring billions of dollars down the drain before we even begin, then we will gain little if anything in the long run. We need to fix the bureaucracy first.