Faced with the need to control the costs and improve the performance of its logistics and sustainment system, the Department of Defense has pursued a deliberate strategy of integrating better the private and public, or organic, defense industrial bases. The centerpiece of this strategy is the creation of public-private partnerships (PPPs) and the implementation of an approach to logistics and sustainment known as performance-based logistics (PBL). By capitalizing on the comparative advantages of the public and private halves of the defense industrial base, the defense department can support the warfighter while reducing the costs for maintenance and sustainment, and improving the availability of weapons systems they need.
The record of PPPs, in general, and PBL, in particular, is very good. Government, industry and academic studies all have reached the same conclusion: contracts have led to improvements in availability in the neighborhood of 20-40 percent while typically reducing costs by 15-20 percent. Improving availability creates an additional cost savings by reducing the total number of systems required in order to meet the warfighter’s needs. In addition, by streamlining supply chains and improving inventory control, PPPs have achieved hundreds of millions of dollars in cost avoidance. The private sector has invested many millions in the organic industrial base, provided invaluable training for government workers and transferred critical intellectual property. The integration of the public and private sectors has led to collaborations in the production of new weapons systems such as the Stryker vehicles, and aircraft and vehicle engines.
Despite this record of success there are increasing signs that some in the Department of Defense are seeking to move backwards, bringing more work into the organic industrial base and sidelining the private sector. The basis for these decisions, particularly the business case, does not appear to be adequate; it certainly has not been transparent.
There are clear perils to increased insourcing. First and foremost, despite claims to the contrary, it is not clear that the military services will be able to save money by insourcing, particularly over the long term. Insourcing potentially could carry a very high price tag, most obviously in the increased costs of goods and services acquired in the maintenance and sustainment process. There is also the danger of reducing the availability of vital weapons systems with consequent risks to the warfighters. Moreover, arguments for insourcing often are based on erroneous or unsubstantiated conclusions about the relative advantages and costs of work performed by the private and public sectors. Then there is the risk that by insourcing, the defense department will diminish the very same private industrial base on which it must rely for the next generation of capabilities.
The Department of Defense needs to rein in the military’s rush to insource. In the midst of two wars, the consequences of an error in judgment is simply too great. They need to proceed slowly, first establishing a department-wide set of procedures for both insourcing and PPP decisions. Central to such an effort is the development of a standardized, transparent and comprehensive analytic approach to defining the business case for or against insourcing. This approach needs to include consideration of the life cycle cost implications of alternative approaches to sustainment. In addition, the military services should make a diligent effort to bring the warfighters into any insourcing decision since they will bear the consequences of any loss of availability or capability. Above all, as the nation is engaged in two wars, everything must be done to ensure that support to the warfighters is not diminished.
This report was written by Dr. Daniel Goure of the Lexington Institute.
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