In a period of declining defense budgets but growing threats to national security, the Department of Defense (DoD) is struggling to figure out how to do more with less. This is the central challenge facing the new Secretary of Defense, Ashton Carter. It was recently reported that Secretary Carter has been seeking advice from some unusual sources, including billionaire businessman and former New York Mayor Michael Bloomberg and Christine Lagarde, chief of the International Monetary Fund. If the Secretary really wants some out-of-the-box solutions to his capabilities-resource mismatch, he might spend time with the Right Honorable Michael Fallon, the United Kingdom’s Minister of Defence.
In the post-Cold War era, of all the major Western military powers, the U.K. has led the way in transforming its system of acquiring and sustaining military capabilities. As defense budgets came down, the Ministry of Defence (MoD) took a bold series of steps to reduce costs and protect core capabilities by privatizing traditional governmental activities. In 2001 it converted most of the activities of the Defence Research and Evaluation Agency into a private company, Qinetiq. In 2006, the MoD signed a 25-year-long support contract for its fleet of Chinook helicopters with a team of private companies led by Boeing. In some ten years of work, the Boeing team has improved helicopter availability while reducing the cost to the MoD. Just the other day, it was announced that Leidos had been selected as the winner of the Logistics Commodities and Services Transformation program intended to procure, store and distribute nonmilitary essentials such as food and medical supplies for the U.K.’s armed forces. This contract is expected to save more than half a billion dollars.
The U.K.’s MoD has shown its U.S. counterpart a partial way out of its dilemma. The solution depends on reworking DoD’s relationships with private industry. Specifically, it means relying more on the private sector for support and sustainment, being willing to enter into long-term relationships and focusing on reducing the overall cost to government of managing fleets and operating supply chains rather than getting the best price for individual items and activities.
The MoD’s solution is based on the recognition of a simple fact: there are many functions that the private sector, properly incentivized, can do better than government. The private sector is light years ahead of the military in its understanding of and efforts to manage large fleets of vehicles, aircraft and ships and optimizing supply chains. This is not because these activities are easier in the commercial world. Rather, it is because at the highest levels of the business world, it is accepted that corporations will live or die based on the way they manage the costs of doing business and the efficiency of their supply chains.
What the MoD has done for its Chinook fleet and in the Logistics Commodities and Services Transformation program would come as no surprise to the private sector. Long term performance-based maintenance and support contracts are quite common in commercial aviation, for example. Actually, DoD knows something about this. It has used performance-based contracting to provide effective and efficient sustainment for a number of platforms, notably the C-17 transport aircraft. A study conducted by AIA of 23 performance-based agreements to support various weapons systems, noted the average annual program cost savings was over $21 million and the average increase in availability was more than 16 percent. Fifteen of the cases examined had cost savings of around $300 million annually.
The same thing is true for supply chain management. Just as the global market benefits from improving the operation of commercial supply chains, the Department of Defense has found value in applying the same principles and commercial best practices to its logistics activities both at home and abroad. For decades, Maersk Line Limited has been under contract with DoD to move virtually every type of equipment and commodity to and from hostile zones. DoD contracts with a set of approved commercial air carriers to move its people around the world. Because they have to create and manage supply chains to produce their products, major defense equipment manufacturers such as Lockheed Martin, BAE Systems, General Dynamics and Raytheon have been providing similar services to the Pentagon.
The difference between the MoD’s and DoD’s approaches to reforming their sustainment systems and supply chain management practices is that the former is willing to trust the private sector, to establish long-term relationships and to privatize activities and functions once the exclusive preserve of government entities and military organizations. This does not mean there is a lack of oversight. Rather, there is sensible oversight that does not seek to micromanage the contractors or ensure that the government gets the best price on every item purchased.
In case after case, the private sector has demonstrated that its approach to supply chain management can improve its efficiency and effectiveness. As the size of the U.S. military shrinks, forces return from overseas and budgets tighten, reliance on the private sector to manage platforms and maintain supply chains will only grow. In these difficult budget times, DoD needs to do what the MoD has done, make better use of private sector companies’ expertise to reduce operations and maintenance costs while maintaining the desired levels of military readiness.
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