Pressure on the defense industrial base is intensifying in the face of significant budget cuts and the looming threat of sequestration. Private sector companies are positioning themselves for a tighter market, increased competition and pressure on profits. In fact, the smartest companies began preparing for the anticipated squeeze several years ago.
Similar pressures are being felt by the public segment of the defense industrial base, a complex of depots, logistics centers, arsenals and production sites most of which trace their origins to this nation’s build up during World War Two. Many of these facilities enjoy a somewhat protected status as a result of laws such as the “50-50” rule which requires that half of all the services’ depot maintenance dollars be spent in the depots and air logistics centers. Nonetheless, the signs are clear that the status of these facilities is not sacrosanct and that they will have to fight to survive. The Department of Defense has already put forward a request for two new rounds of base realignments and closures (BRAC), one in 2013 and another in 2015. The depots, air logistics centers and other public facilities may soon find themselves in a fight for their very survival against both the private sector and their own public sector compatriots.
The natural pressures produced by deep reductions in defense spending to slim down the public industrial base are likely to be exacerbated by growing evidence that the public sector often is not cost competitive with their private sector equivalents. Efforts begun at the start of the Obama Administration to transfer vast amounts of private sector work to the public sector on the theory that this would save money had to be halted when, as former Secretary of Defense Robert Gates acknowledged, the savings were not materializing. One reason for this was suggested by a recent Congressional Budget Office study that reported the cost of federal employees was on average 16 percent higher than in the private sector with the greatest difference, 36 percent being among blue collar workers. Many of the public sector facilities carry the burden of excessive size and out-dated infrastructure which weigh on their overhead costs. Then there are the advantages the private sector has in supply chain management and inventory controls that create tremendous opportunities for cost savings by reductions in stocks and speed of delivery. Where this is a chance to make a profit, industry will invest in new technologies, more durable parts and process improvements. This is the lesson firmly established by more than a decades’ worth of experience with performance-based logistics.
One possible model for some public facilities is that established by the former Kelly Air Force base in San Antonio, Texas. The initial decision to close Kelly as part of the 1995 BRAC round was staid by the Clinton Administration in favor of the facility’s privatization. Today, the logistics center at Port San Antonio — formerly Kelly USA — handles more than 50 percent of repair and overall work on Air Force engines, maintenance of the C-5, T-37 and T-38 aircraft, and support for a wide range of other power and electrical systems. Major aerospace companies such as Lockheed Martin, Boeing and StandardAero are or have been working at the logistics center. The search is continuing for new private sector tenants that could take advantage of the skilled workforce and unique facilities at the port.
As the public sector depots, air logistics centers and other facilities contemplate their future, the experience of Port San Antonio stands as a potential model of how to survive the defense downturn. San Antonio represents one approach. The Letterkenny and Anniston Army Depots have demonstrated the value of partnering with private industry to produce new and modified platforms. The Warner-Robins Air Logistics Center and Boeing have established a long-term performance-based agreement to provide support for the C-17. In a sense, such relationships blur the line between the public and private parts of the defense industrial base. Even head-to-head competitions between public facilities and private companies such as some of those that used to occur under the A-76 process can improve the efficiency of the public sector facilities and reduce costs to the federal government.
The experience of the U.S. Postal Service is illustrative in this regard. Yes, the USPS is currently struggling to find ways to close a major budget gap. However, that gap would be much larger, probably impossible to close, had it not been for the efforts made since privatization to cut costs through collaboration with private sector logistics providers such as UPS and massive investments in automation. The USPS could achieve solvency today were it not for Congress’s insistence that it retain excessive staffing levels, outdated work rules and excess infrastructure.
Public sector facilities have two choices in an austere budget environment. They can move in the direction of the private sector, seeking closer collaborative relationships or even choosing privatization. Or they can try and maintain their separate, almost privileged positions but risk greater competition from their public sector counterparts as well as increased competition from the private sector with respect to cost, responsiveness and efficiency.
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