Banking on Efficiency

Buy now and save later. Such was the pitch used by officials at the Army Materiel Command earlier this year trying to sell Army leaders on their plan to substantially change the way AMC does business. The Army bought the plan. Now it's up to AMC to deliver nearly $2 billion in promised savings.

By establishing a host of new efficiencies at AMC, officials at the organization that consumes half of every Army procurement dollar researching, developing, managing and maintaining the Army's equipment and supplies say they will hold AMC's prices at zero inflation through 2003, reduce its overhead costs and inventory, and improve goods and services it sells the Army.

It is a tall order for AMC, which spends $20 billion a year and has a staff of 69,400 employees scattered in 258 locations across 42 states and 14 countries. It's one on which few private corporations would stake their reputations. More than AMC's reputation is at stake, however.

The Army is so confident AMC will come through that it has already programmed the savings into its future budget plans. But some Army officials believe the Army's confidence is inspired not so much by the soundness of AMC's business plans as by the service's desperation to maintain a force of 495,000 troops in the face of pressure to cut the Army further. At the very least, the skeptics say, the Army is banking on savings that may never materialize.

Gen. Johnnie Wilson, commanding general of AMC, understands the skepticism but believes the Army and his agency have acted prudently.

"We need to program our limited Army resources now to maintain the momentum in our modernization and force structure programs," he says. "If we wait to reduce the funding at the unit levels until after the savings have been fully realized, we will lose several years' worth of opportunity to realign our limited dollars. Is this a high-risk strategy? You bet it is, but I am convinced that we are doing the right things to mitigate that risk and we are already beginning to see the first fruits of our efforts."

Tough Sell

"There is a concern," says Col. Vince Scatamacchia, deputy director for management and control in the Army Budget Office. "If AMC doesn't realize the savings, the money will have to be made up in future years' budgets." How that would be accomplished is unclear.

The savings AMC is counting on have already been applied to the Army's flagging weapons modernization programs and vulnerable personnel accounts, Scatamacchia says. For Army field commanders, that means their budgets have been cut to reflect the lower prices AMC anticipates charging for materiel and maintenance.

There is a lot of trepidation among those commanders, says another Army budget official. "There's a sense that we've been down this road before," with savings projected from base closings that never panned out. For that reason, the Army has made every effort to identify exactly what must be done to achieve AMC's projections and to closely monitor the agency's progress. "Those two things will clearly mitigate against the risk," the budget official says.

AMC's Col. Keith Brower is aware of the risk as much as anybody. As the agency's executive director for business, Brower spends much of his time on the road convincing skeptical Army commanders AMC won't let them down. "In many places, the savings we make are in the cost of what we sell to the Army, so there's a fear that we're playing with other people's money, which we clearly are," Brower says. "Having said that, I believe we're also doing the smart thing to deliver on our promise.

"It really shouldn't matter to the guy out there in a division how much money he gets to buy [AMC goods and services] as long as I can deliver at the price he's resourced at. The fact that commanders will get less money to maintain their operating tempo is incidental if it costs them less to maintain that operating tempo. That's the principle," Brower says.

Behind the principle are dozens of changes AMC is making in the way it manages and procures spare parts and maintains equipment and supplies. Even some of the items it sells to the Army, from batteries to helmets to tank engines, are being redesigned in the hope that money can be saved up front or a better product can be created to lower replacement costs and generate long-term savings.

Virtually no item or area of operation at AMC is off limits, says chief of AMC's Cost Analysis Division, Maryann Dominiak, known as the agency's "Efficiency Czar."

"What we're chartered to do is make sure AMC delivers the savings we've promised as well as find new opportunities for savings," she says. To that end, her office has established a database to record and measure savings across the command and operate as a clearinghouse for new ideas. Whether considering reorganization of a particular function or reform of some aspect of the acquisition process, regular brainstorming sessions with personnel across the command keep ideas percolating.

"I'm interested in reducing the cost of anything on which the Army spends resources," she says. That would be just about everything at AMC, since the agency applies a surcharge to every item it sells the Army to cover all overhead costs, from engineering to procurement to distribution and maintenance.

AMC's surcharge to cover overhead this year is 16.7 percent, down from 30 percent a few years ago. "We've really crunched down that number," Brower says. "Obviously you reach a point where you can't go lower. I don't know what that point is yet because every time I think we're there we manage to crunch it a little lower," he says.

Holding Costs Steady

Controlling and reducing overhead costs is central to AMC's savings plans. The following are among the initiatives the agency is pursuing to cut the surcharge:

  • Through automation and electronic contracting, AMC has reduced administrative employment, thereby reducing costs.
  • The European Redistribution Facility, a Cold War necessity when 220,000 U.S. troops were in Europe, will be closed.
  • Better contracting agreements have reduced the amount of time it takes to obtain spare parts, enabling AMC to sell off inventory and lower the associated costs.
  • Direct-delivery agreements with vendors have eliminated the need to stock some parts altogether.
  • Merging wholesale and retail stock funds has streamlined functions and eliminated a layer of management.

"We've essentially said we're going to hold our prices across the [1998-2003 budget period] at zero inflation against the 1996 baseline," Brower says. "We're not going to let our prices increase. A lot of people have said 'That's crazy. There's no way you can do that.' I would only say that from 1991 to 1997 we had almost no increases. And we did that by reducing overhead and changing the way we do contracting. We propose to continue to do that."

To spur more competition in procurements and attract more prime suppliers, AMC has begun offering more multi-year contracts or banding together similar items to make larger contracts in exchange for shorter delivery time on contracts. "A one-year contract might not be attractive to a prime supplier but a five-year contract may be different," Brower says. "[The contractor] may be very capable of making five years' worth of parts and putting them on the shelf and releasing them to us when we ask for them and achieving economies of scale where a smaller contractor couldn't."

Another area where AMC expects to reap big savings is in the redesign of spare parts and supplies. For example, the Army spends about $77 million per year on batteries. By using new technology to extend the life of batteries, AMC believes it can eventually cut that expense in half.

"Our long-term goal is a 50 percent reduction in battery demand across the Army," Brower says. In particular, he wants to see the Army cut back on the rate at which it replaces vehicle and radio batteries. Because so many military vehicles sit idle in motor pools for long periods of time, their batteries show a high rate of failure due to the build up of sulfates on the plates inside the battery. On average, the Army replaces vehicle batteries about once a year.

AMC engineers discovered they could mount a $65 commercially available solar plate to vehicles that sends an electrical charge down the battery post and prevents the sulfate build-up. Tests at Fort Hood, Texas, have shown the solar plates can double and triple the life of vehicle batteries.

AMC also discovered that soldiers, instead of taking a chance with a partially used battery before heading into an exercise, were replacing radio batteries much more frequently than necessary. The discarded batteries were being returned to AMC with about 70 percent of their charge remaining. To cut down on the battery use rate and give soldiers greater peace of mind, AMC is developing a battery with a state-of-charge indicator so soldiers know exactly how much life is left in it.

Time To Put Up

To promote savings through better designed equipment, AMC has set aside $20 million to invest in research and engineering efforts. "For years in the Army I've heard it said if I just had a little money I could redesign this or that and do it better and save money. Now it's time to put up or shut up," Brower says.

One of the most successful initiatives under the program, which will continue to be funded through the savings it generates, has been the redesign of the helmets worn by armor personnel. The helmets are equipped with a headset communication system that until recently had to be entirely replaced even if only one ear piece was broken, which was usually the case. By designing and installing a connector to run between the two ear pieces, only the faulty one needs to be replaced now. AMC officials estimate that this change alone, which required about a $1 million investment, will save $44 million over the next 10 years.

In another modification of the helmet, AMC has redesigned the ear cups that fit over soldiers' ears to prevent hearing loss during exercises and on the battlefield. The ear cups are made of a clear plastic sack filled with silicon jell. They were originally designed to be replaced once a year for hygienic reasons, but their unusual appearance seemed to invite soldiers to fool around with them, and the Army had to replace them two to three times a year at $70 a pair. AMC has redesigned the ear cup with a dark foam seal that is just as effective but is more resistant to damage. The $2.9 million investment in the new ear cups is expected to reap $46 million in savings over the next 10 years.

Blair Dodds, AMC's operations research analyst who heads up the redesign program, says the new helmet has been one of the most successful programs in terms of the savings-to-investment ratio. "There are a lot of good ideas out there, but from a financial perspective they are not always justifiable," he says. He is currently overseeing 31 redesign projects and expects to award money for other projects soon.

How important is achieving these efficiencies to AMC? "It's beyond important," Wilson says. "It is a survival issue and marks a turning point for the command. . . . We can't afford redundancies, long lead times and inadequate or overpriced products. So we have to streamline our business processes, optimize our research dollars and work our [logistics] programs smarter."

"If any of it were easy, we would have done it a long time ago," Wilson says. "Probably the toughest element is the fact that we are making broad changes in our culture and business processes during a period of intensive downsizing."

By 2003, AMC will have to cut another 10,000 of its 65,000 civilian jobs to meet downsizing goals. Some cuts will result from base closings, but others will come from reductions in AMC's headquarters, the research, development, testing and evaluation staff, and the Army Science Board. While the cuts account for some of the projected savings in overhead costs, they add to the turmoil AMC is now experiencing as it alters many long-time business operations.

"We've just taken the first step in what promises to be a long journey towards being as efficient as we can be," Wilson says.

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