Vice Admiral Mark Harnitchek has been heading the Defense Logistics Agency (DLA) for 2 years and presented an update on the agency's challenges and progress during WBR's 2013 Defense Logistics conference. He candidly talked about how DoD at large, and DLA specifically, had benefited from "budget largesse" in recent years, especially with supplemental budgets (i.e. OCO / war spending) and had grown "thicker in the middle" as a result. In plain admission of the government's shortcomings, the development of a "culture of judiciousness" to apply better judgment and save money is necessary within DLA. This is a welcome evolution in public discourse after so much hand-wringing about sequestration and befuddlement at the very idea of having to operate within financial constraints.
VADM Harnitchek was equally frank in recognizing that part of the agency's focus will translate into margin pressure for contractors. Like other DoD senior officials, he's broadcasting a clear signal that budget constraints are expected to stay and everyone should learn to operate within them. This should lead to increased reliance on commercial capabilities and less DoD resources, in relative terms. To that effect, fuel and food are pretty much already run "factory to foxhole" through commercial suppliers.
DLA sales to the services peaked in FY11 at $46B, stayed almost at that level the next year, and are now down to the high 30s. That is still about double of DLA's scale before the Gulf war.
Reverse Auctioning... Everything?
Harnitchek has set a $13B cost reduction goal for the DLA to reach over the FY14-FY19 period, split between $4B in operating cost reductions, and $9B in material savings. That goal, expressed in his FY14 guidance, is even more aggressive than the $10B in savings previously sought over 5 years. We asked him whether having exited two war theaters by then would have anything to do with meeting these goals, and Harnitchek was adamant that this natural decline in demand had nothing to do with it: he's measuring the result of DLA's own proactive measures. That is a laudable intent, but here, as often with governmental self-defined savings goal and self-reported results, the baseline is not crystal clear in DLA's documents. Savings against what, and will all other things be really equal?
Methodology questions aside, some of these savings are indeed under DLA's control and can come from prosaic changes, such as moving from MILSPEC to commercial packaging, which alone can save $150M/year in cardboard. Another way to achieve savings that can scale much further is reverse auctions. DLA is using a web application called Procurex through which providers can make their bids and know whether they have made the lowest offer or not. 5,000 auctions have been run over the past year for buys above $150K, leading to savings of 5% to 20% vs. DLA's traditional contracting.
Finally, VADM Harnitchek again reiterated his focus on meeting the audit readiness mandate by FY17. That DLA evaluated bidders through lowest-price, technically acceptable criteria and used an online reverse auction to pick an accounting firm to help assess its audit readiness may indicate the agency is a bit too much in love with its new rulebook. Fuel is fuel is fuel, and reverse online auctions make a lot of sense for fungible commodities, but accounting advice sits firmly at the opposite end of the spectrum, as a high-skill bespoke type of service. That decision will certainly drive home the point that DLA and DoD are serious about squeezing costs... and suppliers. For all the talk about partnerships and fighting costs rather than profits, the way DoD and its agencies choose to contract will ultimately send an even more powerful message.
