Army's Directorate of Logistics Saves $6 Million with Activity Based Costing.

Our activity-based costing/management/budgeting program at the Army's Directorate of Logistics, Fort Riley Kansas, has produced remarkable results--a 34 percent reduction in manpower and $6 million in annual savings.

Every employee in every activity center participated in defining step-by-step activities to accomplish every task in the Directorate. By measuring the accomplishment time and applying skill and grade and workload data, we were able to define the true manpower requirement for each activity. And the requirement was almost always less than we had expected. Using this methodology, we redefined our process and restructured our organization to focus on the customer. The result was dramatic operating efficiencies.

The installation's Directorate of Logistics is a 650-employee organization with a $34-million operating budget and a $ 130-million stock fund (supplies) budget. It is responsible for transportation, supply, maintenance, services, and equipment readiness for the Army. Facing the inevitable pressures that come when a nation begins to place a higher proportion of its national treasures into programs other than defense, the Directorate of Logistics at Fort Riley sought a method to systematically contend with fiscal reductions.

Our approach was to conduct an in-depth, process-oriented management study. We decided to build a team and asked the members to start by examining our reason for existing. We next asked them to lay out the step-by-step requirements to accomplish our reason for being and then let a lean, minimum-overhead organization with attendant resource requirements fall our. The study was also to provide for continuous improvement opportunities. It was clear that one best approach existed: activity-based costing and management (ABC/M)--the natural, common-sense approach to accomplishing the task at hand.

We adopted an academic principle that Southwest Airlines has enjoyed success with: that of turning the organization "upside down." To better focus our efforts on the essence of this project--improved service to our customers--the soldier was placed at the top of our organization chart. The top organizational line became those activity centers that touched the customer on a day-to-day basis, the most important elements in our organization. The empowerment of employees would prove to be extremely valuable.

Overhead, including the Director, became the lower element of our organization, with the primary mission of providing resources to the first line in order to enable first-class customer support. Learning from other businesses, we adopted their applicable best practices. (We used practices from Toyota, SeaLand, Alcoa, Mars, Boeing, and others.)

Because Commercial Activities Study requirements loomed, we sought assistance from a consulting agency that could give us an experience base to accomplish A76 requirements as we proceeded with our ABC/M-based study. Fortunately, we received a demonstration from Interactive Technologies Group.

While learning their approach, we discovered their Systems Process Assessment Reengineering and Redesign Comparison (SPARRC) method to be a significant activity-based costing/ management/ budgeting/planning (ABCIM/B/P) enabler. In fact, we quickly discovered that ABC/M/B/P and SPARRC are joined at the hip. SPARRC enables an organization to deploy ABC/M/B/P simultaneously and relatively quickly.

We examined our strategic plan by looking very closely at our reason for being. Our key processes fell out of that examination, and they became our cost objects.

Then every employee of each activity center (generally aligned with organizational elements) attended iterative workshops to lay out the step-by-step activities--the heart of ABC--needed to accomplish our reason for being (cost objects). Using the Functionally Enhanced Manhours and Workload (FENYX) routine in the SPARRC model, a resolute ABC Activities Model was built and simultaneously workloaded using "per accomplishment time" (PAT) and frequency as primary drivers. Thereby the first ABM iteration occurred as the ABC model was being developed and populated because, for the first time, employees focused on the frequency of activities and the time it took to accomplish those activities. Reengineering inevitably resulted from the start.

A technical physical, an evaluation by ABC Technologies' (Beaverton, Oregon) technical services team, was of central importance at this point. The physical propelled us months ahead in the development of our approach. The refining process was enhanced through Pareto and value-added analysis. The SPARRC/FENYX program automatically provides the Pareto charts, which enabled all employees to see how they spent their time (instead of having to maintain arduous daily time survey sheets).

Further, by measuring the PAT and applying skill and grade and workload data, we were able to accurately define the true manpower requirement for the activity, almost always significantly less than previously thought. Involving our customers in the process further enhanced the refining process.

Attributes were used to conduct value added analysis. In addition to involving customers in workshops, we conducted an installation-wide customer survey, and we used the results to redefine our organization based on their assessment of value. In addition to modifying and eliminating many activities, we reduced much overhead during this phase. We also conducted iterative internal command climate surveys to give employees yet another method to contribute their ideas. Also, every employee was given access to e-mail and the Internet to facilitate open communication. The very best innovations came from employees.

Within six months, our ABC model had become resolute and valuable. We found that developing and linking the cost object module and the activities module were relatively easy and enjoyable. It was, however, relatively difficult to link the resource module with Defense Finance and Accounting Systems because the formats are so opposed.

Our goal was to have our resource managers build the activities-resource-Standard Army Finance Systems links so that we could build our FY 2000 budget forecasts using the ABC model. We desired to develop the means to manage, automatically, by populating directly from Defense Automated Systems. We have largely broken the code. We now have an FY 2000 budget based on ABC data, with month-by-month forecasts and a means to populate them so that we can see actuals compared to forecasts monthly.

SPARRC has been a great enabler. In fact, SPARRC and ABC are quite similar. Indeed, one of the significant merits of SPARRC is that it facilitates building the budget forecast and execution paths as the ABC/M/B/P management model is developed.

Several ABC Technologies' applications assistance visits were critical to our success, and they will be required as we continue to mature in our ABC/M effort. As a note, we considered it very important to bring in ABC experts who had experienced multiple full deployments. We viewed this change to ABM as an overarching change in management methodology metaphorically akin to open-chest surgery, and we therefore sought out experienced ABC "surgeons" whom we "interns" could watch and learn from.

ABC/M/B is too often viewed as a Financial technique or a financial management system. If properly applied, it is instead a revolutionary means for the Army and, perhaps, the Department of Defense to manage as it has never been able to do so before. Using this methodology, tremendous efficiencies can be attained, and the cost associated with maintaining trained and ready soldiers, ready equipment, and a satisfactory quality of life can be seen much more dearly. Further, ABC/M may very well unveil from within the resources required to underwrite necessary Army reshaping initiatives.

The results of our efforts have been significant. Most importantly, our organization is now focused on the customer. Our "upside-down" organization now has two layers rather than seven, with the customer at the top. Employees feel empowered and important. We have eliminated deputies, division chiefs, branch chiefs, section chiefs, and subsection chiefs. Communication channels are open, short, and quick. Administrative help has been pooled. Collocations and consolidations have eliminated redundancies. We have reduced our noncontracted manpower by 34 percent and our annual operating costs by $6 million.

And we are only beginning. Our next iteration will result in exponentially larger increases in efficiency at much less cost.

Today we are in our second phase. ABC/M/B/P, all of which were simultaneously deployed using SPARRC/FENYX, has become an institution. We have a long way to go to reach maturity with ABC/M, but we speak the language. We refine monthly, even daily.

Our performance measures are ABC based; our internal action plan is ABC based and is linked directly to installation and higher headquarters strategic plans; we are integrating ISO 9000 into our model; our budget and execution data are in ABC format; we are benchmarking with an array of internal and external entities. And, perhaps the most compelling aspect, our employees and our customers are vested in what we do. It is their product, their system, and the Army is much ahead as a result.

It's as easy as ABC.

Gory L LaGrange is Director of Logistics at Fort Riley, Kansas. He has championed the deployment of ABC/M/B/P in the functions of Transportation, Maintenance, Supply, Services, and Readiness. A retired Army colonel, Mr. LaGrange served as CEO and President of a manufacturing and distribution corporation for five years before reentering federal service. He holds a BBA and an MBA from the University of Iowa and an MS in contract law and management from the Florida Institute of Technology.