Financial issues overview. (Supply Support: Air Force Spares Campaign).
With the focus on the Air Force process of providing spare parts to organizations that manage and maintain weapon systems, several consistent disconnects were identified. The disconnects can be grouped around five major areas:
* Lack of price stability from year to year. Price swings make it difficult to accurately forecast budget requirements and, in the year of execution, cause disconnects between available funding and what is actually needed.
* Lack of understanding about the true costs associated with providing spares and the misalignment of cost-recovery methods used with the actual activities of the processes performed. This misalignment makes it difficult to identify and manage costs, particularly within the common business operations processes.
* Incomplete spares requirements forecasts for which spares will be needed, by whom, in what quantities, and in what timeframe.
* Inability to adjust to shifting priorities from day-to-day operations. The current process does not allow quick reactions to those changes.
* Difficulty in identifying and achieving desired levels of mission-capable weapon systems as a result of varying funding levels and changes in spares usage. This lack of cause and effect hampers adjustments in the year of execution and to future Planning, Programming, and Budgeting System (PPBS) cycles and does not give factual, analytical support for decisionmaking.
There are three major programming and financial initiatives within the Spares Campaign to address these five issues. These initiatives are intended to improve pricing and help clearly identify the cost structure of spares (depot-level repair [DLR] and cost-management). They will centralize the spares requirements determination process to establish a single, understood Air Force spares requirement for programming and budgeting purposes, as well as provide capability to track budgetary expenditures to expected availability of spares to meet the warfighter's weapon systems availability needs.
An explanation of these Spares Campaign programming and financial management initiatives and their objectives, expected outcomes, and major milestones follows.
Changes to DLR Price and Cost Structure
The overall objective of this initiative is to improve DLR price stability and better allocate the costs associated with providing spares to the warfighter's weapon systems. Current DLR pricing methodology focuses on total cost recovery at the stock number level, realized through sales. It requires that recovery of business operations and materiel replacement costs be recovered from sales that are forecast years in advance. A major cause of price fluctuations is that determining exactly what stock number will sell years in advance is not possible. Some stock numbers thought to sell will not, and not in the quantities expected, and others not expected to sell will. This occurs because a forecast is just that, a forecast, and by its nature cannot be 100-percent accurate. There is no way to determine exactly what parts will break, when, and how often. In the aggregate of all stock numbers, for budgeting purposes, one can get close, but not for each individual stock number. The result has been that, each year, ma ny individual stock numbers have seen large price swings. This confounds the budget process for the repair and operational units that buy the spares. And it leads to lost cost recovery in the year of expenditure--if a stock number that is expected to sell does not, its cost recovery factor is not achieved. This creates a bill.
The new DLR pricing structure attempts to reduce this variability. Under the initiative's methodology, all Air Force customers pay only the latest repair cost or the latest acquisition cost. The business operations costs (including inventory pipeline adjustments, business operations, replenishment buys, and non-sales-based repair), previously charged to the customer, will be centrally reimbursed to the working capital fund (WCF). The end result is a more stable price to the customer and full cost recovery to the fund. This proposal will be implemented in phases--a flat surcharge in fiscal year (FY) 2003 and 2004 for business operations cost recovery--and moves toward full implementation in FY05 once system changes can be made.
Multiple organizations within the Air Staff and the Air Force Materiel Command (AFMC) are working to ensure this initiative maintains a close tie to the cost-per-flying-hour program used by the Office of the Secretary of Defense, Office of Management and Budget, and Congress to review the Air Force budget. They are also working to develop a new WCF business operations reimbursement process and identify required system changes. Expected results, once this initiative is fully implemented, include:
* Reduced customer price volatility
* Better cost visibility throughout the spares process
* Reduced WCF losses in the execution year
* Accounting for all costs of providing spares
* Better cost management, using activity-based cost management (ABC/M)
ABC/M is an important element of this initiative. Applying it takes advantage of proven best commercial business practices. ABC/M tools can be used to better identify and understand the total cost of providing spares and give visibility to those who can best influence these costs. The Spares Campaign ABC/M initiative takes spares process business operations costs (overhead costs) and uses proven methodologies to determine which of these costs are actually incurred in the delivery of spares. ABC/M then assigns these costs to cost objects like weapon system, base, MAJCOM, or DLR. In this way, spares management business operations costs can be linked (traced) to whom or what the activity is benefiting. Overall, ABC/M should allow for better cost management; point out areas for cost improvement; and provide the capability to identify, justify, explain, and defend business operations costs.
Improving the Spares Forecasting, Programming, and Budgeting Process
The Spares Campaign is also focused on improving the spares forecasting, programming and budgeting process used to identify the total spares requirement. This second initiative focuses on improving integration of spares planning and forecasting within the PPBS process to ensure the entire spares requirement is fully understood and made visible to the Air Force corporate structure.
This initiative begins with full implementation of the Spares Requirement Review Board (SRRB), whose responsibility is to develop and agree on a single, credible Air Force total forecasted spares requirement to meet specific weapon systems availability goals. The spares requirement forecasting process had become fractured over the years. The lack of coordination among flying-hour spares consumption estimates, spares pipeline requirements and readiness spares packages yielded forecasts that were incomplete at best. This often resulted in unplanned year-of-execution bills to the Air Force. Since the flying-hour computation covered consumption requirements only, nonsales-based requirements (readiness spares packages, safety stock, and pipeline) were not always included in MAJCOM program objective memorandum (POM) submissions. These different requirements processes made total spares requirements assessment, selection, and prioritization difficult.
Under the SRRB process, all forecasted spares requirement computations are synchronized into a single, agreed-upon spares forecast for planning, programming, and budgeting. Budgeting and programming spares forecasts are created based on the best analytical data and consensus of all relevant parties. First meeting in December 2001, the SRRB process was used to develop the FY04 spares POM requirement. The work has resulted in lessons learned that will be applied to the FY05 spares forecast. With the completion of an Air Force instruction, update to the USAF Supply Manual, and publication of a process guide by the end of calendar year 2002, the SRRB will be an implemented initiative.
Another component of this initiative is expanding use of the Aircraft Availability Model logic used in computing safety levels for items in repair status. Currently, safety levels are calculated only for items in a buy status. Expanding this capability to items being repaired and improving the algorithms to include factors for price and individual weapon system aircraft availability targets (currently an average is used) should provide a more accurate safety level and better define the spares requirement.
Improved Financial Management Decisionmaking
The Spares Campaign is also taking steps to complement improvements in the spares PPBS process by developing a tool with the enhanced ability to track execution of weapon system support against the approved plan and budget. This tool will improve the ability to manage and react to variations between forecast performance and actual execution, track variations, and provide alternatives for problem resolution in real time. These capabilities will assist decisionmakers in identifying specific performance issues assessing feasible alternatives, and making adjustments where necessary.
This is a difficult undertaking, as the Ai Force spares requirements and execution processes are highly dynamic. In spite of host of existing metrics and related analyses, there is no effective automatic mechanism to track how well current year execution is performing against the approved plan (approved spares funding level). There is currently no way of directly linking execution-year funding to operational outcomes. These limitations have led to many man-hours routinely being consumed to backtrack to the cause of the perturbations between what was forecasted and approved and what performance was actually experienced. Once adjustments are identified as needed, there is no effective way to make mission-capability tradeoffs among weapon systems. The Improve Financial Management Decisionmaking initiative attempts to provide solutions to these problems.
As a solution, the Spares Campaign is evaluating the feasibility of developing a closed-loop, decision support tool that will track the execution of weapon system support against the approved plan and budget. This tool will assist the Air Force programming and budgeting planners with allocating spares support budgets to reach the best weapon systems availability given funding and repair constraints. The intent is to automatically set support system targets based on funding and operational goals, which will aid logistics planners in evaluating how close they are to their budget during execution. It will also allow them to make tradeoffs of buy-and-repair decisions among multiple systems in the execution year when operational requirements or budget allocations change. This should save considerable time (estimated 30-40 percent) in determining a course of action when faced with changes in requirements or budget authority. Additionally, the impacts of increased or decreased funding could be identified almost imme diately.
RAND is developing the analytical underpinning and overall architecture of the decision support tool. Dynamic Research Corporation (DRC), as part of the BearingPoint team, is taking the RAND developmental prototype and building the initial proof-of-principle operational model. Initial computational algorithms for the execution-year planning module have been programmed and tested. The supply repair database design has been defined and set up to directly feed the prototype-planning model. The next step is to complete the building of the test data sets, along with collection of the operations data and development of the databases that will feed the prototype-planning module.
The initial architecture was presented on 17 January and 5 February 2002 for review, and the work to date is very promising. The majority of data sources for the planning model have been identified, as well as the test cases. Data for F-15 CID, F-15 E, and block 40 F-16s have been successfully demonstrated in a limited number of repair cases. DRC is drafting a concept of operations (CONOPS) in coordination with RAND and the AFMC Management Sciences Division, Item Requirements Branch, and Financial and Analysis Branch. The CONOPS should be complete in fall 2002. Once the proof of principle is complete, Air Staff and AFMC will evaluate the tool for an implementation decision.
The Spares Campaign Programming and Financial Management initiatives are intended to address some fundamental spares support issues. Simplified pricing should allow warfighters to spend less time on financial management issues and more on warfighting issues. Better cost management should help logistics planners understand the total cost of spares ownership and give insight into areas for process and cost improvement. The Spares Requirements Review Board will provide a single spares forecast. The SRRIB forecast will present he entire spares requirement to the Air Force for programming and budgeting. While the entire forecasted requirement might not be funded, it will be recognized, and expectations for spares support can be aligned to get the best weapon systems availability given the fiscal reality at the time. The closed-loop decision support tool will provide feedback on how well the approved spares funding is meeting anticipated outcomes, primarily mission capability Taken together, these initiatives shoul d help transform Air Force logistics and better support the aerospace expeditionary force.
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Mr Newsome is senior manager, BearingPoint, Directorate of Supply Chain Integration, Air Force Deputy Chief of Staff Installations and Logistics; Lieutenant Colonel Redmon is project manager, Financial Management, Directorate of Supply Chain Integration, Air Force Deputy Chief of Staff Installations and Logistics; and Mr Terry is a consultant, BearingPoint, Directorate of Supply Chain Integration, Air Force Deputy Chief of Staff Installations and Logistics.
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|Author:||Newsome, Jon; Redmon, Verdis; Terry, Mark|
|Publication:||Air Force Journal of Logistics|
|Date:||Sep 22, 2002|
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