Pentagon officials hold a briefing in Washington, D.C. (photo: Win McNamee/Getty Images)
'How
Do You Buy $7 Billion of Stuff You Don't Need?'
By Bryan Bender, Politico
29 December 15
Bad things happen when the Pentagon tries to run itself like a
business.
Fifty-four
years ago, the brand-new Secretary of Defense Robert McNamara thought he could
bring Pentagon spending on everyday items under control by applying
efficiencies he had used to help turn around Ford Motor Co.
Instead,
he created a monster. McNamara’s creation, known as the Defense Logistics
Agency, has grown into a global, $44 billion operation that, were it a private
enterprise, would rank in the Fortune 50. Its 25,000 employees process roughly
100,000 orders a day for everything from poultry to pharmaceuticals, precious
metals to aircraft parts. In terms of Pentagon contracts, it is nearly as large
as Boeing and Lockheed Martin, the Pentagon’s largest contractors, combined.
Key Players
Air Force Lt. Gen. Andrew Busch is director of the Defense Logistics Agency. "Being audited... puts us in a position to more fully explain to the American public what we're doing with all of those dollars."
Denise Parker oversees DLA's audit readiness effort at its network of distribution centers. "When we started we didn't know how to check it as well as we do know."
Simone Reba is the DLA's deputy director of finance. "Stuff we thought should be on our books we didn¹t have it in our records. Our financial system was not reflecting the right inventory."
Sen. Charles Grassley, a senior member of the Budget and Finance Committees, has demanded the Pentagon undergo a full financial audit for years. "This broken accounting system isn't an option. The Constitution requires that we know where the money is spent."
Arnold Punaro is a retired Marine Corps general and the former staff director of the Senate Armed Services Committee. He believes that a major problem with DLA is that it¹s effectively a business "run by three-star [generals or admirals] with no management experience."
Mae Devincentis retired as the agency¹s vice director in 2012 after more than three decades at DLA. A major financial challenge for the agency, she says, is its sheer size. "When you get more missions you get a higher level of complexity."
Air Force Lt. Gen. Andrew Busch is director of the Defense Logistics Agency. "Being audited... puts us in a position to more fully explain to the American public what we're doing with all of those dollars."
Denise Parker oversees DLA's audit readiness effort at its network of distribution centers. "When we started we didn't know how to check it as well as we do know."
Simone Reba is the DLA's deputy director of finance. "Stuff we thought should be on our books we didn¹t have it in our records. Our financial system was not reflecting the right inventory."
Sen. Charles Grassley, a senior member of the Budget and Finance Committees, has demanded the Pentagon undergo a full financial audit for years. "This broken accounting system isn't an option. The Constitution requires that we know where the money is spent."
Arnold Punaro is a retired Marine Corps general and the former staff director of the Senate Armed Services Committee. He believes that a major problem with DLA is that it¹s effectively a business "run by three-star [generals or admirals] with no management experience."
Mae Devincentis retired as the agency¹s vice director in 2012 after more than three decades at DLA. A major financial challenge for the agency, she says, is its sheer size. "When you get more missions you get a higher level of complexity."
Led by
military officials with little or no private-sector experience, DLA lacks the
redeeming features of the lean and efficient business McNamara envisioned. A
trail of inspector general reports shows how DLA is systemically overcharged
for parts. It buys things the military doesn’t need — like 80 years worth of
aircraft frames for a plane that will likely be out of use long before then.
The Government Accountability Office in 2010 estimated that about half of the
agency's inventory — said to be worth nearly $14 billion at the time — was just
taking up space.
"How
do you buy $7 billion of stuff you don't need?" exclaimed Arnold Punaro, a
retired major general in the Marine Corps Reserve who is currently overseeing a
special task force on logistics for the Pentagon's Defense Business Board.
"If a company did that they'd be out of business. Even Wal-Mart."
Congress
is now demanding that the entire Department of Defense undergo its first-ever
financial audit. And DLA, which after three years of preparation says it is
ready for a full scrub of its books, is the test case. A series of mock audits
underway for three years demonstrate the enormous challenge.
“We
found out the first year how much we really didn’t know,” Simone Reba, the
deputy director of finance for the DLA, said in an interview at the agency’s
Fort Belvoir, Virginia, headquarters outside Washington. “Stuff we thought
should be on our books we didn’t have it in our records. Our financial system
was not reflecting the right inventory."
Even
those who are intimately familiar with the Pentagon’s notorious reputation for
waste are shocked by what the audits are finding — or rather not finding.
In
some instances, DLA recently found, there was simply no way to locate
inventory. Remarked Reba: “It seems it would be pretty easy to track a
firetruck."
***
In
1961, the administration of John F. Kennedy was new, and so was the thinking
among his new generation of "whiz kids" who descended on Washington
from Ivy League schools and corporate America. It was a good time to reform a
system that had grown flabby and complacent.
Attempts
had been made in the previous decade to streamline purchasing by giving each
military branch authority over broad sectors — the Army had food and clothing,
the Navy had fuel and medical supplies and the Air Force handled electronics,
for example. But the lack of uniformity undermined the intent of the reform.
The
44-year-old McNamara, who had spent World War II analyzing the effectiveness of
bombers operating in the Pacific theater, was well-suited to the task of
reining in a budget for logistics.
It has
often been said that the history of the Pentagon was defined by two eras:
before McNamara and after McNamara, due to the reforms he initiated in how the
armed forces prepared for and fought wars but also the administrative and
managerial reforms he instituted.
But
the verdict on many of those reforms, like his handling of the Vietnam War, was
not always kind.
"Many
of his reforms were seen as impractical. Even if they were conceptually sound,
the quantity and quality of organizational effort required to carry out McNamara's
innovations frequently exceeded the Pentagon's capacity, as well as its
will," an assessment published by Harvard University, where McNamara had
previously taught, concluded nearly three decades later.
McNamara's
order in October of ‘61 established what was then called the Defense Supply
Agency, which oversaw eight different supply centers. But it was just the
beginning of a consolidation of military supply and logistics activities that
advanced over the next several decades.
In the
early 1970s, the supply agency went international, put in charge of
"worldwide procurement, management, and distribution of coal and bulk
petroleum products," as well as all food to feed the troops, according to
an official DLA history.
In the
1980s, by which time it had been renamed the Defense Logistics Agency, it was
given another mission: stockpiling "strategic materials" such as
precious metals and industrial grade diamonds. The materials, once stored in
caves and now kept in a bank vault and other secure locations, are hoarded for
national security in case a global war cuts off access to international
supplies. The diamonds, for instance, are essential to sharpen machine tools
and to make components for tanks, warships and bombers.
But as
it grew — including taking on the purchasing of some items for other customers
such as the Federal Emergency Management Agency and the U.S. Forestry Service
and responding to a host of humanitarian disasters around the world — so did
the warning signs that DLA was becoming too large for its own good.
A 1999
Pentagon report to Congress estimated that there were 300 separate reform
initiatives focused on improving the military's logistics support system —
"an unprecedented level of emphasis on management improvement." But
all the reforms couldn’t quite solve the problems. The department's inspector
general cited "poor logistics management" and "cumbersome
financial management” and criticized the Pentagon for paying "excessive
prices for spare parts." The review also hit the agency for "poor visibility"
over the location of items in transit to military units and for failing to
transfer unneeded items to other branches before disposing of them.
The
reports — and their monotonously similar complaints — just keep coming.
One
recent example is the purchase of spare parts from Bell Helicopter and Boeing
for the V-22 Osprey tiltrotor aircraft — a process managed by DLA for the Naval
Supply Systems Command.
The
Pentagon inspector general reviewed 53 parts at random and discovered that DLA
bought 22 too many of them, at a total cost of $9 million. The report
concluded, with some understatement, that DLA “did not effectively manage
government-owned V-22 Osprey spare parts.”
One of
those parts was aircraft frames. Even though on average only two replacements
are needed each year, DLA had purchased 166. That's a nearly 80-year supply,
which is decades longer than the expected usefulness of the V-22 fleet. The
inspector general also estimated that it will cost the Pentagon $700,000 to
store all the unneeded equipment over the next five years.
In
response to the findings, DLA officials insisted they regularly review
quantities of spare parts to prevent "over-procurements." But the
investigators found that while the process evaluated existing purchase orders,
it "did not evaluate whether existing spare parts inventory quantities
were reasonable."
Another
recent Pentagon IG report calculated that the government could save $7.2
million over six years if DLA would stop buying cars and trucks for government
agencies that didn’t need them.
What
it buys, it often overpays for. Earlier this year, DLA contracted to buy
aircraft braking systems, but the officer in charge didn’t do a sufficient
price analysis, as required by regulations. According to an internal review
designated "for official use only," this oversight resulted in $8.5
million being overpaid for 32 different parts that were purchased without
seeking other bids.
The
GAO, the oversight arm of Congress, has repeatedly flagged systemic management
problems at the agency. The congressional watchdog found in 2010 that "the
average annual value of the inventory for the 3 years reviewed was about $13.7
billion. Of this total, about $7.1 billion (52 percent) was beyond the amount
needed to meet the requirements objective."
Translation:
Half of what the DLA has purchased may never be used. Wal-Mart, by comparison,
turns over its entire worldwide inventory eight times a year.
"When
you get more missions, you get a higher level of complexity," said Mae
Devincentis, who retired as the agency's vice director in 2012 after more than
three decades at DLA. "That has been part of their problem."
DLA
has made some progress becoming more efficient over the years, but a study
published earlier this fall by the Center for Strategic and International
Studies shows how far it has to go to reach McNamara’s vision. For example, if
DLA adopted business practices for spare parts commonly utilized by private
industry — particularly the airline industry, the report’s authors suggested —
it could save a billion dollars a year.
Punaro,
the member of the Defense Business Board, believes a major problem with DLA is
that it is effectively a government-run business. But like other similar
Pentagon enterprises — including agencies that acquire health and information
services or run military commissaries and missile defense programs — it doesn't
use the same business practices.
"They
don't treat them like businesses and they don't run them like businesses. They
are run by three-star [generals or admirals] with no management
experience," said Punaro, who also served as staff director of the Senate
Armed Services Committee. "In the private sector, everything runs on one
system," he added. At DLA, "they don't have a single database that
tracks everything."
Yet
Punaro also believes that some of the underlying forces are out of DLA's
control.
DLA
has "a terrible customer" in the Pentagon, he said. "It has no
sense of value or time. No one in the Pentagon is looking for a bargain on most
days. It's a cultural thing. These are people that will ship a pallet of water
on a C-17” cargo plane.
***
DLA’s
inventory flows in and out of 28 massive distribution facilities around the
world. One of them is the Susquehanna Distribution Center, in New Cumberland,
Pennsylvania, a few hours from Washington.
Inside
the sprawling complex is a massive repository, nearly seven stories tall, that
has been dubbed the “high rise.” On a recent afternoon, a technician operating
an elevated crane slid into the shadows between two of the hulking gray storage
towers to retrieve a small bell crank — to be shipped to the USS America.
It
took a few minutes to locate the palm-sized item, box it and send it on its way
— a success by most measures. But the truth is that no one can say with
certainty what the exact contents of this distribution center are, which is why
it is ground zero for the attempt to pass a financial audit.
Inside
policy circles, the fact that the Pentagon, a $700-billion-a-year enterprise,
has never been audited is emblematic of government’s complacency about waste.
An accounting of what money comes in and how exactly it goes out, of course, is
considered the norm in private industry.
But
there’s little that’s routine about an audit of the military, as the Marine
Corps’ recent experience attests. In 2013, Pentagon officials selected the
Corps, the smallest of the branches, to be audited first. When the Pentagon
inspector general last year gave it a clean audit opinion for its 2012 budget,
military officials trumpeted it as a major milestone. Then-Secretary of Defense
Chuck Hagel even gave the Marine Corps an award.
This
year, after further scrutiny by the GAO and others, the audit had to be
withdrawn. There were allegations that Pentagon officials approved it even
though they knew the books were incomplete and some of the data inaccurate. The
accounting firm that prepared the Marine Corps audit, Grant Thornton LLP, was
fired earlier this year as a result.
Sen.
Chuck Grassley, an Iowa Republican who has been among the most dogged members
of Congress in demanding an audit of the Pentagon, took to the Senate floor
this summer to rail against the Marine Corps effort, calling it "a
disaster."
The
DLA is trying desperately to avoid another one. But the challenges are proving
immense — requiring an army of independent outside auditors, including one to
be selected under a new contract DLA will award early next year.
Audits
depend on a paper trail. But DLA has had difficulty locating basic contracts,
known as "interdepartmental purchase requests," it inks with other
agencies that specify the supplies or services being provided or requested.
"We
couldn't find them," Reba, the agency's deputy director of finance, said.
"You could show them there was a new roof, but did you pay the right
amount? And can you pull those documents very quickly? If it takes you three
months to pull it, [the auditors] don't think you have good control over your
processes."
***
Across
the Pennsylvania distribution center from the "high rise" storage
units, a technician sat at a sparsely decorated metal desk with a computer in
the middle of the vast facility surrounded by boxes filled with circuit board
assemblies, each packaged in a shiny padded envelope.
His
task was to make sure all of them were recorded in the computer, the quantities
matched with what was originally ordered, they were stored in their designated
place and labeled with their correct shelf life, and that the items were also
"matched with the purchase manager folks so they know they are in custody
and can pay the vendor," explained Denise Parker, who is overseeing DLA's
audit readiness efforts at its network of distribution centers.
Easier
said than done.
"This
is kind of hard to read. It's all blurry," said the warehouse technician.
In
another section of the vast facility called the "walk and pick," red
bins filled with specialty items lined either side of a long conveyor belt.
Employees handpicked the items to fill orders — at a rate of 35 per hour. There
were bins filled with signal horns, magnifier lenses, toggle switches, pistol
grips, belts, buckles and various types of hoses. Here, as part of the audit
prep, DLA has instituted a "floor to book" process designed to
physically track supplies and match them with the ledgers.
"When
we started, we didn't know how to check it as well as we do now," Parker
said.
"We didn't know how to audit the transactions as well."
DLA
officials stress that unlike the Marine Corps, which completed only a statement
of budget activity — outlining budget authority and how it is broadly being
spent — DLA is preparing to complete the more rigorous, multistep process
followed in the private sector, including preparing a balance sheet that lists
assets and liabilities, a statement of yearly revenue and a so-called statement
of net position that delineates transactions for several years.
"We
are ready for audit. We believe we have done enough to pass. No one is as far
along as we are," said Reba.
The
hope is the audit of DLA will finally account for how all — or at least the
vast majority — of DLA's funds are being spent. And lead to real change.
"We
are accountable to the American public for every one of those dollars,"
Air Force Lt. Gen. Andrew Busch, DLA's current director, told POLITICO in a
statement. "Being audited, even just being audit ready, helps us better
manage what we do and puts us in a position to more fully explain to the
American public what we're doing with all of those dollars."
But he
acknowledged the obstacles that lie ahead.
"There
is no real experience in DoD to perform audits, no one to scout out the path on
how to do this gargantuan task," he explained. "We went through a
number of iterations, but it wasn't until we decided to have professional
auditors come and show us what it meant to be audited, to prepare for an audit,
did we finally realize what right looks like."
Passing
an independent audit — first at DLA and then across the whole Pentagon — is
increasingly seen by the department's own leadership as critical in an era of
tighter budgets.
John
Conger, a senior Pentagon official, told a Senate panel last month that the
Pentagon suffers from a "credibility" problem due to its lack of
financial accountability.
"Without
a clean audit, it is harder to make the case that we are efficiently using all
of the funds Congress has provided us, even as we request more," he said.
"I
think a lot is riding on it," added Devincentis, the agency's former vice
director. "DLA is viewed as one of the more complex. It will help reveal
what it takes to pass these audits. They know there are going to be issues that
are going to be uncovered."
If the
agency at which she worked for more than three decades can succeed, she added,
an enduring challenge will be to remain in an "audit ready state" —
in other words, to keep the books accurate.
"You
can take a snapshot at a point in time, but the problems arise when you change
your processes and change data flows — now you have undone things."
Many
who have watched the agency closely for years are deeply wary that the agency
can get a clean bill of financial health anytime soon — including Charles
Murphy, a longtime aide to Grassley who has tracked the government's lack of
financial accountability for more than two decades.
Murphy
said he has serious doubts about the accuracy of the data that are available.
"It
is not just the documentation that is the problem," Murphy said in an
interview. "It is also the accuracy of the accounting information in these
systems. You need the documentation to support those entries. But the entries
themselves are largely inaccurate. The transaction data is just not
reliable."
"This
broken accounting system isn't an option," Grassley told POLITICO.
"The Constitution requires that we know where the money is spent. So what
DLA says they are ready to do? I hope they are right.”
But
even the cleanest financial audit in the world won't solve what many observers
insist is a much bigger problem:
Why
did the agency buy all this stuff in the first place?
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