Summary

The Department of Defense (DOD) transports second destination freight from over 600 locations to thousands of destinations throughout the continental United States each year at a cost of approximately $900 million. In 2001, DOD conducted a prototype program to better understand whether commercial best practices--specifically the use of a third-party logistics provider--could be applied to its freight transportation system and reduce costs. The prototype, which included a 1-year base agreement with two 1-year option periods, was conducted at selected Defense Logistics Agency (DLA) and military service shipping locations in the southeastern United States. At the conclusion of the first year, DLA exercised an option to extend the prototype at its shipping locations, whereas the military service shipping locations returned to DOD's previous freight shipping system due to dissatisfaction with the prototype's performance. On the basis of the prototype, DOD concluded that a third-party logistics provider could successfully integrate with DOD transportation processes if the program was designed and implemented correctly to capitalize on the benefits of using a third-party logistics provider while also addressing the performance problems that were experienced with the prototype. In 2004, the Under Secretary of Defense for Acquisition, Technology, and Logistics initiated the Defense Transportation Coordination Initiative (DTCI) to improve the reliability, predictability, and efficiency of moving materiel within the continental United States through a long-term partnership with a third-party logistics provider. DOD issued a request for proposals in June 2006 and plans to award a contract during fiscal year 2007. The DTCI contracting vehicle will be an indefinite-delivery, requirements-type contract3 that will pay the contractor on a cost-reimbursable basis for moving freight, a monthly fixed price for management services, and a semi-annual award fee based on contractor performance. The contract covers commodities that DOD refers to as "freight all kinds"4 and excludes a number of shipment types, such as household goods; arms, ammunition, and explosives; and sensitive and classified shipments. Scheduled for a phased implementation over 3 years, DTCI will encompass 67 DLA and military service shipping locations by the end of 2009, with the potential to add almost 200 more military service shipping locations. According to DOD, freight costs at the DTCI locations are estimated at about $250 million annually. DOD has projected a savings in freight costs of approximately $60 million in the third year of implementation, after DTCI has become operational at all sites. Net savings will be less due to management costs associated with implementing DTCI. DOD views DTCI as an organizational transformation aimed at leveraging a third-party logistics provider's existing commercial business, along with its best commercial practices, to achieve efficiencies in distribution and associated cost savings. The implementation of DTCI represents a shift from the current decentralized transportation management practice of having individual DOD transportation officers manage freight, to the use of a centralized system in which a single third-party logistics provider coordinates freight transportation for the sites. DTCI is also a key DOD initiative to address distribution problems in supply chain management, which we have designated as a high-risk area in the federal government. In response to Senate Report No. 109-254 accompanying the National Defense Authorization Act for Fiscal Year 2007 and as agreed with Congress, this letter provides information on DOD's plans for implementing DTCI. Our specific objectives were to (1) identify the actions DOD took to incorporate lessons learned from the earlier prototype program in its planning for DTCI and (2) evaluate the steps DOD has taken to achieve the organizational transformation envisioned under DTCI.

DOD took numerous actions to incorporate lessons learned from the prototype program in its planning for DTCI. Specifically, we identified 36 lessons learned--including successes and problems--from the prototype, and determined that DOD had taken actions that were responsive to each of these. For example, the prototype succeeded in showing the benefits of using both electronic data interchange between the government's and contractor's systems and a Web-based tracking system to provide visibility over shipments, and DOD plans to require the DTCI contractor to use both of these technologies. However, the prototype also experienced problems in areas such as program development and implementation, information technology systems and integration, performance, business processes, and contracting. DOD, in its planning for DTCI, has made changes in response to these lessons learned. For example, during the prototype, the military services had several concerns about performance, such as the contractor's inconsistency in picking up freight on time, contributing to their dissatisfaction with that program. To address this lesson learned, the contract solicitation for DTCI includes on-time pickup as one of several key indicators to measure contractor performance. The prototype also showed that a 1-year base contract period was inadequate to secure a level of commitment or investment from the partners in a third-party logistics relationship and to develop effective communication processes. In contrast to the prototype contract, DOD plans to enter into a 3-year base agreement with a third-party logistics provider for DTCI with the option for two 1-year extensions and the possibility of two additional 1-year award options--a potential contract period totaling up to 7 years. Furthermore, the prototype experienced problems because the interfaces between the contractor's and the government's information technology systems were not fully operational when the prototype began. For DTCI, DOD has established a team addressing interface integration, and it plans to conduct robust testing at each site before DTCI is implemented. The DTCI program management office has also developed a policy of "safe start," intended to reduce risk to the government and build confidence in the partnership between the third-party logistics provider and the government. For example, according to program officials, in the initial phase of DTCI implementation, only DLA shipping sites are involved. The military service sites will not be participating until the contractor has demonstrated full capability with their system interfaces and training of shipping installation personnel is completed. While DOD incorporated lessons learned from the prototype in its planning for DTCI, DOD components pursuing similar types of acquisitions may be unable to benefit from the successes and problems experienced during implementation of DTCI because DOD lacks a plan for disseminating DTCI lessons learned. Effective sharing of lessons learned is a key tool for institutionalizing change and facilitating efficient operations. The DTCI program management office has initiated efforts to gather lessons learned. However, without dissemination of these lessons learned to the broader DOD acquisition community, other DOD components pursuing similar types of acquisitions may lack useful information that could assist their efforts. Therefore, we are recommending that DOD develop and implement a plan for sharing DTCI lessons learned across the department. In commenting on a draft of this correspondence, DOD concurred with our recommendation.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Implemented" or "Not implemented" based on our follow up work.

Recommendations for Executive Action