Increasing Cost Consciousness in the Air Force Materiel Command

1
IncreasingCost Consciousnessin theAir Force
Materiel Command

• Colonel Mark Borkowski
• Chief, Programs Division HQ AFMC/XPP
• Major General Todd Stewart
• Chief Operating Officer (Installations and
  Support)
• Professor Fred Thompson
• Willamette University

2
Air Force Materiel Command

• AFMC sells/provides Combat Support Services to
  Warfighting Commands
• 95,000 People (Military and Civilian)
• 30 Billion Worth of Work (Each Year)
• 13 major installations located in 10 states (45
  billion physical plant)
• Operations in 22 countries

3
Challenges facing AFMCInternal and External
Customers Want More Service, Faster, Less Cost
Changing Threats AEF
The Law

• Too Expensive
• Input and Budget Mindset
• Internal Focused
• Non-competitive
• Large/Aging Workforce
• Infrastructure

Reduced Budgets
Privatization Outsourcing
Aging Weapon Systems
Base Closures
4
The Response of AFMC 1

• 1992-95 - Forming and Storming"
• Merging Two Cultures
• Acquisition (AFSC) and Logistics (AFLC)

Supply, Maintenance, Depots
1992
1995
AFLC AFSC
Forming
Storming
RDTE Acquisitions (Aircraft, Munitions.
Space Systems and 3C, Computers)
5
The Response of AFMC 2

• 1995-97 - Storming and Norming
• Integrating Two Cultures
• Integrated (or Process-Complete) Life Cycle
  Approach to Weapon System Mgmt

1992
1995
1997
AFLC AFSC
Forming
Norming
Storming
6
Response of AFMC 3

• 1997- 1999 - Norming and Performing
• Business Management Approach

1992
1995
1997
Now
AFLC AFSC
Forming
Norming
Performing
Storming
7
GENERAL GEORGE T. BABBITT

• 1965 BS mechanical engineering,
• 1970 MS logistics management, AFIT
  Wright-Patterson AFB
• 1975 Program Managers Course, DSMC
• 1978 Armed Forces Staff College
• 1986 Air War College, Maxwell AFB
• 1989 Executive Program, Kellogg School of
  Management, Northwestern
• 1993 Program for Senior Managers in Government,
  John F. Kennedy School of Government, Harvard

8
Commanders Intervention 1

• We will run AFMC like a business

Application of a Business Metaphor Provided the
Tools for Dramatic and Immediate Intervention by
the Commander
9
Commanders Intervention 2

• Divisionalization
• ID Products and Costs
• Reinforce the Business Metaphor at Every
  Opportunity

10
Commanders Guidance

• Focus on the mission
• Know your customers
• Plan, program, budget, execute, and report
  results
• Be both effective and efficient
• Set goals and measure results for both
  operational and financial performance

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Commanders Guidance

• Know the products and services you provide and
  deliver them with quality, responsiveness, and on
  cost
• Manage the total cost of the output, not inputs
• Set annual goals to improve quality and
  responsiveness and drive down unit costs

12
Commanders Guidance

• You are responsible and accountable for both
  performance and cost
• You will be cost managers, not budget managers
• Your job is to deliver products and services that
  meet performance standards and reduced unit cost
  targets, through continuous process improvement
  your job is not to acquire bigger budgets and
  spend it all

13
Commanders Guidance

• For products and services that meet performance
  (quality) standards, drive down unit cost
• For products and services that dont meet
  performance standards, improve the performance
  (quality), without increasing the unit cost

14
Commanders Guidance

• The Business Management Approach IS Morally and
  Ethically Correct
• Warfighters must be sold on AFMCs Products --
  or they wont (and shouldnt) support them
• AFMC Must Reduce Its Infrastructure and Support
  Costs to Provide Funds for Readiness and
  Modernization
• It is the law (GPRA and CFOA )

15
Business Management Approach-- Components

• Structural Alignment (Divisionalization --
  Business Areas/ responsibility structures)
• Responsibility defined in terms of Cost as well
  as Performance

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Management Structure

AFMCs products are managed and supported by
eight business areas...
Science and Technology
Test and Evaluation
Mission Centers External Customers
Product Support
Information Services
Supply Management
Depot Maintenance
Support Centers Internal Customers

Information Management
Installations and Support
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AFMC Business Areas

• Each business area has
• Defined Customers
• Unique products and services
• Product specific assets and resources
• Performance measures and standards
• Cost measures and targets
• A Responsible/Accountable chief operating officer
  (COO)

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Installations and Support (IS) Outputs
Product/Service Structure
More than 65 IS products and services
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SERVICE PERFORMANCE IN SUPPLY MANAGEMENT
Service efforts Service Accomplishments
EFFICIENCY Inputs Required to Achieve
Outputs EFFECTIVENESS Customer Satisfaction
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SERVICE PERFORMANCE IN PRODUCT SUPPORT (Informatio
n collected by Program, Center, phase, and/or
acquisition category)
Service Efforts
Service Accomplishments
EFFICIENCY Procurement Dollars Managed per
Dollar Spent, RDTE Dollars Managed, Technical
Order Dollars Managed, Sustainment Dollars
Managed Per Dollar Spent EFFECTIVENESS
Satisfaction of MAJCOMs, SAF Acquisition Office,
etc.
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Making Responsibility REAL

• Cultivate Collective Responsibility/Accountability
  
• Structuring jobs with overlapping
  responsibilities
• Base rewards on unit performance
• Designing procedures and work layout so that
  employees with different jobs can collaborate
• Focus on Responsibility -- Hold Managers
  (especially COOS) to Their Commitments. Reward
  them for Exceeding Targets.

22
Cost Management Mindset

• Reward people for leadership in meeting
  operational performance and cost-reduction
  targets (practice target costing)
• Decentralize performance and cost management
  decision authority

23
Using Break-even Analysis to Set Target
Cost/Price Target Revenue Target Cost

• For each product,
• TR PQ
• TC DC IC GAC
• where
• P Target price to customer or unit cost
• Q Quantity of service output
• DC Direct Cost
• IC Indirect Cost GAC General and
  Administrative Costs allocated to the output

• Hence P
• (DC IC GAC)/Q
• AFMC used this approach to set unit cost
  standards, less 5 to set financial targets that
  each COO was expected to achieve --
• OR BEAT

24
Cost And Performance Analysis

• COOs do cost and performance best practices
  analysis to identify opportunities for
  improvement
• Analysis of Variance among bases
• Benchmarking with outside organizations
• Other MAJCOMs and services/agencies
• Public sector (e.g., Indianapolis and Sunnyvale)
• Private sector

25
Cost-reduction Initiatives

• Capital Asset Management
• Base realignment and closure
• Privatization
• Public/private partnerships
• Process Improvement
• Re-engineering
• Competition (outsourcing)
• Technology
• Performance-based standards

26
Results

• AFMC reduced its operating costs this year by
  2.7 billion
• Paid a 1.1 billion bill issued to AFMC by HQ
  USAF
• Will return another 1.4 billion in savings to HQ
  USAF
• Will reinvest .3 billion to achieve future
  savings/performance improvements

27
Some Constraints

• Capabilities
• Lack of Well-Understood and Common Processes --
  Programming, Budgeting, Accounting
• Lack of Adequate Accounting and Information
  Systems
• Culture
• Lack of Understanding of the Business Metaphor
• Conflict Between Budget and Cost Focus
• Conflict Between Chain of Command and
  Divisionalized Structure and Functional
  Communities and Process-Complete Program
  Management
• Structure
• Madisonian Mess (Color of Money problem)

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Budget vs. Cost Management

• Budget Management
• Focus on spending and on the source of Funds
• Spend everything
• BA is an Asset
• Deploying that asset is a top management function

• Cost Management
• Focus on accomplishments
• Cut Costs/Maximize Productivity
• BA is a Liability
• Decentralize Decisions to those best situated to
  Maximize Productivity

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PROBLEM

• Before you can manage and control your costs
  with confidence, you need to know what they are
  and understand what they mean

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Needed High Fidelity Definition of AFMC
ProductsAccurate Accounting for Unit Costs of
Those Products
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Performance and Cost

• Need to understand the relationship between
• Operational performance (outputs)
• Quantity
• Quality
• Cost
• Unit Cost
• Total Cost

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Activity-Based Costing (ABC)

• Chart the flow of activities needed to design,
  create, and deliver a service
• For each activity determine its associated cost
  and the cause of that cost, or cost driver
• Determine whether the step adds value for the
  customer and, if it is non-value adding,
  eliminate it and its associated cost
• Determine the cycle time of each activity and its
  cycle efficiency (value-added time/total time)
  and
• Improve cycle efficiency and reduce associated
  costs due to delays, excesses, and unevenness in
  activities.

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Realignment

• Align AFMCs Administrative and Responsibility
  Structures with its market and service delivery
  strategy.
• Align AFMCs organizations Control/Reward
  Structure with its administrative and
  responsibility structures
• Align AFMCs Human Resource Management Practices
  its control/reward structure.