Increasing

Cost Consciousnessin the

Air Force Materiel CommandColonel Mark BorkowskiColonel Mark Borkowski

Chief, Programs Division HQ AFMC/XPPChief, Programs Division HQ AFMC/XPP

Major General Todd StewartMajor General Todd StewartChief Operating Officer (Installations and Support)Chief Operating Officer (Installations and Support)

Professor Fred ThompsonProfessor Fred ThompsonWillamette UniversityWillamette University

Air Force Materiel Command

• AFMC sells/provides Combat Support AFMC sells/provides Combat Support Services to Warfighting CommandsServices to Warfighting Commands

• 95,000 People (Military and Civilian)95,000 People (Military and Civilian)• $30+ Billion Worth of Work (Each Year)$30+ Billion Worth of Work (Each Year)

• 13 major installations located in 10 states 13 major installations located in 10 states ($45 billion physical plant)($45 billion physical plant)

• Operations in 22 countriesOperations in 22 countries

Challenges facing AFMC:Internal and External

• Too ExpensiveToo Expensive• Input and Budget MindsetInput and Budget Mindset

• Internal FocusedInternal Focused• Non-competitiveNon-competitive

• Large/Aging WorkforceLarge/Aging Workforce& Infrastructure& Infrastructure

Customers Customers Want: More

Want: More Service, Service, Faster, Less

Faster, Less CostCost

Privatization Privatization

OutsourcingOutsourcing

Reduced Reduced BudgetsBudgets

Changing

Changing

Threats Threats

AEFAEF

Aging Aging

WeaponWeapon

SystemsSystems

Base Base

ClosuresClosures

Combat Support to the War Fighter

The LawThe Law

The Response of AFMCThe Response of AFMC 1 1

• 1992-95 - ”Forming and Storming"

•Merging Two Cultures

•Acquisition (AFSC) and Logistics (AFLC)

AFLC&

AFSCForm

ing

Forming

1992 1995

Storming

Storming

Supply, Maintenance, Depots

R&D;T&E; Acquisitions (Aircraft, Munitions. Space Systems and 3C, &

Computers)

The Response of AFMC The Response of AFMC 22

• 1995-97 - “Storming and Norming”

• Integrating Two Cultures

• Integrated (or Process-Complete) Life Cycle Approach to Weapon System Mgmt

AFLC&

AFSCForm

ing

Forming

Norming

Norming

1992 1995 1997

Storming

Storming

Response of AFMC Response of AFMC 33

• 1997- 1999 - Norming and Performing

• “Business Management” Approach

AFLC&

AFSCForm

ing

Forming

Norming

Norming

19921992 19951995 19971997 NowNow

Storming

Storming

Perform

ing

Perform

ing

GENERAL GEORGE T. BABBITT

• 1965 BS mechanical engineering, 1965 BS mechanical engineering, • 1970 MS logistics management, 1970 MS logistics management,

AFIT Wright-Patterson AFBAFIT Wright-Patterson AFB• 1975 Program Managers Course, 1975 Program Managers Course,

DSMCDSMC• 1978 Armed Forces Staff College1978 Armed Forces Staff College• 1986 Air War College, Maxwell AFB1986 Air War College, Maxwell AFB• 1989 Executive Program, Kellogg 1989 Executive Program, Kellogg

School of Management, School of Management, Northwestern Northwestern

• 1993 Program for Senior Managers 1993 Program for Senior Managers in Government, John F. Kennedy in Government, John F. Kennedy School of Government, HarvardSchool of Government, Harvard

Commander’s Intervention 1:

We will run AFMC We will run AFMC like a businesslike a business

Application of a Business Metaphor Provided the Tools for Dramatic and

Immediate Intervention by the Commander

Commander’s Intervention 2:

• DivisionalizationDivisionalization

–ID Products and Costs ID Products and Costs

• Reinforce the Business Reinforce the Business

Metaphor at Every OpportunityMetaphor at Every Opportunity

Commander’s Guidance

• Focus on the missionFocus on the mission

• Know your customersKnow your customers

• Plan, program, budget, execute, and Plan, program, budget, execute, and report results report results

• Be Be bothboth effective and efficient effective and efficient

• Set goals and measure results for Set goals and measure results for both operational and financial both operational and financial performanceperformance

Commander’s Guidance

• Know the products and services Know the products and services you provide and deliver them with you provide and deliver them with quality, responsiveness, and on quality, responsiveness, and on costcost

• Manage the total cost of the output, Manage the total cost of the output, not inputsnot inputs

• Set annual goals to improve quality Set annual goals to improve quality and responsiveness and drive down and responsiveness and drive down unit costsunit costs

Commander’s Guidance

• YouYou are responsible and accountable are responsible and accountable for for bothboth performance and cost performance and cost

• YouYou will be cost managers, not budget will be cost managers, not budget managersmanagers

• YourYour job is to deliver products and job is to deliver products and services that meet performance services that meet performance standards and reduced unit cost standards and reduced unit cost targets, through continuous process targets, through continuous process improvement … your job is improvement … your job is notnot to to acquire bigger budgets and spend it allacquire bigger budgets and spend it all

Commander’s Guidance

• For products and services that meet For products and services that meet performance (quality) standards, drive performance (quality) standards, drive down unit costdown unit cost

• For products and services that don’t For products and services that don’t meet performance standards, improve meet performance standards, improve the performance (quality), without the performance (quality), without increasing the unit costincreasing the unit cost

Commander’s Guidance

• The Business Management Approach IS The Business Management Approach IS Morally and Ethically CorrectMorally and Ethically Correct

• Warfighters must be sold on AFMC’’s Warfighters must be sold on AFMC’’s Products -- Products -- or they won’t (and shouldn’t) or they won’t (and shouldn’t) support themsupport them

• AFMC Must Reduce Its Infrastructure and AFMC Must Reduce Its Infrastructure and Support Costs to Provide Funds for Support Costs to Provide Funds for Readiness and ModernizationReadiness and Modernization

• It is the law (GPRA and CFOA )It is the law (GPRA and CFOA )

Business Management Approach-- Components

• Structural Alignment (Divisionalization -- Structural Alignment (Divisionalization -- Business Areas/ responsibility structures)Business Areas/ responsibility structures)

• Responsibility defined in terms of Cost as Responsibility defined in terms of Cost as well as Performancewell as Performance

Management StructureManagement StructureAFMC’s products are managed and supportedAFMC’s products are managed and supportedby eight business areas...by eight business areas...

}Mission Mission Centers:Centers:

ExternalExternalCustomersCustomers

Installations and SupportInstallations and Support

Information ManagementInformation Management }Support Support Centers: Centers: InternalInternal

CustomersCustomers

Test and EvaluationTest and Evaluation

Product SupportProduct Support

Information ServicesInformation Services

Supply ManagementSupply Management

Depot MaintenanceDepot Maintenance

Science and TechnologyScience and Technology

AFMC Business Areas

• Each business area has:Each business area has:–Defined CustomersDefined Customers–Unique products and servicesUnique products and services–Product specific assets and Product specific assets and

resourcesresources–Performance measures and Performance measures and

standardsstandards–Cost measures and targetsCost measures and targets–A A Responsible/AccountableResponsible/Accountable chief chief

operating officer (COO)operating officer (COO)

Installations and Support (I&S) Outputs: Product/Service Structure

Security Forces

Personnel

Chaplain

Services

Supply

Transportation

Corporate Services

Support Services

Property Maintenance

Property Services

Family Housing

Property Management

Restoration

Compliance

Pollution Prevention

Conservation

Environmental Management

Provide Community Services, Property Managementand Environmental Protection

forAFMC Mission Centers (Organized by Installation)

More than 65 I&S products and services

SERVICE PERFORMANCE IN SUPPLY MANAGEMENTSERVICE PERFORMANCE IN SUPPLY MANAGEMENTService effortsService efforts Service Accomplishments Service Accomplishments

INPUTS PROCESSES OUTPUTS RESULTSLabor Order

processingMaterialshipped ordelivered

Ordersmet

Materials Receipt andstow of material

Response toinquires

Queriesanswered

Equipment Issuance ofmaterial

Shippingandhandling

Shipping/delivery ofmaterial

Otherresources

Recording &filing updates

Equipment &facilitiesutilization andmaintenance

QUALITY (INPUT) QUALITY (OUTPUT)Timeliness of receipts Delivery timelinessAccuracy of stowage Accuracy of order completedAccuracy of records Accuracy of billing

EFFICIENCY = Inputs EFFICIENCY = Inputs Required to Achieve Required to Achieve

OutputsOutputs

EFFECTIVENESS = EFFECTIVENESS = Customer SatisfactionCustomer Satisfaction

SERVICE PERFORMANCE IN PRODUCT SUPPORTSERVICE PERFORMANCE IN PRODUCT SUPPORT(Information collected by Program, Center, phase, and/or acquisition category)

Service EffortsService Efforts Service AccomplishmentsService Accomplishments

INPUTS PROCESSES OUTPUTS RESULTS

Labor Needsassessment

Programsmanaged

Programs moving fromone phase to next

Material Lettingcontracts

Testsperformed

WS units delivered

Plant Productionmanagement

Technicalorders issued

WS units sustained

Other Sustainment Programssustained

Disposal

QUALITY (INPUT) QUALITY (OUTPUT)Accuracy of assessment Timeliness of delivery

Speed of process WS CostWS Performance

EFFICIENCY = Procurement Dollars Managed per Dollar Spent, EFFICIENCY = Procurement Dollars Managed per Dollar Spent, RDT&E Dollars Managed, Technical Order Dollars Managed, RDT&E Dollars Managed, Technical Order Dollars Managed,

Sustainment Dollars Managed Per Dollar SpentSustainment Dollars Managed Per Dollar Spent

EFFECTIVENESS = Satisfaction of MAJCOMs, SAF Acquisition Office, EFFECTIVENESS = Satisfaction of MAJCOMs, SAF Acquisition Office, etc.etc.

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 Focus on Responsibility -- Hold Managers

((especially COOSespecially COOS) to Their Commitments. ) to Their Commitments. Reward them for Exceeding Targets.Reward them for Exceeding Targets.

Cost Management Mindset

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

• Decentralize performance and cost Decentralize performance and cost management decision authoritymanagement decision authority

Using Break-even Analysis to Set Target Cost/Price

Target Revenue = Target Cost For each product,

TR = PQTC = DC + IC + GAC

whereP = Target price to customer or unit cost Q = Quantity of service outputDC = 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 BEATOR BEAT

Cost And Performance Analysis

• COOs do cost and performance best COOs do cost and performance best practices analysis to identify practices analysis to identify opportunities for improvement opportunities for improvement

• Analysis of Variance among basesAnalysis of Variance among bases• Benchmarking with outside Benchmarking with outside

organizationsorganizations–Other MAJCOMs and Other MAJCOMs and

services/agenciesservices/agencies–Public sector (e.g., Indianapolis and Public sector (e.g., Indianapolis and

Sunnyvale)Sunnyvale)–Private sectorPrivate sector

Cost-reduction Initiatives

• Capital Asset ManagementCapital Asset Management–Base realignment and closureBase realignment and closure–PrivatizationPrivatization–Public/private partnershipsPublic/private partnerships

• Process ImprovementProcess Improvement–Re-engineeringRe-engineering–Competition (outsourcing)Competition (outsourcing)– TechnologyTechnology

• Performance-based standardsPerformance-based standards

Results

• AFMC reduced its operating costs this AFMC reduced its operating costs this year by $2.7 billion:year by $2.7 billion:–Paid a $1.1 billion “bill” issued to AFMC Paid a $1.1 billion “bill” issued to AFMC

by HQ USAFby HQ USAF–Will return another $1.4 billion in Will return another $1.4 billion in

savings to HQ USAFsavings to HQ USAF–Will reinvest $.3 billion to achieve future Will reinvest $.3 billion to achieve future

savings/performance improvementssavings/performance improvements

Some Constraints

• CapabilitiesCapabilities– Lack of Well-Understood and Common Processes -- Lack of Well-Understood and Common Processes --

Programming, Budgeting, AccountingProgramming, Budgeting, Accounting– Lack of Adequate Accounting and Information Lack of Adequate Accounting and Information

SystemsSystems• CultureCulture– Lack of Understanding of the Business MetaphorLack of Understanding of the Business Metaphor– Conflict Between Budget and Cost FocusConflict Between Budget and Cost Focus– Conflict Between Chain of Command and Conflict Between Chain of Command and

Divisionalized Structure and Divisionalized Structure and Functional Communities and and Process-Complete Program Management

• StructureStructure– Madisonian Mess (Color of Money problem)Madisonian Mess (Color of Money problem)

Budget ManagementBudget Management

• Focus on spending Focus on spending and on the source of and on the source of FundsFunds • Spend everythingSpend everything • BA is an AssetBA is an Asset

• Deploying that asset Deploying that asset is a top management is a top management functionfunction

Budget vs. Cost Management

Cost Management

• Focus on accomplishments

• Cut Costs/Maximize Productivity

• BA is a Liability

• Decentralize Decisions to those best situated to Maximize Productivity

PROBLEM

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

Needed:

High Fidelity Definition of AFMC Products

Accurate Accounting for Unit Costs of Those Products

Performance and Cost

• Need to understand theNeed to understand the relationshiprelationship between:between:–Operational performance (outputs)Operational performance (outputs)• QuantityQuantity• QualityQuality

–CostCost• Unit CostUnit Cost• Total CostTotal Cost

Activity-Based Costing (ABC)

Chart the flow of activities needed to design, Chart the flow of activities needed to design, create, and deliver a service;create, and deliver a service;

For each activity determine its associated cost For each activity determine its associated cost and the cause of that cost, or and the cause of that cost, or cost drivercost driver;;

Determine whether the step Determine whether the step adds valueadds value for the for the customer and, if it is customer and, if it is non-value addingnon-value adding, eliminate , eliminate it and its associated cost;it and its associated cost;

Determine the cycle time of each activity and its Determine the cycle time of each activity and its cycle efficiencycycle efficiency (value-added time/total time); (value-added time/total time); and and

Improve cycle efficiency and reduce associated Improve cycle efficiency and reduce associated costs due to delays, excesses, and unevenness in costs due to delays, excesses, and unevenness in activities.activities.

Realignment

• Align Align AFMC’sAFMC’s Administrative and Administrative and Responsibility StructuresResponsibility Structures with its market with its market and service delivery strategy.and service delivery strategy.

• Align Align AFMC’sAFMC’s organization’s organization’s Control/Reward StructureControl/Reward Structure with its with its administrative and responsibility administrative and responsibility structuresstructures

• Align Align AFMC’sAFMC’s Human Resource Human Resource Management PracticesManagement Practices its control/reward its control/reward structure.structure.