Transforming to Meet the Nation's Needs General Fund...100 percent tuition funding for anytime, anyplace distance learning. Available at Forts Benning, Hood, and Campbell, the program

General Fund

"Transforming to M

eet the Nation's N

eeds"

General Fund—Overview 3Mission and Organization . . . . . . . . . . . . . . . . . . . . . . . . . 4

Management Integrity 12Corrected Weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Continuing Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Future Financial Trends and Business Events 16Emerging Challenges and Trends . . . . . . . . . . . . . . . . . . 16

Business Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

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United States Army Annual Financial Statement Fiscal Year 2001

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General Fund—OverviewFounded in 1776 to fight our first war, the Army celebrated its 225thbirthday in 2001. Throughout its history, the Army has been struc-tured to meet national needs as defined byour civilian leadership and the times athand. Six years after its founding, theArmy was downsized by the ContinentalCongress to just 80 men, 25 of whomwere assigned to Fort Pitt and 55 to WestPoint and "other magazines." We have,since that modest beginning, been in aconstant state of change, evolving throughthe years to fight in many wars and con-flicts, from the fields of Gettysburg to thebeaches of Normandy, the jungles ofVietnam, and the deserts of Iraq. The onething that has not changed is our commit-ment to America. Indeed, the Army is astrategic instrument of national policy, andit is the most formidable land force onearth. Our 480,000 active soldiers,350,000 National Guardsman, 205,000Army Reservists, and 216,000 civilianemployees stand ready to serve whenever and wherever required.

The events of September 11, 2001, demonstrate how the nature ofbattle is changing. We must today be able to project power any-where in the world, including to the mostremote, desolate, landlocked, and infra-structure-poor areas on earth. Anticipatingthis need, two years ago we announced anew vision for the Army, calling for astrategic transition from our Cold Wardesign to that of a force able to meet theemerging challenges of the 21st century.We must at all times also be ready to carryout our current missions. Even as we aretransforming the ways that we organize,staff, equip, and train our force and as wedevelop our future leaders, our soldiers arein the field fighting terrorism. It is only bybringing our vision to reality that we can best ensure that when thisbattle is won, we will be ready to go on and win the next.

This is not the first time the Army and America have faced such achallenge. General Marshall's words, spoken early in World War II,will prove as true now as they were then.

3

President George W. Bush speaks to U.S. soldiers and troops from other NATOnations at Camp Bondsteel in Kosovo on July 24, 2001. The President is visiting theTask Force Falcon soldiers to show support for the troops in Kosovo. (DoD photo byStaff Sgt. Clinton J. Evans, U.S. Army)

"We are determined that before the sun setson this terrible struggle, our flag will be rec-ognized throughout the world as a symbol offreedom on the one hand, of overwhelmingpower on the other."

General George C. Marshall Army Chief of Staff

Mission and OrganizationMission

The Army has a non-negotiable contract to fight and decisivelywin America's wars and, through land force dominance, to estab-lish conditions for lasting peace. As the world's most dominantland force, the Army enables America to seek first to avoid war

through deterring aggression on the part ofpotential adversaries. Should deterrence fail,the Army is organized and trained for promptand sustained combat, as directed by law.

At home and abroad, the Army is requiredalso to support the civil authorities, providingassistance and management capability intimes of crisis. Our missions can range inscope from counter-drug operations to pro-viding relief to victims of natural and man-made disasters.

A versatile Army, we are organized and pre-pared both to fight America's wars and torespond to the nation's peacetime needs.

What the Army Does and How WeDo ItWhile the Army accomplishes its missiontoday and prepares for future mission, we arealso in pursuit of a vision. First announcedmore than two years ago, the Army vision iscomposed of three clear elements: people,readiness, and transformation.

PeopleOur people are at the core of our ability toaccomplish our mission, and their well-beingis paramount: their physical, material, andmental states directly affects the Army's abil-ity to fight and win America's wars. This is areadiness issue. It is critical that we preserveour ability to attract and retain the qualifiedpersonnel whom we can develop into tomor-row's leaders.

The well-being of our personnel affects theArmy's readiness through its influence on thebond between leaders and subordinates.Soldiers must trust that their leaders aredoing all that they can to sustain their well-being and that of their families. With the

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"It is the intent of Congress to provide an Armythat is capable, in conjunction with the otherArmed Forces, of preserving the peace andsecurity…of the United States... supporting thenational objectives... and overcoming any nationsresponsible for aggressive acts that imperil thepeace and security of the United States. [TheArmy] shall be organized, trained, and equippedprimarily for prompt and sustained combat inci-dent to operations on land...[and] is responsiblefor the preparation of land forces necessary forthe effective prosecution of war except as other-wise assigned and, in accordance with integrat-ed...mobilization plans, for the expansion of thepeacetime components of the Army to meet theneeds of war."

Section 3062, Title 10, United States Code

A California Guard Black Hawk drops a load of water on one of the many wildfires thatplagued the state last year.

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security of knowing that their familiesare provided for, our soldiers can focuson their mission. Further, they are alsomore likely to remain with us, giving usgreater ability to retain high-quality peo-ple. In FY 2001, the Army continued toenhance the well-being of its membersthrough expanded educational opportuni-ties, increased compensation, betterhealthcare, and improved housing.

It is essential that we have the best force possible to accomplishour mission. We believe that better educated soldiers are morecompetent and confident. Thus, duringFY 2001, we continued to invest in ArmyUniversity Access Online, or "eArmyU,"a program that provides soldiers with100 percent tuition funding for anytime,anyplace distance learning. Available atForts Benning, Hood, and Campbell, theprogram also provides a technologypackage of laptop computer, printer, and Internet service provideraccount to enable soldiers to pursue post-secondary academicdegrees and certificates.

Compensation is also critical to a sol-dier's well-being. Our people serve withselfless devotion, but they should not beexpected to sacrifice the well-being oftheir families in their service to America.In January 2001, Congress provided amuch-needed 3.7 percent pay raise fol-lowed by a one-time adjustment targetedto mid-grade enlisted soldiers.

FY 2001 also saw improvements in ourprovision of healthcare. With a fewexceptions, active duty families no longerhave to make TRICARE Prime co-pay-ments for the care that they receive fromcivilian providers. TRICARE PrimeRemote is furthermore being extended to family members whochoose to live with soldiers assigned to remote locations. We areimproving beneficiary education, in part through use of theInternet, and have achieved 83 percent satisfaction with accessibil-ity to care and 88 percent satisfaction with quality of care. The netresult for our soldiers and their families is lower out-of-pocketexpenses, increased benefits, and greater sense of well-being.

5

Today's soldiers are well educated, fit, and ready for any challenge.

"Above all, we must realize that no arsenal,or no weapon in the arsenals of the world, isso formidable as the will and moral courageof free men and women. It is a weapon ouradversaries in today's world do not have."

President Ronald Reagan

"Platforms and organizations don't defendthis nation; people do."

General Eric K. ShinsekiArmy Chief of Staff

Perhaps the most important quality-of-life issue, however, is hous-ing. In FY 2001, we expanded our partnership with private indus-try in a residential community initiative that seeks to improveArmy housing by capitalizing on private sector expertise,resources, and market-based incentives.

These and other factors contribute to our ability to attract andretain high-quality people, and the results of our efforts in theseareas are encouraging. In FY 2001, for the second consecutiveyear, we reached our recruiting goal, signing up 35,000 new activesoldiers and more than 41,000 Army Reservists. The improvedwell-being of our soldiers and families, coupled with innovativerecruiting tools such as GoArmy.com and GoArmyReserve.com,are helping to ensure that we maintain a high-quality force readyto accomplish any mission.

ReadinessThe Army's top priority is to maintainwarfighting readiness. As our "go-to-war"force, the active component must be capableof undertaking immediate combat operationsanywhere in the world. Our ability to do thisdepends in large part on the nature of ourcurrent engagements around the globe withour allies, partners, and even our potentialadversaries. Forward-stationed and forward-deployed soldiers in the field advanceAmerican interests and support theater

engagement plans while training for combat. These forces promotestability, strengthen our nation's influence overseas, and facilitateour access to trouble spots in times of crisis.

On any given day, the Army has over 125,000 soldiers and 15,000civilian employees forward-stationed in more than 100 countriesaround the world. In FY 2001, we deployed more than 27,000additional soldiers on a daily average for operations and militaryexercises in 70 countries. These soldiers and civilians are support-ing assigned missions such as enforcing United Nations sanctionsagainst Iraq, conducting stability operations in the Persian Gulf,and performing peacekeeping operations in Bosnia and the Sinai.

In instances where contingency operations become long-term com-mitments, as has happened in Bosnia, our mission tempo, bothtraining and operational, can strain our forces. While we havemanpower shortfalls in our active component combat forces,through our Manning Initiative we have successfully filled all per-sonnel authorizations in our active divisions and cavalry regi-ments. In FY 2001, we brought in more than 34,000 soldiers toearly-deploying units, those that most directly support the divi-

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"… at the battalion level and below, this iswhere I see the heart of readiness. …Unless squads and platoons and companiescan do what they need to do … you're notready."

General Eric K. ShinsekiArmy Chief of Staff

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sions in combat. As a result, these units are achieving higher readi-ness, with some reaching the highest level of personnel readiness(C1) for the first time in five years.

We are nonetheless increasingly relyingon reserve component forces. As FY2001 drew to a close, we had almost2,000 National Guard and Army Reservesoldiers serving in Bosnia, Kosovo,Saudi Arabia, and Kuwait. To ensure thatthe 1995 Dayton Peace Accords are notviolated, National Guard soldiers armedwith automatic weapons are, for the firsttime, patrolling the Bosnian countryside.A total of 176 infantry and armor sol-diers from North Carolina's enhanced30th Infantry Brigade and 170 infantrysoldiers from Oklahoma's 45th InfantryBrigade are engaged in this very impor-tant duty, patrolling alongside activeArmy soldiers of the 3rd Infantry Division from Fort Stewart,Georgia.

TransformationIn 1990, Operation Desert Shield exposed an operational weaknessin the capabilities of the Army's heavy and light forces. Our heavyarmored forces, tailored for the ColdWar, were formidable on the battlefield,but were slow to deploy to where theywere needed. Our light forces could read-ily deploy to the battlefield, but whenthey got there were not lethal or surviv-able enough for modern, conventionalwarfare. We faced a clear need to trans-form into a more strategically responsiveforce, able to get to any battlefield quick-ly and able to dominate across the spectrum of military operationswhen we get there.

To successfully address this need, we must transform the entireArmy, from installations to leader development programs. We willchange doctrine, training, leaders, organizations, material, and ourpeople. Everything will be impacted. Army KnowledgeManagement (AKM) is a key initiative to meeting this challenge.This comprehensive strategy to transform the Army into a net-work-centric, knowledge-based force will result in decision domi-nance by battlespace commanders and business stewards. Itemphasizes the enterprise management of the information technol-ogy infrastructure in synch with the Global Information Grid, with

7

"The dangers of this new century are quitedifferent from the familiar dangers of the pastcentury."

Thomas E. WhiteSecretary of the Army

Members of North Carolina Army National Guard man a checkpoint in a mock Bosniatown during a training exercise at Fort Bragg, North Carolina, in preparation fordeployment to Bosnia.

a view toward reducing the footprint and improving operationsthrough the use of best business and governance practices and theemphasis on innovative human capital strategies. It is a key com-ponent of Army transformation.

To achieve this transformation, we envisionthe creation of and transition through threeforces: the Legacy Force, the ObjectiveForce, and the Interim Force (see figure 1).

The development of the Objective Force isour goal, but it is a long-term project. For thenext 10 to 15 years, it is the Legacy Forcethat will fight and win America's wars. TheLegacy Force is a more capable force thanthat which fought Desert Storm, enhanced bythe modernization, when appropriate, ofobsolete equipment and the repair and refit ofaging equipment. New command and controlsystems assist commanders to see, under-

stand, and act decisively on the battlefield. In FY 2001, the 4thInfantry Division demonstrated the results of our efforts to digitizeour divisions; we will continue to digitize and upgrade selectedlegacy units until transition to the Objective Force is complete.

The Objective Force, our ultimate goal, is a system of integratedcapabilities comprising space, air, and ground and direct and indi-rect fire. It will be seamlessly connected with command, control,communications, intelligence, surveillance, and reconnaissance. Itwill make the fullest use of technology and organizational adapta-tions to revolutionize our land-power capabilities. To accomplishthis transformation this decade we are applying AKM. This com-prehensive strategy emphasizes the enterprise management of theinformation technology infrastructure in synch with the GlobalInformation Grid, with a view toward reducing the logistics foot-print and improving operations. We are seeking to establish inno-vative partnerships with industry. Investment in the program ismore than $1 billion per year; monthly reviews by the Chief ofStaff monitor the potential returns on that investment and ensurethat resources are concentrated on the most promising programs.

The Interim Force will fill the gap identified during Desert Shielduntil the Objective Force is fully fielded. Creation of this forcewill require the establishment of between six and eight InterimBrigade Combat Teams, equipped with more than 2,000 new LightArmored Vehicles and a Mobile Gun System. The Interim Forcewill ultimately serve as the vanguard of the Objective Force. Evenas the Interim Force is being put in place, we are continuing torefine the doctrine, leadership training, and other elements neces-sary to ensure its success on the battlefield.

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Figure 1: Transformation Strategy

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Sources of FundsThe Army's funding comes primarily from the DefenseAppropriations Act and the MilitaryConstruction Act. In FY 2001, we usedour resources to maintain the progresswe recently achieved in readiness, quali-ty-of-life programs such as housing andeducation, and modernization. We main-tained our legacy systems and providedoperational training that is unmatchedanywhere in the world. We also investedin preparations for the future.

In FY 2001, we began the process oftransforming the Army into a force thatwill be strategically dominant at everypoint on the spectrum of operations. It isthrough this investment that we seek toassure the ability of the active compo-nent, the Army Reserve, the NationalGuard, and the civilian component of theArmy to accomplish all that will berequired of them in the future.

How the Organization Supports theMission

The Army is an organization of integrat-ed headquarters, staffs, commands, andunits operating as a system to accomplishits Title 10 functions. Because of the sizeand complexity of the Army and its mis-sion, it requires an approach that affordsflexibility to its separate parts whileenabling the leadership to retain com-mand and control. The Army has threedistinct subsystems: production, combat,and integrating. Each subsystem operateswithin a given environment to assureeffectiveness.

The Production SubsystemThe Army is charged with formingorganizations of people and machines"for the effective prosecution of war."Primarily, the production subsystem sup-ports the combat subsystem. Through a number of diverse organi-zations, the production subsystem obtains the "raw materials" thatthe Army needs, recruiting untrained people, searching for newtechnologies, and dealing with the producers of required materiel.

9

$64.0

$66.0

$68.0

$70.0

$72.0

$74.0

$76.0

$78.0

FY 1999 FY 2000 FY 2001

TotalObligationAuthority

BudgetAuthority

$69.1$68.6

$71.0

$72.1

$77.6

$76.1

Figure 2: Budget Resources (Current Year Dollars)

At the 120th Adjutant General Battalion Reception Center, SSG Sonya Gomez checksrecruits' records before the new soldiers join their basic-training companies.

Other elements of this subsystem then convert these raw materialsinto "intermediate goods." For example, training centers andschools turn untrained people into tank crewmen, infantrymen, andmechanics. Schools convert ideas and knowledge into doctrine,tactics, and training methods to enhance the capability of the com-bat subsystem. Laboratories, arsenals, and procurement and test

organizations convert technology and con-tractor effort into weapons and equipment forcombat.

The two major components of the productionsubsystem are the Training and DoctrineCommand and the Army Materiel Command.The former produces the training, doctrine,and tactics needed to fight and win America'swars. The latter provides the materiel solu-tions needed by the warfighting units of thecombat subsystem.

The Combat SubsystemThe combat subsystem converts the "interme-diate goods" of the production subsystem intothe mission-ready units that will fight ourwars. It melds together individual soldiers,

pieces of equipment, and doctrine to produce combat readiness. Itstays abreast of potential threats and the needs of the unified com-batant commanders to whom it provides ready forces.

The combat force structure is organized intocorps and divisions placed under the peace-time command of the major Army command-ers. The commanders are charged with keep-ing their assigned forces ready to fight when-ever and wherever needed. These corps anddivisions are either forward-deployed, pre-pared for rapid response or contingencies, orheld for strategic reserve. Figure 3 shows thestationing of our major combat forces.

The active, reserve, and civilian componentsof the Army each play an integral part inenabling the combat subsystem to accomplishits goal of providing combat-ready forces. Theactive component forms the nucleus of theinitial combat forces in a crisis. The reservecomponents reinforce and augment the active

forces, either by unit or by individual replacements. The civiliancomponent complements this subsystem by providing critical sup-port and sustainment.

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Members of the 501st MP Co. help an injured reporter after the town of Krivenik washit by mortar fire.

Strategic Reserve�8 ARNG Divisions3 ARNG Separate Brigades

Contingency�2 Corps4 AC Divisions

Rapid Regional Response�1 Corps1 AC Division

Reinforcing�1 AC Division15 ARNG Separate Brigades

Europe1 Corps2 AC Divisions

Pacific/Korea2 AC Divisions

Figure 3: Combat Force Stationing in FY 2001

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The Integrating SubsystemThe integrating subsystem ties the other two subsystems together anddecides what must be done to ensure that the Army can accomplishits mission. Integration is the primary function of the Secretary of theArmy and of the Army Chief of Staff. The Honorable Thomas E.White assumed duties as the 18th Secretary of the Army in May2001; General Eric K. Shinseki has served as the 34th Chief of Staffsince June 1999. Together they lead the Headquarters Department ofthe Army (HQDA) in ensuring that the major tasks required of theArmy are accomplished.

HQDA is composed of two elements: the Army Secretariat (the civil-ian leadership) focuses on managing the business of the Army, andthe Army Staff (military leadership) is responsible for planning,developing, executing, reviewing, and analyzing Army programs.

In performing its integrating function, HQDA determines the natureof the Army's mission requirements in conjunction with theCongress, the Department of Defense, and the other military servic-es, and by assessing the nature of the threats faced by the nation.HQDA then charts a course for the Army, securing the necessaryresources and allocating them to best accomplish the mission. HQDAcontinually monitors the performance of the other subsystems andeffects change when performance does not meet requirements.

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Management IntegrityIf we are to remain the best fighting force in the world, the Armymust maintain effective control over its resources. All commanders

and managers have an inherent managementcontrol responsibility. We have evaluated ourmanagement controls and have found that,except as indicated, we have reasonableassurance that effective controls are in place.

In the 18 reporting years of the FederalManagers Financial Integrity Act, HQDAreported a total of 224 material weaknesses.

At the beginning of FY 2001, we had only nine remaining identi-fied material weaknesses. During the course of the year, one newweakness was identified and one was corrected. We are now work-ing to correct the final nine.

Corrected WeaknessesIndividual Augmentation for Contingency Operationsand Exercise Deployments

Previously, the Army could not tell how many people wereinvolved in individual augmentation missions, where they were, orhow long the mission was expected to last. Individual augmenteesoften received late notification, and in the case of low-density/high-usage personnel, were repeatedly tasked. Correctingthis weakness was important to improve our ability to take care ofour people.

Over the last two years, the Army has established an IndividualAugmentation Branch, established new policies and procedures forconducting current operations, and activated a WorldwideIndividual Augmentation System. In June 2001, the U.S. ArmyAudit Agency validated that this weakness had been corrected.This marked an important step forward in the way that we takecare of people.

Continuing ChallengesWe continue to work on correcting the remaining eight identifiedmaterial weaknesses. Below, we describe our efforts on the fourmost significant ones.

Financial Reporting of Real Property and GeneralEquipment

The Army does not meet Federal Accounting Standards for finan-cial reporting of real property (land, buildings, and structures) andgeneral equipment. To become compliant, Army records must cap-ture the correct acquisition date and cost, which current Army sys-

12


"… [T]he stewardship of scarce publicresources is a bedrock principle."


General Fund

tems were not designed to do. Correcting this weakness willrequire two major efforts. First, the costs recorded in Army equip-ment and logistics systems must be validated and reported, andwhere they are determined to be inaccurate, estimates of historicalcosts and the associated accumulated depreciation must be devel-oped and reported. The Army, as part of a Department of Defenseinitiative, has been working diligently to determine the recordedcosts; validate the existence and completeness of all propertyitems; and, where costs are not recorded, develop reasonable esti-mates of historical costs. This will help the Army establish proper-ty, plant, and equipment values in accordance with generallyaccepted accounting methods.

Second, a CFO-compliant system must be implemented for report-ing. The Army is consequently implementing the Defense PropertyAccountability System (DPAS) for reporting general equipment.DPAS will replace existing non compliant systems and will bringthe Army into compliance with Federal Accounting Standards forgeneral equipment. For real property, the Army Office of theAssistant Chief of Staff for Installation Management is assessingoptions to either modify or replace its current real propertyaccountability systems.

Failure to meet this standard for financial reporting does not meanthe Army lacks property accountability. However, the Army'sinability to identify an item's acquisition date and cost prevents thecomputation of depreciation expense and the determination ofbook value for financial reporting. These shortcomings are majorfactors in our inability to obtain an unqualified audit opinion onour annual financial statements. We anticipate correcting thisweakness for general equipment during FY 2002.

Pollution PreventionThe Army's pollution prevention program is not yet effectivelyintegrated into all Army mission areas. Pollution prevention mustbe an integral part of the Army's acquisition and systems engineer-ing processes, and all Army organizations must plan, program,budget, and execute their portion of the Army pollution preventionprogram. Our inability to meet these responsibilities properly hasresulted in a failure to identify pollution prevention requirementsand lost opportunities to resolve those requirements. Such opportu-nities could reduce the costs associated with weapons systemacquisition, logistics, training, occupational health, safety, andenvironmental contamination and restoration.

Opportunities also exist to achieve potential operational cost sav-ings, to reduce health risks, and to reduce hazardous wastestreams. The future costs and potential liabilities associated withenvironmental compliance and restoration are likely to increase ifthese issues are not addressed and resolved.

13

We are taking action to focus on the integration, across the Army,of pollution prevention and on ways in which Army communitiescan improve long-term cost avoidance through pollution preven-tion. In FY 2001, we addressed the pollution prevention require-ments defined in the Program Objective Memorandum to ensurethat our efforts to meet these requirements are adequately funded.We also began to integrate pollution prevention fully in weaponssystem development programs. Finally, we implemented a trainingprogram within the Army Acquisition Corps to ensure that pollu-tion prevention is fully considered as a way of avoiding unneces-sary costs. We expect to correct this weakness in FY 2002.

Manpower Requirements DeterminationThe Army is working to establish effective manpower programsfor managing and controlling our Tables of Distribution andAllowances (TDAs) workload, organizations, and manpowerstaffing, including reductions in force. We are seeking to linkworkload, manpower requirements, and dollars so that we can reli-ably predict future manpower requirements based on workload.Once this has been successfully achieved, we will be able to pro-vide managers with the information needed to improve work per-formance and increase organizational efficiency, while betterdetermining and supporting staffing needs, manpower budgets, andpersonnel reductions.

In FY 2001, we provided the Major Commands with the ability toview their manpower and costing position via the Internet. We alsofully integrated workload-based military, civilian, and contractormanpower requirements into the Total Army Analysis model. Most

of our work is completed, and we expect tocorrect this weakness in FY 2003.

In-Transit Equipment VisibilitySystems interface and logistics process prob-lems cause a significant portion of the in-transit records displayed by the ContinuingBalance System-Expanded (CBS-X) to beinvalid. The equipment involved is receivedand reported as on-hand by the receivingunits, but the receipt transactions do not closeout the shipment (in-transit) records. As aresult, the Army lacks reliable data on thevalue of equipment in transit, and the valueof in-transits reported on the Army's financialstatements is misstated by a significant butunknown amount. Some units have alsoexperienced unnecessary delays when requi-

sitioning equipment because invalid in-transit records have causedrequisitions to be rejected.

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The Army is capitalizing on new technologies to maintain total asset visibility of goodswhile in transit.

General Fund

We plan to correct the identified process problems, and in so doingto reduce error rates to an acceptable level. We will not aim for acompletely error-free posture, as we believe that any attempt to doso would be neither practical nor cost-effective. We expect to cor-rect this weakness in FY 2002.

SummaryThe Army is aggressively seeking to identify material weaknessesand to correct them. We recognize that an effective program forreviewing and improving management controls is vital to goodstewardship. We take our stewardship responsibilities very seriously.

15

Future Financial Trends andBusiness Events

As the Army transforms to a 21st-century force, we must face thechallenge of matching resources to requirements as we seek torealize our vision for people, readiness, and transformation.

Emerging Challenges and TrendsThe Requirements Gap

The requirements gap exposed in Desert Storm has yet to be cor-rected. As Iraq overran Kuwait City and moved south to threaten

the airfields and ports that our heavy forceswould need in order to gain entry to theregion, we responded by sending a brigade oflight infantry to block Iraq's further advance.This force lacked both a robust anti-tank andartillery capability. It is not a battle we wouldhave designed. Iraq's heavy mechanizedforces were advancing against light infantry

because we couldn't get our own heavy, more lethal forces therequickly enough. That condition has yet to be corrected.

The Army that fought Desert Storm is essentially the Army oftoday. While it remains a magnificent army, it was designed for the

Cold War that ended more than10 years ago.The missions that we must perform todayinclude the provision of humanitarian assis-tance, the evacuation of noncombatants fromthe most remote corners of the world, peace-keeping, and the conduct of a major theaterwar. This demands that we transform into aflexible force that is light enough to get therequickly, lethal enough to overwhelm anyenemy, and survivable enough to stay thecourse.

High Operational DemandsThe U.S. Army is the most capable army inthe world. The emerging requirement toaccomplish increasingly long-term contin-gency missions will challenge the readinessand tempo of our personnel and units, majorweapons systems, and infrastructure. We

have maintained the readiness of our forward-deployed and "first-to-fight" forces at the expense of our non divisional and reservecomponent units and the institutional Army. We expect that exces-sive operational demands will continue to take their toll and willforce our continued reliance on the reserve component.

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"We must build … a future force that isdefined less by size and more by mobilityand swiftness."

President George W. Bush

1LT Steve Cunningham of the 9th Inf. crawls beneath barbed wire during training atCamp Casey, Korea.

General Fund

Aging Work ForceThe Army must transform its work force. An increasing number ofour civilian personnel are nearing retirement age, presenting aproblem that has been exacerbated by recent personnel reductionsand hiring freezes. Indeed, the hiatus of new civilian personnelhires has created a shortage of civilians to fill the leadership posi-tions that soon will be vacated by retirees.

Increasing Cost to Maintain Near-Term Readiness

The nature of our mission, to fight andwin America's wars, demands that wemaintain near-term readiness. This limitsour ability to recapitalize the force,which in turn makes it difficult to main-tain aging equipment to high readinessstandards. Since 1995, operations andsustainment costs have risen by morethan 35 percent. Seventy-five percent ofour major combat systems will exceedtheir design life by 2010. These agingsystems must be maintained to ensurenear-term readiness, but the cost to main-tain them is rising as they break downmore frequently and become more diffi-cult to repair.

Deteriorating InfrastructureThe need to maintain near-term readiness will also continue to putpressure on our ability to recapitalize our aging facilities. We mustfind ways to maintain, modernize, and transform the training plat-forms and ranges that prepare the force; the depots and arsenalsthat maintain and equip the force; and the power projection plat-forms and information infrastructure that support the force whendeployed. Taking care of installation infrastructure is absolutelyessential to maintaining readiness.

We would prefer to divest ourselves of excess infrastructure and touse the resulting savings to maintain critical facilities or fund otherpriorities. Until we can do this, we will be forced to draw from ourtraining funds to sustain our facilities. We have an $18 billionbacklog of work for sustaining, restoring, and modernizing ourcurrent facilities and a $25 billion deficit in unfunded new facilityrequirements across the Future Years Defense Plan. Resolution ofthis situation will require a long-term commitment to fully fundsustainment and to focus restoration and modernization funding onselected facility types.

17

4th ID soldiers and equipment begin moving into the desert maneuver area at theNational Training Center to begin battle.

Business InitiativesThe challenges and trends described in the previous section do notpermit maintenance of the status quo. Without change, our currentprograms will over time become more expensive to maintain. It isessential that we transform our business practices to take care ofour people, to sustain readiness, and to complete our transforma-tion into a force for the 21st century.

The Army has several business initiatives in place to introduce thenecessary changes. The Residential Communities Initiative (RCI),for example, deals directly with our infrastructure challenges.Even more sweeping is the ongoing effort to transform our logis-tics processes. These efforts are vital to closing the requirementsgap and to reducing the cost of readiness.

In addition, Secretary White has established the BusinessInitiatives Task Force to coordinate with the Department ofDefense and to identify improvement opportunities. We will, in thecoming months, be implementing several of the initiatives identi-fied by this group.

Ongoing InitiativesResidential Communities InitiativeBecause housing management is not a core activity and because itis readily found in the private sector, the Army is implementing anaggressive program to attract private sector expertise and capital tocreate modern residential communities and improve the quality of

Army family housing. Through the RCI, theArmy is leveraging appropriated funds andgovernment assets by entering into partner-ships with private sector residential commu-nity development firms to obtain the finan-cial and management expertise necessary tobuild, replace, maintain and repair, and oper-ate Army family housing. By leveraging theexpertise and resources of our developmentpartners and by applying market-based incen-tives, we expect to dramatically improve thewell-being of Army families.

The Army competitively selects private sec-tor partners that demonstrate the requisiteskills and experience in real estate develop-ment and property management and that havethe appropriate financial capability. The

Army and its partners then negotiate a business plan for each spe-cific RCI project, and set forth the terms of the developer's long-term relationship with the Army. The plan defines the scope of

18


"[Y]ou have to decide what is core to theUnited States Army. …Then you take all thenon-core activities, just like you would in thebusiness world, …and see if there is a valueproposition … that you can get from the pri-vate sector, so you can lay off the risksassociated with non-core activities to the pri-vate sector."


General Fund

development, management processes, financial structure, and time-line for improving residential communities. The partner assumesownership of family housing units and is responsible for operating,managing, and renovating existing units and for constructing newand/or replacement units, using processes and standards agreed toby the Army. The partner's income on the project comes from rentspaid by military personnel from their basic allowance for housing.A typical partnership agreement will be for a 50-year period.

The Army scoring/investment costs, when required, come from theFamily Housing Improvement Fund (FHIF). The Army transfersfunds to the FHIF from the Army Family Housing-Constructionappropriation after Congress approves the business plan. The RCIprogram operations and implementation costs are paid from theArmy Family Housing-Operations appropriation.

Four pilot projects will privatize more than 15,000 family housingunits at Forts Carson, Hood, Lewis, and Meade. Forts Carson andHood have transitioned to privatized operations, and agreementswill be concluded at Forts Lewis and Meade in early 2002. TheArmy has initiated 23 additional projects, with 53,000 housingunits to be privatized by 2002-2006.

Infrastructure Reduction and ReplacementThe Army has excess infrastructure that is inadequate for missionrequirements. It also has significant requirements for modern infra-structure to support a transforming force. Efforts to address thischallenge include programs to eliminate excess infrastructure, toreplace or refurbish infrastructure that no longer meets require-ments, and to build infrastructure to meet new requirements.Eliminating excess infrastructure will reduce the burden of facilitiesmaintenance and will support the provi-sion of appropriate modern infrastructureto improve the capabilities of the objec-tive force.

Base Realignment and Closure (BRAC) isthe most powerful tool for reshaping andeliminating excess infrastructure. Havingcompleted the actions authorized underthe first four BRAC rounds, the Army ispreparing to study and recommend addi-tional actions with the BRAC authorityauthorized by Congress beginning in FY2005. Since 1997, the annual recurringsavings from BRAC have exceeded thecost of implementing authorized actions.

The Facilities Reduction Program (FRP)is another effective way to streamline

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ANNUAL RECURRING�BRAC 88 260BRAC 91 304BRAC 93 68BRAC 95 313

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Figure 4: BRAC Costs and Savings

Army infrastructure. FRP aims to improve the utilization of per-manent facilities, consolidate operations into the best facilities, anddispose of the worst facilities. From 1992 to 1999, the Army dis-posed of approximately 49 million square feet (MSF) of excessinfrastructure. FRP will eliminate an additional 13 MSF of excessinfrastructure by the end of FY 2003. The savings achievedthrough both BRAC and FRP can help provide funds for otherprograms.

Transforming LogisticsWe are transforming Army logistics from a system based predomi-nantly on redundancy of mass to one based on velocity, mobility,and information. Our move to a Distribution-Based LogisticsSystem (DBLS) is one of our most important initiatives, represent-ing a fundamental change in our approach to logistics manage-ment. DBLS will comprise a set of reengineered processes, inno-vative policies, and advanced information systems. The result willbe a seamless logistics system that relies on velocity and precisionto link readiness management, distribution management, and assetmanagement.

Velocity ManagementFollowing a study of logistics management at Motorola andCaterpillar, the Army adopted a commercial business practice

referred to as velocity management. Thispractice uses a three-step methodology todefine an issue, measure performance, andimprove the process used. Our goal is toimprove the performance of our major logis-tics processes, such as repair and supply, interms of speed, accuracy, and reliability. Wealso expect to reduce costs.

Using velocity management, we are measur-ing our performance to identify problemnodes in the supply chain on which we canthen focus our improvement efforts.Correcting these problems will enhance theefficiency of the supply chain and will enableus to supplant our reliance on supply masswith fast and accurate issue information andinventory levels. This will reduce costs andincrease our mobility. Velocity managementhas over the past decade enabled us to reducetotal inventory by more than 50 percent.

Improving Our MetricsIn the past, we measured the performance of the supply system interms of Order Ship Time (OST). This measured the time between

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Velocity Management�A Process Improvement Program Based on�

Best Business Practice

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Figure 5: Velocity Management

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when a Supply Support Activity initiated a demand to the time thatthe Supply Support Activity received the item requested. It did notaccount for how long the supply support activity took to processthe customer's request or how long it took the supply supportactivity to deliver the item to the customer. Our new metric isCustomer Wait Time (CWT), which measures the amount of timefrom the issuance of a customer order to the satisfaction of thatorder. We will ultimately achieve the ability to measure perform-ance wait time at every node in the supply chain and to measureits impact on the repair cycle. By reducing CWT, we will improvereadiness.

The Army is also undertaking an Equipment Downtime Analysis(EDA) to measure how the performance of each supply and main-tenance node affects equipment readiness rates. EDA uses holisticanalysis of the maintenance system and supply chain to uncoverreadiness issues. Ultimately, this too will allow us to focus ourefforts to correct those areas causing the greatest impact on readi-ness. This will improve our ability to sustain readiness, while atthe same time reducing total support costs.

Improved Policies: Dollar Cost BandingThe Army requires more than 1.4 million repair parts to support itsequipment. Choosing the right mix to be stocked at each SupplySupport Activity has a major impact on the cost of readiness andon our effort to increase mobility. In calculating which parts tostock, the Army historically used the same criteria whether theitem cost $10 or $500,000. A study by the Rand Corporationrevealed that the majority of parts that resulted in deadlined equip-ment cost less than $100. Under Dollar Cost Banding, the SupplySupport Activity can increase the stockage of these less expensivedeadlining parts while decreasing stockage of more expensive, nondeadlining items, and can do so without affecting the total cost ofrepair parts inventory. In effect, the Army gets more readiness forthe same cost.

The results thus far have been encouraging in terms of both sup-port and mobility. The 1st Corps Support Command at Fort Bragghas experienced a 176 percent increase in the range of spare partsavailable; the 82nd Airborne Division at Fort Bragg has experi-enced an 11 percent reduction in required storage space; and the3rd Infantry Division at Fort Stewart experienced a 13 percentincrease in its order fill rate, thereby reducing customer wait time.

Web-Based LogisticsThe Army envisions that the use of global Internet/intranet tech-nology, and specifically the development of a single enterprisedatabase, will make our logistics business processes more effectiveand efficient and will reduce process costs. Access to a unified

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database could provide real-time logistics information to managersat all levels, thereby improving precision in the logistics supportarena. Our long-range objective is to integrate sustainmentproviders and customers into a single system, through use of acommon, enterprise-wide data model in the Global CombatService Support-Army (GCSS-A) system and the WholesaleLogistics Modernization Program (WLMP).

Army Knowledge ManagementArmy Knowledge Management is a strategy to transform the Armyinto a network-centric, knowledge-based force. As such, it is anintegral part of Army Transformation. AKM will improve decisiondominance by warfighters in the battlespace and by business stew-ards in our organizations and practices.

AKM includes the Army Knowledge Online (AKO) initiative toprovide a single point of access to Army data, information, andknowledge. We are moving from decentralized C4/IT investmentmanagement to an enterprise portfolio management focus, to cen-trally manage more than $5 billion in annual IT funding. This cen-tral focus began in 2001 and will improve each year as policies andgovernance mechanisms are refined to ensure program integration,implementation of best practices, provision of web-enabled busi-ness solutions, and improved IT infrastructure management.

We will provide all soldiers, civilians, and appropriate contractorswith access to AKO and a single lifetime email address. By usingthe AKO portal, this audience of 1.2 million people will gainaccess to expanded educational opportunities, producing bettereducated, more competent soldiers and civilians. Accessing theglobal reach of the worldwide web will boost morale of our for-ward deployed forces, and permit capturing and sharing the knowl-edge of our aging work force. As newly web-enabled automatedsystems come on-line, commanders will be able to access currentdata on readiness, largely unreachable in conventional systems.The portal is integral to web-based logistics transformation, pro-viding a single access point to logistics data for forward-deployedforces and enables access to CONUS resources and systems.

Business Initiatives Task Force InitiativesPooling Cell Phone MinutesIn many locations, each individual cell phone user is allocated hisor her own block of minutes, even though most users do not use alltheir minutes. By pooling available minutes at the organization orinstallation level, we expect to lower costs and waste fewer unusedminutes. This initiative has been tested at one Air Force installa-tion, where the monthly savings approached $10,000. The savingsthat this initiative is expected to make represent funds that can befreed up for use on readiness of infrastructure support, at the discre-tion of the local commander.

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General Fund

Recovery AuditingRecovery auditing is an initiative that addresses the issue of poten-tial overpayments to contractors. It calls for civilian audit firms tobe hired to audit contracts for possible overpayments. The auditingfirm would be paid a percentage of all recovered overpayments. Byrecovering such overpayments we can reduce the cost of near-termreadiness and of modernization; we can additionally apply therecovered funds to other programs.

Web-Based InvoicingThis initiative addresses invoicing and payments associated withgovernment contracts, calling for the conversion from a paper-based process to a web-enabled process. This would reduce pro-cessing time; provide for more timely payment, thus reducingpenalties incurred by the government; and result in reduced operat-ing costs from the Defense Finance and Accounting Service, whichcharges less for electronic transactions than for paper ones.

Modified Waiver Procedures for Hiring Military PersonnelStatutes impose a 180-day waiting period before the Department ofDefense can hire retired military personnel. The waiting period canbe waived, but DoD policy is that waivers must be approved atMajor Command level. This proposal calls for a change in that pol-icy to allow Service secretaries to delegate waiver authority as theysee fit, probably to installation level. This would provide a moreresponsive system, able to hire qualified people who might other-wise go elsewhere because of the delays involved. (This proposalwould not affect the legislative prohibition that addresses civilianpositions established within the last two years.) This would enableus to bring in experienced and qualified leaders to fill the growinggap caused by civilian retirements.

Through these initiatives and many others, the Army is seeking tostreamline the way it does business. By continuing to emphasizeinitiatives such as these, the Army can improve its business effi-ciency, freeing up resources that can be otherwise invested in peo-ple, readiness, and transformation.

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