Fixed vs. Flexible Approaches to Improving Capital Investment in Military Depots

Abstract

The military depots form a vital component of America's defense capability, providing for the repair, rebuilding, and major overhaul of weapon systems (e.g., ships, armored vehicles, missile systems, and aircraft), their parts, assemblies, and subassemblies2. In FY 2014, the DoD spent $31.4 billion on depot-level maintenance and repair work (Office of the Assistant Secretary of Defense, Logistics & Materiel Readiness [OASD(L&MR)], 2015). As of 2007, each of the three military departments is required by law to make an annual capital investment in its depots at a rate of at least 6% of their combined average revenue.3 The required investments have been made to support military construction, facilities maintenance and repair, and equipment procurement and process installation. This requirement was enacted in response to the deteriorating capabilities of depots during the 1990s, which lawmakers and military leaders attributed to insufficient investments in facilities, equipment, and human capital. According to the Government Accountability Office (GAO; 2001a), this lack of investment could be traced to the "DoD's downsizing of its depot infrastructure and workforce since the end of the Cold War, [which] was done without sound strategic planning"(p. 3). Indeed, by the end of the millennium, the DoD had outsourced a number of logistical support functions to the private sector, including weapon system maintenance and repair activities, with some arguing that inadequate consideration was being given to the definition and protection of so-called "core"capabilities.4 In light of increasing budgetary pressure at all levels of government, improving strategic investment decision-making;the process of correctly identifying, evaluating, and selecting among projects that will have the greatest impact on the organization's ability to perform its mission;is of critical importance. In the case of military depots, there is debate over whether the mandated minimum investment requirement facilitates or inhibits strategic investment decision-making. For instance, although the law does not place upper limits on annual capital investment, there is an implicit assumption that 6% is and will continue to represent an adequate (minimum) level of investment and that previous years' revenues represent the appropriate sum upon which to base the 6%. This is unlikely to be the case. At the same time, it might be argued that in the absence of dedicated funding, routine investment in depots will be overlooked;that it, in fact, was overlooked;to fund more visible, higher-profile programs and projects. This report explores the impact of funding mechanisms on decision-making, investment levels, and capabilities. Barrett and Greene (2013) assert that "when funds are dedicated, often from a special revenue stream,"the advantage of consistent funding "buffers a program from the powerful wind of changing political climate"(p. 1). They contrast dedicated funding (or "earmarkingﾔ) with "one-fund-fits-all"(i.e., general fund financing), which gives legislators and managers more financial flexibility to move funds as needs change. They conclude, "Unfortunately, there's no overridingly best practice here;no black or whiteﾅ but understanding the pros and cons of both routes to funding holds out the hope of coming to the right answer for a particular project"(p. 1). This report evaluates these pros and cons, as well as any barriers to change, within the context of military depot funding. Ultimately, it seeks to determine if and how current capital investment policy should be modified in order to optimize depot capabilities.