Select Committee on Defence Minutes of Evidence

Examination of Witness (Questions 380 - 399)



Mr Hancock

  380. There has to be a cost, surely? I used to be asked to make these savings all the time when I was in local government, and we used to try and save them, but there is always a cost associated with that; you might have a better efficiency in procurement target but there was a drop somewhere in the efficiency of the organisation. I would be surprised if any organisation, even one as big as the Ministry of Defence, could put forward a 20% total and say that the overall efficiency of the services has not declined because of that. Are you able to sit there and say you can achieve this target at no operational effect on the services' capability?
  (Air Chief Marshal Sir Malcolm Pledger) I think I would want to go farther and say that against the parameters I have described in here, against that process review and subsequent procurement initiatives, output costing regimes, my mission (again, the mission is in there) is to produce efficient and effective support in that uncertain world that requires logistic agility into the future.

  Rachel Squire: I would like to ask the Air Chief Marshal to write to us about who, how and why this 20% target was set, so that we can then follow it up. I would say, as a Member of the Committee that has actually seen some of the effects that setting constant efficiency targets have on the ground in that respect, I share Mr Hancock's concerns about the overall effect that that can have on performance, quality and professional standards. So I think it is an area that we need to follow up.

  Chairman: You may not appreciate it but we are actually trying to be very supportive, in the sense that the MoD can say that they have made X% efficiency cuts, but we know that in many cases they are nothing of the sort; they have made cuts and then they are sophisticated enough to find some form of justification for the cuts they have made. What we want to be absolutely certain about is that as a result of any cuts that have been made, the service actually comes out better at the end of the process and not 20% worse. I am not saying there is no inefficiency in the MoD—of course there is—but the Treasury has a formula of arbitrary figures. I think what we can do is fairly easy and it will get you off the hook for twelve months, Air Chief Marshal. In twelve months' time, because yours is such an important job, we will invite you back and the number one question that Kevan Jones can ask, or Mike Hancock, or James Cran, or Rachel Squire, will be "What cuts have you made? Will you prove to us beyond any criticism that you have achieved efficiency as a result?" We are quite wise to the wiles of the MoD and we will give you a hard time if you come up with a formula which we think is merely window dressing to justify some form of Treasury direct or indirect imposition upon you. So we can move off this now.

Mr Cran

  381. Chairman, just so that we are clear that a note is going to come from the MoD justifying what the methodology was in setting 20% rather than some other figure. I am afraid I find it unconvincing just to say that with a large organisation 20% seemed right. I would personally hope that we are going to get a memorandum from the department telling us why 20%.
  (Air Chief Marshal Sir Malcolm Pledger) I have taken a note of that, Chairman.


  382. We are on your side.
  (Air Chief Marshal Sir Malcolm Pledger) May I still say, though, that—and I would be delighted to come back and report progress—I think there is a mechanism in here to show how we are going to do this, the benefits associated with it and, therefore, the consistency between what I have described as effective logistic support in that new environment at better value for money.

Mr Hancock

  383. You would have to be optimistic to find that mechanism in that report, Air Chief Marshal. I wondered where the mechanism was.
  (Air Chief Marshal Sir Malcolm Pledger) I am rather disappointed. Each of these themes comes with priorities and key targets.

  Mr Hancock: But you do not know where they started from.

  Chairman: Let us not go back there; we have got another 20 questions to ask, so I think we had better move on.

Syd Rapson

  384. Good morning. I see in your background you like flying helicopters. I used to like repairing them but your choice of Chinook is a bit dodgy.
  (Air Chief Marshal Sir Malcolm Pledger) I think you used to repair mine.

  Chairman: You are very lucky you are in front of us!

Syd Rapson

  385. It is more fun flying one than being here, I am sure. I am interested in the present tendency when you are buying defence equipment to have a contract for a combined package not only for the acquisition but for in-service support. At the same time, the MoD then go out and have a separate contract with exactly the same manufacturer for maintenance support. I cannot understand why it has to be two separate organisations, the DPA and your own DLO, and why we cannot combine the two and make things much more efficient. Have you given any thought to that, or can you explain why we go about these convoluted systems?
  (Air Chief Marshal Sir Malcolm Pledger) Could I, perhaps, try and explain some of the process by which we do this, because the IPTs, of course, who are responding to the equipment requirement, in the first place, and procuring that particular solution are subsequently dually accountable to my organisation. So when they put their support package together it is what I will call the mortgage against which they will move across that divide and subsequently deliver the support solution. So the linkage, the interoperability, the necessity for the competences and the skills are recognised in the relationship between the DPA and the DLO right from the beginning. CDP and I are both firmly committed, therefore, to developing those skills from both perspectives. We also have arrangements in place to develop through-life management plans and for whole-life costings, which starts to get to grips with some of the earlier questions about base-lines. That has proven its worth already when equipments that have been procured under Smart Acquisition move across that divide. So it is no longer one organisation doing something and another picking up the consequences. That regime, we believe, has given the win-win of procurement and subsequent through-life management. It has also made sure that the customer regime is firmly engaged in setting the right total capability requirement of that equipment rather than, if I may, just the procurement aspects of the equipment. Therefore, the risks of management through life have been reduced by that integrated solution. In terms of putting them together—I suppose I smile ruefully because we were talking about efficiency challenges earlier. Putting three large organisations—nay, four, because DCSA came in as well—I would simply say that I see this as a big enough job as it stands, let alone trying to merge two organisations when the structures and the processes can gain the benefits that I have referred to.

  386. I did not understand all of your answer but that is because I am fuzzy-headed this morning. It just seems strange to me that we cannot, in the long term, draw towards a single unit when we are dealing with exactly the same manufacturer; it is not as if there is a choice of manufacturers who can give through-life support. There would be savings there, in the long-term, which would help you meet your targets without actually sacking a lot of workers.
  (Air Chief Marshal Sir Malcolm Pledger) I still think, in terms of combining these, there has to be a line at which we understand that the management issues associated with an organisation in real terms suggest that we should not merge. I think that is where we are at the moment. I think there is another feature, if I may, and that is that, of course, the risks associated with those two activities are also slightly different—well, substantially different. My responsibility is direct logistic support to military capability in its employment regime. Therefore, I think it is legitimate to create some tension between myself and CDP and the customer such that we clearly understand the balance of risk between procurement project management and subsequent through-life management of that support endeavour.

  387. Can I go on to the Customer-Supplier Agreements, which we now use as terminology. The relationship with your equipment-user customers appears to be encompassed by the Customer-Supplier Agreements and in the Strategic Plan, on page 12, it appears that you have mapped out a way to make these much more effective. What is actually wrong with the Customer-Supplier Agreements at the moment that you want to change them to make them much more useful?
  (Air Chief Marshal Sir Malcolm Pledger) This comes back to output specifications, it comes back to the culture aspects we talked about, and it comes back to the requirement for me to support employment in the SDR New Chapter and indeed in the original SDR assumptions. We need to have what I will call greater agility and different systems of support than might have been pertinent in the old static regime of the Cold War. Those are still developing, there is no doubt. It will be enormously helpful when we can get to a better understanding of what I will call the availability regimes rather than stipulating how we should do our business. Our customer today does tend to want to tell us how we should do things rather than what it is he requires to perform his job in the various elements of capability—training for readiness, subsequent training for actual employment against a particular threat, deployment and so on and so forth. We need, as I say, to make these much more sophisticated in output and support terms than simply saying "You need to have enough of these on the shelves such that I can have available immediately the number of bullets we need". We need to actually plan for this in a much more output-oriented regime.

  388. From your review of the Customer-Supplier Agreements, have you covered all the sustainability gaps, do you think? Are you confident on that?
  (Air Chief Marshal Sir Malcolm Pledger) I did not say we were confident, I said we need to create much more sophisticated and output-oriented against a military capability and the subsequent employment parameters, and we are not anywhere near that. By going through this I think we will have a much better handle then on where those shortfalls really are and how best I can ameliorate them through some of the savings that I am trying to make in the process arena, and therefore go back, hopefully, to answer some of the questions of effectiveness as well as efficiency.

  389. Your Strategic Plan also envisages through-life management plans for all major equipment. Just how close a relationship do you have with the equipment users when you are devising the plans?
  (Air Chief Marshal Sir Malcolm Pledger) What we have currently is what I will call certain tools and techniques that both sides understand and have contributed to. The IPTs, in putting these things together, are constrained to that particular framework. Then, when trying to devise the through-life solution, of course, what we have is an approvals regime which involves the customer—user—such that we understand and agree that the operational risk with doing things differently is acceptable against the value for money parameters that we will, again, accrue from those. So we do have an approvals regime involving that customer.

  390. You are quite happy that that is a good arrangement?
  (Air Chief Marshal Sir Malcolm Pledger) No, no, we need, as I say, to develop this such that his input is much more sophisticated and is about delivering capability. I think, again, if you look at the McKinsey Report, they were very concerned about the uncertain base-lines that the DLO was required to perform against. It is that area that I am interested in.

  391. Could I just check on these agreements, because the Customer-Supplier Agreements appear to be the in-thing. How much more efficient and effective is it to have a good customer-supplier relationship as opposed to an agreement? It seems to me it is much better to be very cosy with people than to just have a piece of written paper.
  (Air Chief Marshal Sir Malcolm Pledger) I absolutely agree with you. I would simply say, again, that what you see in the Strategic Plan is my determination to raise these broad agreements to the four-star level such that that relationship and that agreement, against that relationship, will be seen at what I will call the lower levels who deal on a day-to-day basis and they understand that this is a handshake not a confrontational "We will deliver you what we have said" kind of regime. I could not agree more. It comes back to, if I may, the culture point that was made right at the beginning.

Mr Cran

  392. Could we now move on to the issue of surplus stock. You have got a lot of stock, around £12 billion worth at any one time—maybe even more—and you have made big efforts (and this has been noted by the National Audit Office) up to 2001, and you have set yourself another target of 5% above that. Talk us through this. What progress are you making? Again, why 5%? Why not 10%?
  (Air Chief Marshal Sir Malcolm Pledger) Perhaps I could just look back for a moment. We, of course, accepted certain targets of reductions when the DLO was formed and I think the NAO has just recognised that we exceeded those targets. It was, I think, 2.2 billion by the end of 2001. Whilst there is a small dispute over figures, I think we over-achieved against that by several hundred millions. That, again, was predominantly a product of moving from what I will call old regimes, Cold War-type regimes—into the new environment where those stocks were clearly seen against the new planning assumptions as over and above the sustainment levels we needed. So that achievement is now complete. That said, of course, life moves on, and I do not think it unreasonable that current targets with the IPTs vary from 5% to 10% in-year to ensure that the changes that have happened since we started this are also seen through to fruition. In reality, I think, this year, at the moment, we are falling slightly short of those targets for getting incremental improvement, but I would not be too surprised at that, given what we have achieved already. The way into the future, though, is to stop making those kinds of what I will call broad order assumptions. What the Strategic Plan sets us for the future is a process-oriented approach to what we now call materiel flow (and you see the figures associated with that). The change programme that is in place will apportion those numbers, having applied the techniques to the right places in the organisation to take us into the future.

  393. I wanted to move on farther to ask you what criteria you set for the candidates for stock reduction?
  (Air Chief Marshal Sir Malcolm Pledger) You are talking about rate of turn and criteria like that?

  394. Yes.
  (Air Chief Marshal Sir Malcolm Pledger) Because McKinsey said, I think, that we should be looking at those stock items that have not turned in in about three years, as an illustration. That is a fine criterion to set, but of course does not then take into account what I will call the war reserve, the deliberate long-lead time items that, therefore, we could not provide for in the preparation time, and does not take into account the fact that some of our equipments are dependent on obsolete spares. So those will not turn at the same frequency. Again, what I would suggest we are doing here is applying those criteria not blindly but inviting the IPTs to apply them and determine what the outcome will be; stand fast where they have made those long-lead time investments or stock investments or obsolete arrangements.

  395. How do you deal with what the NAO have called "a volume of slow-moving stock"? I have to say I am struck by the fact that in some categories you have got ten years' worth of holdings which is costing you the thick end of £1 billion just to store. That would seem to me, if I were an auditor, one of the areas that I would zoom straight into. I take it you are, too?
  (Air Chief Marshal Sir Malcolm Pledger) Absolutely, and that is why I say the immediate priorities and the targets reflect those kinds of concerns. It takes me back, also, into the CSAs. Just a simple change to a timing or availability regime, rather than providing directly from stock, for 0.556 mm ammunition can reduce inventory levels by about 40%. So I come back to a more sophisticated arrangement with my customer, rather than what I will call a traditional approach.

  396. Let me put the question the other way: if you were to come back to this rather important meeting in a year's time and I was to say to you "Do you recall my saying to you that it would cost you £870 million per annum to hold these slow-moving issues of stock", do you think you will be able to say to me that you have been able to reduce that rather large figure?
  (Air Chief Marshal Sir Malcolm Pledger) I must be able to, yes.

  397. This is getting back to the discussion we had on the 20% efficiency target. You are telling us you "must"; but what we are asking is: tell us not only how you are going to do it but why you think you will succeed.
  (Air Chief Marshal Sir Malcolm Pledger) If you look at the priorities, it tells you what we are already embarked upon to try to achieve that. That is the reason for my confidence that I will be able to show improvements in those kinds of areas.

  398. But you cannot quantify them at the moment?
  (Air Chief Marshal Sir Malcolm Pledger) As I say, this is a process application to what we have. That is why I say we are trying to do this by process application, by then inviting the results of that, which I will hold people accountable against, rather than taking the kinds of guesses that, of course, this Committee is suggesting is not what I should be doing. It is evidence-based. I want to create that evidence by applying the tools and the techniques—

  399. I suppose we have got to come back to this next year and measure after the event. Could I go on to another tack here, which is simply this: as the Committee has gone around the MoD establishment it has been perfectly apparent to us that there have been shortages of significant pieces of equipment. I do not want to go into the details of what that happens to be because journalists will pounce on that and make stories where, perhaps, there should not be any. However, we have been struck by the fact that there has been a measure of cannibalisation—robbing and so on a piece of equipment from one major vehicle, whatever that may be, to keep another one going. Tell me whether that is a problem that you recognise and tell me how you deal with it.
  (Air Chief Marshal Sir Malcolm Pledger) Cannibalisation is not a preferred means of working. Nonetheless—

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