Select Committee on Defence Minutes of Evidence


Supplementary memorandum by the Ministry of Defence (17 January 2003)

MCKINSEY STUDY COST (Q352)

  The McKinsey study cost some £1.5 million, and identified efficiencies and improvements which will help the Defence Logistics Organisation achieve its Strategic Goal.

SETTING OF THE 20% OUTPUT COST REDUCTION (Q361, 379-380)

  The DLO's Strategic Goal, to deliver a 20% reduction in output cost by 31 March 2006 while maintaining and where appropriate improving the quality of those outputs, was agreed by the Department in 1999. It reflects judgements of the potential for process improvements flowing from the convergence of the single-Service logistic organisations (and thus encapsulates the rationale for the organisation itself, as set out in the Strategic Defence Review) whilst representing a demanding but achievable target. The process improvements that will flow from the Strategic Goal will allow the DLO to support the front line more effectively that was possible previously. It was expressed as a single target to be achieved over an extended period (rather than an extension of previous year-on-year efficiency targets) to signal the need for a step change in modernising our logistic processes. The figure reflected the DLO's judgement of what would be achievable while maintaining or improving the quality of the support provided to the front line, and was informed by an assessment of what other organisations had achieved by implementing process change.

  There are a number of mechanisms in place and being developed to ensure that the quality of logistic support to the front-line is maintained and, where possible, enhanced. These include formal annual agreements between the DLO and its customers that specify the level of support to be provided for a given level of resources and against which performance is regularly assessed through the Department's balanced scorecard system. The DLO is also working with its suppliers to develop innovative procurement practices, based on Smart Acquisition principles, that reward firms which meet or exceed quality standards. It should also be stressed that the Strategic Goal is deliberately couched in terms of output costing, thus establishing a clear link with overall performance and distinguishing it from targets designed simply to contain or reduce cash costs.

STORES DISPOSAL AND STORES AVAILABILITY (Q402 AND Q420)

  The Defence Planning Assumptions give top level guidance as to the location and duration and personnel who will be involved in possible operations, and these are developed into lower level planning assumptions which drive the stock holding policy. Dependent on the size and duration of the operational scenarios for which we are required to plan, we assess whether there is a surplus, or a need to procure additional stock. Acquisition is normally through the conventional defence procurement process, but can be accelerated if operational requirements so dictate.

  Assets holdings are kept under continuous review. Stockholdings are based on predicted consumption using provisioning parameters applicable to the equipment type, classification, weapons system fit, etc and include operational stock levels where appropriate. Long-term equipment needs to take into account the known in-service life of each weapon platform and then reflect actual Defence Planning Assumptions and anticipated resource levels. DLO Integrated Project Teams model usage and consumption patterns, adjusting and improving modelling techniques in order to improve the accuracy of their forecasts.

  Surplus equipment and material is disposed of by the Department's Disposal Services Agency (DSA). The disposal of the ships, aircraft, vehicles and other major capital assets is either through sale to foreign Governments, to other customers, or by commercial disposal. Other equipment and spares are disposed of through a range of commercial and regional marketing agreements that have been established with industry. Items are sold in accordance with strict rules and regulations.

  The Department is taking steps to ensure that the Armed Forces are equipped and supported to deal enable them to meet contingent operational tasks. This includes generating, where appropriate, the stock holdings that would be required to support possible operational commitments.

LESSONS LEARNED AND IMPLEMENTED FROM MAJOR FIRES (Q420)

  Following the fires at Donnington, operationally important stores items have been segregated and a comprehensive fire protection programme has been undertaken.

  Those items that are categorised as Strategically Important/Mission Essential (SI/ME), a stock segregation policy is followed. This policy draws directly upon the lessons learned from the two Donnington fires and is applied at Defence Storage and Distribution Agency (DSDA) sites, including Donnington. The segregated storage policy requires that:

    (a)  No more than 70% of an SI/ME item is stored in a single location.

    (b)  If the total MOD holding of items is less than 10, the stock-split ratio is to be 50/50.

    (c)  The total value of stock that may be held in a fire compartment/building is dependent upon the level of fire protection and ranges between £132 million up to £194 million.

  The completion of Buildings C4 and D1 at Bicester in May-June 2002 marked the end of the DSDA element of an extensive programme of fire protection works which commenced after the 1988 Donnington fire. The programme covered 20 major store sheds at Bicester in addition to fire main and fire alarm works, and six major store sheds at Donnington and associated water mains and 21 buildings at Stafford. The fire protection work also included significant elements of general refurbishment, in addition to specific fire protection measures.

REASONS FOR THE CURTAILMENT OF DSMS, OPTIONS FOR A SIMILAR CAPABILITY AND THE COST OF THE ABORTED WORK ON DSMS BEFORE ITS POSTPONEMENT

  The original objectives of the Defence Stores Management Solution (DSMS) were to manage the single Service inventories as a single Defence inventory, to build a single system to replace the existing Royal Navy, Army and Royal Air Force systems, and to provide a deployed inventory management capability. The project was still in the technical demonstration phase and had not achieved Main Gate approval when it was suspended.

  Initial whole-life costings placed the project cost at between £470 and £620 million and, because of concerns about technical complexity and risk, approval to proceed was granted incrementally and for a technical demonstration only. In Autumn 2001, the DLO was obliged to slip DSMS development by three months to help contain in-year expenditure. Subsequent work that autumn and in early 2002 on the Department's forward programme indicated that DSMS could not attract in the short-term—that is, before the outcome of Spending Review 2002 was known—sufficient priority for funding against the then pressures on the Defence budget and other higher priorities. In addition, the emergence at around the same time of new Enterprise Application Integration technologies potentially offered a more cost-effective and lower-risk route to meeting the requirement to provide a single view of the Defence inventory without building a single system. As soon as these factors became apparent, the decision was taken to suspend the project at the earliest contract breakpoint in December 2001, thereby minimising cost and risk, pending identification of a revised way forward.

  The MOD is now considering, in the light of the possible new ways forward, a recommendation formally to cancel the project as originally conceived, although the original inventory management needs, including the continuing need for a deployed inventory management capability, remain. These will be addressed as part of a wider review of the Defence logistics process, which should complete by mid-2003 and help identify how the DLO will achieve the benefits originally ascribed to DSMS.

  Expenditure on DSMS to date totals £130 million. However, MOD has gained significant value from the investment, having learnt much from the work undertaken to date.

THE NUMBER OF SERVICE PERSONNEL AND CIVILIANS WORKING IN EACH OF THE DLO BUSINESS UNITS AND THE DLO HEADQUARTERS (Q460-462)

  The following table shows the manpower strength of the DLO as at 1 November 2002.


Units
Service Personnel
Civilian Personnel
Total

DLO Headquarters
192
544
736
Warship Support Agency
2,778
5,195
7,973
Equipment Support (Land)
417
1,876
2,293
Equipment Support (Air)
1,701
2,625
4,326
Defence Supply Chain
731
6,441
7,172
Defence Communication Services Agency
1,705
3,138
4,843
Total
7,524
19,819
27,343


GIFTING OF CHALLENGER TANKS TO JORDAN (Q472-278)

  We are currently in the process of amending the Anglo Jordanian Memorandum of Understanding (MOU) to include the provision, as a gift, of the remainder of our surplus Challenger 1 MBT fleet. This will allow the transfer to Jordan of up to 402 surplus Main Battle Tanks and 15 surplus Driver Training Tanks under the "Al Hussein" Programme.

  The Department is funding the refurbishment, by the Army Base Repair Organisation (ABRO), of the first 44 vehicles to an agreed "operational" standard. The remainder will be brought ABRO to an appropriate condition for transportation and delivery. This work is being resourced using either marginal ABRO capacity, or money from the Defence Assistance Fund. In this context, the Department has assessed that the cost of reducing the vehicles to scrap, by demilitarisation and removal of special armour, was far greater than the cost of vehicle preparation prior to gifting.

  No desertisation or other modification will be undertaken on the vehicles. However the MOD had already desertised some of the fleet (during OP DESERT STORM in 1991), to improve vehicle performance in desert conditions. The Jordanians authorities are aware of the condition of the vehicles and have sought quotes from British Industry for the supply of a modification package for local application.

  The MOU also provides for support and training package for the CRI MBT (renamed "AL HUSSEIN" in Jordanian service). The Jordanians agreed to provide appropriate funding for a UK-based Project Team, as well as for surplus spares, ammunition, special tools, test equipment and training equipment if these were judged to have a net realisable residual value. Equipment that is common, or relevant, to CHALLENGER 2 or other British Army vehicles has not been offered to the Jordanians and such items will be obtained commercially. Given that Jordan is now the sole operator of the CR1 MBT, and that almost all unique spares have no alternative use, other than as processing for scrap, the Department has assessed that it is actually cost-effective in most cases to offer the spares to Jordan free of charge. Where this is not the case the appropriate bills have been presented to Jordan. Gifting avoids the costs of repackaging, transportation, de-classification and/or demilitarisation and disposal verification associated with industrial scrap processing. The Committee may also be interested to know that considerable disposal cost savings have been achieved for surplus tank ammunition as well, by gifting it to the Jordanians instead of the usual reduction to scrap.

  Approximately 75% of surplus CR1 MBT spares have already been supplied to Jordan. The remaining spares will be packaged and despatched from DLO depots by late 2003.

DETAILS OF THE LOGISTICS SUPPORT PROJECT AT COTTESMORE/WITTERING

  The Department is undertaking a number of wide-ranging reviews of logistic support with the objective of achieving substantial efficiency improvements.

  A Harrier Future Integrated Support Team (FIST) consisting of personnel from the MOD and industry (predominately BAE SYSTEMS) has been created as part of this work. The team is working closely with the front-line and industry to optimise the efficiency and effectiveness of logistics support. This is being achieved partly by rationalising the key maintenance activities at the main operating bases at RAF Cottesmore and RAF Wittering. Support processes at third and fourth line, and in industry, can then be streamlined and made as cost effective as possible. Already substantial reductions in repair turn round times have been made, as well as inventory reductions.

  The major industry suppliers to Harrier are BAE SYSTEMS and Rolls-Royce. The cost of the MOD element of the FIST programme is approximately £1.3 million per annum, mainly in the form of additional manpower costs. However, these costs are already being recovered in the form of increased availability of stock, and it is expected that overall savings will vastly outweigh the costs. Industry is investing in this work at similar levels. This approach is consistent with our overall strategy of working more closely with our industrial suppliers.

  The Harrier team is actively encouraging closer DARA involvement, and DARA will, of course, be eligible to bid for our work under normal procedures.



 
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