Supplementary memorandum by the Ministry
of Defence (17 January 2003)
The McKinsey study cost some £1.5 million,
and identified efficiencies and improvements which will help the
Defence Logistics Organisation achieve its Strategic Goal.
THE 20% OUTPUT
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
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.
AVAILABILITY (Q402 AND
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
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.
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
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.
OF DSMS, OPTIONS
DSMS BEFORE ITS
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-termthat
is, before the outcome of Spending Review 2002 was knownsufficient
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.
DLO BUSINESS UNITS
DLO HEADQUARTERS (Q460-462)
The following table shows the manpower strength
of the DLO as at 1 November 2002.
|Warship Support Agency||2,778
|Equipment Support (Land)||417
|Equipment Support (Air)||1,701
|Defence Supply Chain||731
|Defence Communication Services Agency||1,705
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
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.
The Department is undertaking a number of wide-ranging reviews
of logistic support with the objective of achieving substantial
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
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