Funding the Fleet

ould you spend your paycheck the same way you spend your agency's funds? That question has become a litmus test for Adm. William "Bud" Flanagan, commander in chief of the Navy's Atlantic Fleet, and the cadre of deputies who manage the fleet's 148,800 troops, 195 ships and submarines, 1,360 aircraft, and the 18 major shore stations that sustain the fleet with training, maintenance and logistics support.

It may not seem a revolutionary approach to management, but it has revolutionized the way the Atlantic Fleet operates. From tearing down unused buildings to reorganizing ship rotations in the Caribbean, fleet managers have saved millions of dollars and avoided millions more in projected expenses. They've begun leasing unused property to private businesses in exchange for services, they've cut redundant activities and begun coordinating efforts with Naval operations outside the fleet that affect fleet management.

In short, they've begun measuring the cost of doing business-everything from how much it costs to heat and cool buildings to how much is spent calibrating weapons and training troops for military operations. By measuring how much they're spending for what return, fleet officials have in some cases dramatically changed the way they do their jobs. It's not rocket science, but for an institution that for decades paid the bills and asked questions later, it's a quantum leap in management.

"We always measured what we did and what it cost but we kind of did it after the fact," says Flanagan, who will soon retire. He has been the major force behind the changes at the Atlantic Fleet, Navy officials say. With nearly three decades of experience in the Navy and a degree from Harvard Business School, Flanagan brought to the job a depth of experience and an affinity for finance and accounting critical in this era of shrinking budgets and expanding missions.

The first thing he wanted to know when he arrived at fleet headquarters in Norfolk, Va., in April 1994 was "How did we spend our money?" he recalls. The answers were not forthcoming. He quickly learned there were few good measures of the Navy's investment and return in fleet operations. For example, while Atlantic Fleet was spending about $100 million a year on electricity, it had no way of knowing how much it was spending on energy in specific areas of operation, says Monica Shephard, deputy director for shore activities.

"We could easily measure the large program costs [for energy], but we didn't have a handle on actual energy use in specific buildings. We had a huge meter at the front gate," she says, but no way to break down consumption or target areas for savings.

To control energy costs, the fleet is investing $4 million in electricity meters for ships and major facilities. The meters will allow officials to measure 80 percent of electricity consumption, Shephard says. Measuring 100 percent of consumption-by putting a meter on every building-would cost $17 million, a cost not justified by potential savings. The Navy also hired a consulting firm to study its energy plans. By becoming "a very educated consumer," Shephard says, the Navy was able to negotiate better deals with power companies in Virginia and Jacksonville, Fla., where the fleet incurs three-quarters of its electricity costs. Based on current usage, the fleet will save $65 million over the next 10 years. Some of the savings will be invested in such things as energy-efficient lights and automatic timers, which should reduce costs even further, she says.

Follow the Money

When a private company offered to pay the Navy several hundred thousand dollars a year to rent an old, unused building at the Norfolk headquarters, the first thing Flanagan wanted to know was how much the service would have to pay to maintain the building for the renter. The first-ever analysis of Atlantic Fleet's electricity bill showed the World War II-era building would consume about $1 million in heating and cooling costs. Flanagan quickly declined the offer and ordered the relic destroyed.

The building is just one of dozens that have been torn down on Flanagan's watch; dozens more face the same fate. The demolition program has not only relieved the fleet of expensive, outdated and unused buildings, it has cleaned up this sprawling installation and revealed some stunning waterfront property-an attractive lure for private businesses interested in investing here in exchange for a share of the profits.

Such private investment is central to Flanagan's vision. While the Navy has long been a cornerstone of the economy in Virginia's tidewater region, Flanagan has managed to parlay the changed security environment following the Cold War and his own business acumen into unprecedented partnerships with the local businesses.

The Atlantic Fleet is now working out an agreement with the Virginia Port Authority to allow the neighboring Norfolk International Terminals to build warehouses on excess Naval property in exchange for cargo-loading services. The plan would redirect rail and truck routes over Naval property, benefiting both the Navy and the terminals. The project, called the Intermodal Partnership, would encourage investment in the region, Shephard says.

In another potential investment project, the Navy has issued a request for proposals to develop a narrow slice of waterfront property called Willoughby Spit. The land, occupied by dilapidated troop apartments, could be a developer's dream with its commanding view of the Chesapeake Bay and easy highway access. According to the plan, a developer would raze the apartments and replace them with a hotel-office-marina complex and upscale town houses. The Navy would use the proceeds from the leased property to finance troop housing elsewhere.

It's not just businesses Flanagan wants to attract to the Naval base. He has removed the guards from the entrances and opened the gates to the public. Visitors no longer face long entrance lines and random inspections and the guards have been redeployed to provide added security in housing areas and at facilities closed to the public.

When fleet spokesman Capt. George Farrar gives a reporter a tour of the base, he sees beyond the endless parking lots that line Decatur Avenue-which parallels the Navy's long row of piers-and imagines bustling sidewalk cafes and restaurants that may one day transform this industrial site into an attractive leisure-time destination for troops and tourists alike. Past the piers, an attractive brick visitors center and restaurant soon will occupy grassy fields not long ago covered with abandoned buildings and disposal facilities.

Cooperation, Not Competition

Not all the changes at the Atlantic Fleet are apparent to visitors. The fleet's maintenance and logistics programs in particular have undergone substantial changes.

By applying an industrial engineering approach and using business case methods to consider alternative processes, Rear Adm. Art Clark has seen the fleet maintenance program evolve into a vastly more efficient operation. The changes were necessary. The fleet maintenance budget used to be $2.5 billion; now it's $1.3 billion, says Clark, the director of fleet maintenance.

By developing a regional maintenance program in conjunction with the Pacific Fleet, redundant, competing operations have been reduced and maintenance activities have been made more efficient, Clark says. "Our business plan that we implemented in 1996 shows about $944 million in savings and cost avoidance. That number has been substantiated by both the [Defense Department] comptroller and the Naval Audit Service. The majority of that savings has been right here in Hampton Roads. It adds up to about 94 initiatives using business case analyses. What we look for are duplicate activities that could be in competition with one another, where there's not sufficient workload to utilize them sufficiently."

For instance, Clark says, the fleet relied on 43 different calibration activities managed by several different organizations before an executive steering committee consolidated the 43 into one with three satellite locations. Some of the former calibration activities were as small as two to three people sitting around waiting for work, Clark says.

"Getting people to look beyond their own budget and consider the Navy's interests is tough," Clark says. In addition, it's often difficult to convince a commander to give up "ownership" of a particular activity for some greater good if he or she fears losing control of a vital part of the operation. "Some of those ownership issues are very heavily ingrained," he says.

Monica Shephard also knows the importance of working cooperatively with organizations outside the fleet. While the fleet wanted to get the best deal possible when renegotiating contracts with power companies in Virginia and Florida, it wasn't the fleet that conducted the negotiations. Instead, the Naval Facilities Engineering Command was responsible. "We basically helped them help us," by hiring the outside consultant and doing the legwork necessary to get the best deal, she says. "We no longer have the luxury of dealing with budget cuts as if we were isolated fortresses in the wilderness."

Says Clark: "We can do an awful lot at my level but we can't carry those changes across disciplines without someone like Adm. Flanagan. That kind of leadership is absolutely essential."

Clark also has developed partnerships with the Norfolk and Portsmouth Naval Shipyards, which provide the bulk of maintenance for the Atlantic Fleet. The shipyards operate under the Navy's Sea Systems Command, making the partnerships essential to improving workload management and reducing overhead costs for the fleet. Because the Sea Systems Command runs the yards and then bills the fleet for maintenance performed there, it is imperative the fleet take a proactive role in managing the yards' workflow, and therefore the costs.

"One of the things we've done is to work very aggressively in managing [the yards'] workload and workforce [and] stay true to the budget that we developed the year before, basically trying to maximize the use of that workforce. Last year we saved over $30 million," Clark says. He and his colleagues also have targeted more than 140 underused buildings at the yards for demolition. By reducing unneeded infrastructure, they will be able to further reduce overhead costs.

"Our involvement has been to recognize they are a full-service major industrial activity. If [the yards] are going to be successful, we have to help manage the workload as we deal with consolidation of our activities. We can be complementary and not competitive," Clark says.

Looking Ahead

Making budget decisions based on considerations beyond the next three to five years is one of the greatest challenges managers face, Clark says. "You have to ask yourself, if we keep this building or activity for 30 years, what is the long-term burden? We're conditioned to do five-year planning, not 30-year [planning]." Clark says, managers must invest according to long-term plans and not cave into short-term pressures.

Rear Adm. Dave Ruble, director of fleet logistics, has presided over reforms in logistics support.

"One of the things we found, afloat particularly, was that we were trying to manage two [logistics support] systems, one for large ships and one for small ships, and all the associated equipment and training and the oversight that's associated with sustaining both of those. We've got a pretty aggressive program right now to standardize that to one system," says Ruble.

By taking advantage of information technology and changing business processes, the fleet is creating a single support system. The new system will make it easier to monitor what's in the supply pipeline and it will standardize accounting, allowing managers to see logistics data in real time and make better budget decisions.

"Currently we have aviation storekeepers and surface storekeepers. This system will allow us to standardize that entire training pipeline. It will also allow us ultimately to use our ships as remote warehouses. We'll be able to take a big portion of that inventory [and] financial management workload, and move it ashore and the ships will become remote transaction reporting sites," Ruble says.

Early results of a prototype system kicked off in October have been positive, he says. In all likelihood, the fleet will be able to significantly reduce inventory-and the related overhead costs-as a result of tracking supplies better.

"By having enhanced visibility we'll be able to invest in less," Ruble says. "The inventory that we do currently have-about $5 billion-is really about $300 million less than it was in 1994, and that reduction really has come from optimizing our fleet materiel inventories, better modeling techniques, increased visibility that we've been able to achieve with some of the automation to date, and reducing some of our logistics response time."

He projects the fleet will be able to save another $190 million in 1997 and 1998 through further inventory reductions.

Reengineering ordnance management is next on Ruble's list. In looking at how ordnance loads are managed, "We found it wasn't frightfully efficient," he says.

"We were changing our loads based on the individual desires of warfare commanders to have a certain bag of things. We have been able to achieve a standardized ordnance load for each of the carrier battle groups going out. That load is locked in six months ahead of time. That cuts down on the amount of churn and return and cross-decking of ordnance.

"Every time you touch it, it costs you money. The emphasis has been on 'Let's touch it as few times as we can and moderate that cost,' " he says. The fleet has devised a standard load based on the requirements for fighting a major regional conflict.

"We've also shifted our load philosophy," he says. "Rather than sustaining an 80 percent load on all combatant ships at all times, we now tailor the load on them to the missions they have. It makes very little sense for us to put strike weapons on platforms that are going down to do drug operations. So we have literally tailored our ordnance load and that's brought us about a $12 million reduction in our ordnance handling costs on an annual basis."

Efforts such as consolidating strategic weapons from three sites down to one site, tailoring the loads and standardizing the logistics system have resulted in about $23 million worth of annual savings with another $4 million to $5 million in savings anticipated over the next two years.

Expecting the Unexpected

Not all of the Atlantic Fleet's innovations have been in shore operations. Post-Cold War military cuts have reduced the size of the fleet but not the number of fleet deployments. As a result, Flanagan and his deputies have learned to conduct operations more efficiently. For example, a new Western Hemisphere Group, based in Mayport, Fla., operates solely in the Caribbean, with its ships responding exclusively to matters in that region.

In addition, training schedules for ships preparing for overseas deployments have been conducted closer to home, trimming fuel costs and training time.

Like the Army and the Air Force, the Navy finds itself playing an increasing role in humanitarian operations. And like its sister services, it has felt the burden of those increased missions in its operating budget. In 1994, Atlantic Fleet found itself picking up the tab for holding thousands of Haitian and Cuban migrants who had fled their homelands for the south coast of Florida. The military transported the migrants to Guantanamo Bay and held them in camps while the Clinton Administration tried to negotiate a solution to the problem.

"We learned some very painful and very expensive lessons in terms of how to ramp up a migrant surge site," Ruble says. The Atlantic Fleet, which initially found itself spending about $1 million a day on the operation, primarily out of its maintenance budget, has developed a plan for dealing with similar situations in the future. The plan includes everything from the supplies each migrant is likely to need to menus.

"I think we are ready at this juncture to cost-effectively handle up to about 10,000 migrants," Ruble says, spending half of what the Navy spent initially in 1994.

The planning is essential, Flanagan says. "The refugee business is probably going to be with us for a while. We don't like to sit here and predict what's going to happen because we don't know. But there's some indicators that there's a boiling pot on the back of the stove in the Caribbean right now."

The Navy must never lose sight of the fact that its primary mission is to fight and win the nation's wars, Flanagan says. But it also must be responsive to the nontraditional needs posed by recent humanitarian and peacekeeping missions. And in order to be responsive in these lean times, it must operate more like a corporation than a bureaucracy. "We all find ourselves operating in a different world today," he says.

It's a world that demands financial accountability: "Would you do it with your own money?" It's a question the admiral can be counted on to ask.