Profit Center

n the fall of 1990, as America's armed forces geared up for Operation Desert Storm, officials at the Defense Personnel Support Center's sprawling industrial complex in Philadelphia found themselves in the middle of the largest U.S. military deployment since the Vietnam War. They had to feed, clothe and provide medical supplies to hundreds of thousands of military personnel. Fortunately, supply center officials had several warehouses full of necessary materials. Or so they thought.

"At the armed services' request, we put nearly $700 million worth of medical supplies into the theater in anticipation of a wholesale ground war," recalls George Allen, deputy commander of the supply center, now known as Defense Supply Center Philadelphia (DSCP). "We had at one point over 50 railroad cars full of IV solution. We put it on ships and planes and moved it overseas. As it turned out, though, for all the stuff we had in depot, the $700 million worth of supplies we sent over was brand new. Nobody wanted the stuff we had in depot. It wasn't what the doctors were used to using, so we had to go out and buy the materials they wanted."

The medical directorate was not the only division that misfired during the Gulf War. The manufacturing base that DSCP relied on was not prepared to deal with a large-scale military deployment. Many suppliers, bracing for defense budget cutbacks, had downsized. DSCP had to scramble to find new ones, according to "Making Washington Work: Tales of Innovation in the Federal Government," a 1999 Brookings Institution report profiling winners of the Innovations in American Government awards.

Not even the legendary warehouses full of supplies could help. "The notion that stockpiling in depots equaled defense readiness was shattered when searches through the vast DSCP warehouses turned up boots for the Korean War, millions of bottles of nasal spray, and World War II-era hospital gowns, among other items that had limited usefulness in the sands of Saudi Arabia," according to the report.

As the Gulf War ended, other challenges arose. The Base Realignment and Closure Commission (BRAC) in 1993 targeted the supply center for relocation. More than 3,000 employees were slated to lose their jobs or be moved to facilities in central Pennsylvania. At the same time, acquisition reform was changing the way military personnel bought supplies. The supply center, a part of the Defense Logistics Agency, once had a captive customer base, selling the armed services nearly all of their food, clothing and medical supplies. In the early 1990s, however, the Pentagon instituted new acquisition rules that allowed the services to make purchases themselves, bypassing supply centers. Declining sales, warehouses full of useless supplies and a pending base closure sounded an alarm at DSCP. Officials who had been experimenting with more commercial-like approaches realized they had to move full steam ahead and completely reinvent their organization.

"We were good at getting low prices for materials. But you got standard military issue quality," says Allen. "It was all done to [military specifications]. You got what was in the depot. The commercial sector was providing supplies in a totally different way. Our customers did not like what we were providing them, so they spoke to us very loudly. Our sales started going down. Desert Storm brought the message home very clearly." He continues, "Then came the BRAC decision. The supply center had to demonstrate it had significant military value and therefore should not be BRAC'd."

Commercial Copycat

The Defense Supply Center Philadelphia is one of three centers providing logistical support to the armed forces. DSCP primarily handles commercially available commodities such as medical supplies, clothing and textiles, and food. In 1999, DSCP took on a general and industrial division that sells everything from wood and plumbing products to diving and firefighting equipment. The other two centers-at Richmond, Va., and Columbus, Ohio-focus on more specialized products, such as spare parts for jet fighters.

Nonetheless, DSCP employees were bound by burdensome requirements to purchase goods based on military specifications. Large manuals detailed exactly how manufacturers should make everything from T-shirts to chocolate chip cookies. DSCP also had to award contracts to the lowest bidder, even though the quality of products was often sub-par, says a former DLA official. Contracts were awarded on a year-by-year basis, making it difficult to establish long-term relationships with manufacturers.

DSCP's distribution system left a lot to be desired as well. It took more than 60 days in some instances for military medical centers to get supplies, according to Robert Molino, who headed the Philadelphia operation from 1985 to 1995. Most recently, he served as executive director for procurement at DLA. "We had nothing but unhappy customers," says Molino, who now runs his own e-business consulting firm in northern Virginia. "The solution was to change how we were buying."

Change they did. For more than a decade, DSCP has been adopting private-sector business practices. Gone are the large warehouses full of uniforms and medical supplies. The agency is now a supply-chain manager. It was one of the early adopters of "prime vendor" contracts, in which the agency designates a primary contractor to handle a particular category of products. That vendor, in turn, has agreements with various suppliers to provide goods. Customers communicate directly with the prime vendor. DSCP sits in the background monitoring the transactions and managing the contracts. "When we were buying something and distributing it ourselves, we were replicating something that did not need to be replicated," Allen says. "We were absolutely duplicating what was being done in the commercial sector."

Under Molino's stewardship, DSCP also shifted its focus from awarding year-by-year contracts to establishing long-term partnerships. This idea was born out of a 1988 scandal in which employees of the center's clothing and textile directorate were accused of taking bribes to place contracts with manufacturers. Nearly half of the division's vendors were barred from doing business with the Defense Department. Molino and his leadership team had to quickly rebuild the industrial base. They did so by awarding multi-year contracts. DSCP also stopped telling clothing manufacturers and distributors how to do their jobs, says Molino. Today, nearly 97 percent of clothing and textile contracts are multi-year awards.

The clothing and textile directorate also experimented with a technique called the shared production process. Rather than warehousing thousands upon thousands of uniforms, DSCP linked up with manufacturers who could ramp up quickly in the event of a military deployment. Terry Manufacturing, a minority-owned clothing manufacturer in Roanoke, Ala., was among the first to enter into such an alliance.

"We were already a supplier to DSCP. We were also a supplier to the commercial market, including McDonald's," explains company CEO Roy Terry. "Part of the thought process was, if another conflict like the Gulf War comes along, how are we going to supply troops with uniforms at a wartime level while we are really trying to operate with a peacetime workforce?" He continues, "Why can't we have a national guard of sewing machine operators? Why not pull people who do McDonald's uniforms, cross-train them on how to do military uniforms and after they are done, send them back to doing McDonald's uniforms?"

The innovations boosted DSCP's business. Total sales jumped from $4.1 billion in 1994 to $5.4 billion in 2000. Officials expect sales to top $6 billion this fiscal year. Gone are the stockpiles of goods. In the early 1990s, nearly 70 percent of DSCP sales came from warehoused materials. Now, warehouses account for just 39 percent of sales. From 1993 to 2000, DSCP's on-hand inventory dropped from $3.96 billion to $2.24 billion. All the while, prime vendors made DSCP more efficient-the average response time to fulfill a customer's order has dropped to five days, compared with 30 days in 1993.

At the same time, DSCP leverages its tremendous buying power to save customers money-even though it imposes surcharges ranging from 6.5 percent for medical supplies to 40.5 percent for general and industrial items. Blaze Hilman, material inventory program manager at the Naval Aviation Depot in Cherry Point, N.C., says she saves more than $16 on every container of a primer adhesive she buys through a DSCP prime vendor compared with what she would have to pay a vendor on the General Services Administration's supply schedule. For other commodities, the savings can be as much as $40. DSCP's success comes at a critical time for the Defense Department. The General Accounting Office still considers its overall logistics system a high-risk area. "The types of things they are doing in Philadelphia and the use of best practices is clearly the direction to go," says GAO's Dave Warren.

Too Much, Too Fast

The successes at DSCP have brought growing pains, too. Following the most recent round of base closings in 1995, DSCP swallowed up its counterpart on the other side of town, the Defense Industrial Supply Center. The merger became official in July 1999, but the transition has been anything but smooth. Unlike DSCP's other commodity lines, few general and industrial products are commercially available. Therefore, it is more difficult to adopt innovative business strategies.

Between July 1999 and September 2000, there was a 48 percent rise in back orders for general and industrial products, according to a March 2001 report by the Defense Department's inspector general. Before July 1999, purchase requests were awarded in 85 days and 88 percent of requisitions were being filled from stock. But by September 2000, purchase requests were being awarded in 107 days and only 83 percent of requisitions were being filled from stock. "The decline in supply effectiveness meant that DSCP increasingly did not provide its customers with the items they requisitioned," the inspector general noted.

The root of the problem was poor planning. DSCP and DLA officials did not provide adequate personnel to support the new division. Additionally, DSCP tried to integrate commercial practices too quickly in its general and industrial directorate. During the past few months, however, the division has made some strides. After back orders peaked at 204,000 in September 2000, they dropped to about 180,000 in March. Customers seem pleased with the progress the division has made. "I'm a happy camper," says the Naval Aviation Depot's Hilman. Through a prime vendor contract, Hilman has been able to speed up the acquisition of critical tools and machine parts.

Like any good business leader, Allen realizes that DSCP can ill afford to rest on its laurels. The agency is in a competitive environment. Procurement officials across the military are armed with credit cards and able to make purchases on their own. That's why DSCP constantly is trying to come up with new ways to improve business. The center's subsistence division, for example, is looking for new customers. It is bidding to get a $450 million, five-year contract to provide food services to VA hospitals. The division already purchases produce for the Agriculture Department in 40 states and has similar arrangements with the Labor Department's Job Corps. It is also beginning to market full-service capabilities.

"We can go in and not just deliver the food, but get a prime vendor to do the prep work, to cook the food and do the cleaning," says Capt. Doug Sweeney, commander of the subsistence directorate. "Our goal is to manage the supply chain from the source to consumption."

That may be reaching too far, says Ken Beeks, vice president of the Tail-to-Tooth Commission, a panel set up by the trade group Business Executives for National Security. The commission supports privatizing Defense support functions, but not competing with the private sector. DSCP should stick to its core competency of providing commodities, not entering into service agreements, Beeks says.

DSCP's divisions are also looking for ways to further use e-commerce initiatives. DSCP already relies heavily on electronic data exchanges and electronic funds transfers. In 1997, the center took in less than $1 billion in electronic payments. But by the end of fiscal 2000, nearly $3.5 billion, or 95 percent of payments, came electronically. In many instances, DSCP requires electronic data exchanges in its contracts with vendors. DSCP also is looking to the Web to broaden its horizons. In late 1998, DSCP's medical division launched an electronic catalog to give customers a new way to order supplies. The site allows medical officers to purchase products that are not available through a prime vendor-primarily optical, laboratory and dental supplies. Customers simply log on and fill up their shopping carts. Orders are then placed directly with distributors and manufacturers. The system allows for price comparisons among suppliers.

"You can set up standing orders so they are taken care of automatically. The next step is to interface with inventory systems so you don't even have to go the Web to do the ordering," explains Stephen McManus, deputy director of the medical division. When the system went public in April 1999, it generated about $100 a month in sales. That has since jumped to nearly $2 million.

Taking Stock

Not all of DSCP's innovations are measured in increased sales. The clothing and textile directorate, for instance, teamed up with researchers at California Polytechnic State University and Clemson University to help the armed services better manage their clothing inventories. They are in the sixth year of a seven-year project. By installing scanners and updating software at two Marine Corps training centers, DSCP was able, for the first time, to monitor inventory levels at the point where uniforms are handed off to recruits. That's created a more efficient distribution system. Instead of overstocking, the training centers can maintain appropriate inventories.v "We started capturing data from recruiters as well," says Bernie Johns, a specialist in the clothing and textile directorate. "So now we can see who is coming in the camps next week and the week after. The Marines are now using that to see what inventory they'll need."

The directorate is also experimenting with 3-D body scanners to get more accurate measurements for dress uniforms. A scanner has been installed at a Marine base in San Diego, and one is planned for Parris Island, S.C. The scanner has a 92 percent accuracy rate, compared to 52 percent for manual measurements, Johns says. That means recruits spend less time in the fitting room and more time training.

Casting an eye inward, DSCP officials know they can't maintain their steady growth unless they continue to make internal changes. Over the past two years, the human resources department, working with the Office of Personnel Management, has conducted a skills assessment of DSCP's staff. The study unearthed deficiencies in basic reasoning skills, particularly in arithmetic. DSCP employees also fell short in several business competencies, including problem-solving and decision-making. Those gaps appear to be the result of downsizing efforts and the shift of workers from clerical jobs to more business-oriented positions.

DSCP's human resources department is developing a training program to address these problem areas. In some cases, employees will go to basic training classes. In other instances, training will be modified to meet a specific business unit's needs. DSCP allocates nearly $4.5 million annually for training programs, including college reimbursement. In another attempt to keep staff sharp, Allen instituted a rotation system two years ago under which senior managers are pulled from their jobs and put into a different commodity line. After a year, managers can stay in their new job or return to their previous division. Among 25 rotations last year, nearly half opted to stay in their new jobs. Allen says the program spreads institutional experience and brings new energy and a fresh set of eyes to problems. It's been received so positively that the employees' union expressed an interest in having rank-and-file workers participate. "You start by moving your best," Allen says. "You do that and everybody says, 'Oh my, they are moving some really good people here.' If those people you move say, 'This isn't a bad deal. In fact, this turned out to be a good thing,' then you overcome all the barriers."

Dennis Dudek, director of business systems modernization, was part of the first round of rotations. He was forced to leave his job in clothing and textiles, where he ran his own business unit, to lead a technology division charged with retooling DSCP's antiquated legacy systems. "When the first rotation came up it was greatly opposed," Dudek says. "I ran my own business and grew it every year for five years. I was really excited about my job. But contrary to what we thought, we were getting stale in our jobs."

Dudek has been in his new job for eight months and feels energized by the challenge. While not a techie, Dudek has business savvy. "My job is to figure out how to make the technical solution work at the buyer's desk," he says. That will be quite a challenge. DSCP is in the process of installing a new computer system that will enable staff to track a customer's ordering history and provide an in-depth analysis of buying patterns.

The rotation system, training efforts and new computer system are designed to keep DSCP moving forward. "The greatest danger they face is complacency," says Molino. "They [might] sit back and say, 'We've done very well and we don't have to pursue new business practices.' That is my greatest fear."