Arroyo Center Rethinking Governance of the Army’s Arsenals and Ammunition Plants W. Michael Hix (cid:2) Ellen M. Pint John R. Bondanella (cid:2) Bruce Held Michael V. Hynes (cid:2) David Johnson (cid:2) Art Pregler Mike Stollenwerk (cid:2) Jerry Sollinger R Prepared for the United States Army Approved for public release; distribution unlimited The research described in this report was sponsored by the United States Army under Contract No. DASW01-96-C-0003. Library of Congress Cataloging-in-Publication Data Rethinking governance of the Army’s arsenals and ammunition plants / W. Michael Hix ... [et al.]. p. cm. “MR-1651.” ISBN 0-8330-3322-0 (Paperback) 1. Arsenals—United States—Management. 2. United States. Army—Ordnance facilities— Management. I. Hix, William M. (William Michael), 1940– UF543.A3R48 2003 355.7'068—dc21 2002154485 RAND is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND® is a registered trademark. RAND’s publications do not necessarily reflect the opinions or policies of its research sponsors. © Copyright 2003 RAND All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from RAND. Published 2003 by RAND 1700 Main Street, P.O. Box 2138, Santa Monica, CA 90407-2138 1200 South Hayes Street, Arlington, VA 22202-5050 201 North Craig Street, Suite 202, Pittsburgh, PA 15213-1516 RAND URL: http://www.rand.org/ To order RAND documents or to obtain additional information, contact Distribution Services: Telephone: (310) 451-7002; Fax: (310) 451-6915; Email: [email protected] PREFACE This report documents the results of an analysis of the Army’s ordnance indus- trial base. It focuses on arsenals and ammunition plants. Specifically, it ana- lyzes Watervliet and Rock Island arsenals and 14 ammunition plants, 11 of which are operated for the Army by contractors, and it considers alternative forms of governance and management for each class of installation. The work was sponsored by the Army G-8. It should interest those involved with the mil- itary industrial base or transferring government activities to the private sector. The work was carried out in the Military Logistics Program of RAND Arroyo Center, a federally funded research and development center sponsored by the United States Army. iii iv Rethinking Governance of the Army's Arsenals and Ammunition Plants For more information on RAND Arroyo Center, contact the Director of Opera- tions (telephone 310-393-0411, extension 6500; FAX 310-451-6952; e-mail [email protected]), or please visit the Arroyo Center’s Web site, found at http://www.rand.org/ard/. CONTENTS Preface .................................................. iii Figures .................................................. ix Tables. .................................................. xi Summary ................................................ xvii Acknowledgments. ......................................... xxix Abbreviations ............................................. xxxi Chapter One INTRODUCTION ....................................... 1 Scope and History of the Study ............................. 1 Study Progress to Date. ................................... 2 Phase 1: Watervliet and Rock Island Arsenals ................. 2 Phase 2: Qualitative Assessment of Broad Options ............. 3 Phase 3: Development and Assessment of Specific Options ...... 4 The Ordnance Industrial Base Today ......................... 5 Ownership and Workforces .............................. 6 Funding of Ordnance Materiel ............................ 7 Replenishment ....................................... 9 Organization of This Report ................................ 9 Chapter Two BUILDING THE NATION’S FOUNDRY: THE EVOLUTION OF THE ARMY ORDNANCE INDUSTRIAL BASE ................... 11 The First Era: Arming the Soldiers of a New Nation .............. 12 Colonial Antecedents ................................... 12 Arming the Revolution .................................. 12 The Early American System .............................. 13 Early Tests: The War of 1812 and the Mexican War ............. 14 From the Civil War to the Great War .......................... 17 From the Great War to World War II .......................... 22 v vi Rethinking Governance of the Army's Arsenals and Ammunition Plants From World War to Cold War, Limited Wars, and Sole Superpower ........................................ 28 Chapter Three PROBLEMS AND ISSUES .................................. 31 The Case for Change ..................................... 31 Our Assessment of the Base ................................ 33 Lack of a Strategic Vision or Plan .......................... 33 Management Distraction ................................ 35 Reduced Workload and High Costs ......................... 35 Invisibility of Costs. .................................... 38 Lack of Access to Capital ................................ 43 Low Priority of Ammunition .............................. 44 Time Required to Dispose of Excess Facilities ................. 46 Lack of a Replenishment Policy ........................... 46 Strategy by Default. .................................... 47 Army Efforts at Innovation and Change ..................... 48 Chapter Four A STRATEGIC VISION AND OPTIONS FOR ACHIEVING IT ......... 53 A Proposed Vision ....................................... 53 Policy Options for Moving Toward the Vision ................... 57 Privatization ......................................... 57 Creation of a Federal Government Corporation ............... 60 Consolidation ........................................ 61 Recapitalization and Unification .......................... 61 Assessment Criteria ...................................... 62 Mission Accomplishment ............................... 62 Long-Run Cost. ....................................... 63 Consistency with National and DoD Policy ................... 63 Administrative Ease .................................... 63 External Issues. ....................................... 64 Limiting the Options to a Feasible Set ........................ 64 Privatization ......................................... 64 Federal Government Corporation ......................... 66 Consolidation ........................................ 67 Recapitalization and Unification .......................... 67 Summary ............................................. 67 Chapter Five THE PRIVATIZATION OPTION ............................. 69 Are Commercial Producers Unresponsive? ..................... 71 Characteristics of the Market for Ordnance Materiel ............ 71 Responsiveness of Markets .............................. 75 Contents vii Examples of “Unresponsiveness” .......................... 80 Would it Cost More to Produce Ordnance Materiel in Privatized Plants?. ........................................... 83 Government Investment and Production Decisions ............ 84 Recovery of Capital Costs ................................ 87 Competition for Ordnance Production ...................... 90 Does Private-Sector Production Involve Unacceptable Risk? ........ 92 Replenishment ....................................... 92 Homeland Security .................................... 94 Loss of Irreplaceable Assets .............................. 96 Environmental Issues. .................................. 97 Bankruptcy .......................................... 99 Responsiveness to Emergency Demands .................... 102 Economic Regeneration Model ............................. 103 Conclusions ........................................... 105 Chapter Six FEDERAL GOVERNMENT CORPORATION OPTION .............. 107 Background ........................................... 107 About Federal Government Corporations ..................... 109 Creating a Federal Government Corporation ................... 112 Options for Ordnance FGCs ................................ 112 Characteristics of the Arsenal FGC ........................... 114 Organizational Structure ................................ 115 Corporate Missions .................................... 116 Corporate Charter Outline ............................... 117 Business Plans ......................................... 118 Market Type ......................................... 119 Market Size .......................................... 120 Gross Margin ......................................... 121 Market Structure ...................................... 122 Summary ............................................. 134 Chapter Seven SUMMARY COMPARISON OF OPTIONS ...................... 139 Comparing the Three Options Against the Five Assessment Criteria .. 140 Mission Accomplishment ................................. 140 Program Risk ......................................... 142 Replenishment Risk .................................... 143 Responsiveness Risk ................................... 145 Disruption Risk ....................................... 146 Risk of Falling Behind in Manufacturing Technology ............ 146 Mission Accomplishment: Comparative Assessment ........... 147 Consistency with National and DoD Policy .................... 147 viii Rethinking Governance of the Army's Arsenals and Ammunition Plants Cost ................................................. 148 Transition Cost ....................................... 150 Managerial Ease ........................................ 151 External Factors ........................................ 151 Summary of Comparative Assessment ........................ 151 Divestiture Implementation Considerations ................... 152 Divestiture Design ..................................... 153 Production Contract Bundling ............................ 154 Divestiture Option Considerations ......................... 155 Divestiture Design Option Evaluation ....................... 157 Creating a Tailored Hybrid Design: One Approach ............. 158 Summary ............................................. 160 Chapter Eight A RECOMMENDED STRATEGY ............................. 161 The Strategy ........................................... 162 Fallback Strategies. ...................................... 162 For the GOCO Plants ................................... 163 For the Arsenals ....................................... 163 Sequencing ............................................ 164 An Integrated Replenishment Strategy ........................ 165 Estimated Budget Effects .................................. 165 Privatization of GOCO Ammunition Plants ................... 166 Creation of Arsenal FGC ................................. 173 Appendix A. DEPOT DUPLICATION ................................... 181 B. REPLENISHMENT. ...................................... 189 C. MODEL OF GOCO COMPETITION WITH UNCERTAINTY ......... 213 D. BUDGET IMPACTS AND DESCRIPTIONS OF FACILITIES .......... 215 E. VALUATION OF PARCELS ................................. 287 References ............................................... 303 FIGURES 1.1. Logic Underpinning Determination of Ownership of Mission-Critical Capability ............................. 5 3.1. Inputs and Output at Watervliet Arsenal ................... 36 3.2. Utilization Rates of Machines Required to Manufacture M256 Gun Tubes at Watervliet Arsenal ..................... 37 3.3. Ratio of Overhead to Total Labor at Arsenals and Comparable Commercial Firms .......................... 39 3.4. Planned and Actual Production for the M795 155mm Artillery Projectile .................................... 45 5.1. Value of Ammunition and Ordnance Shipments, 2001 Dollars ............................................ 74 6.1. USOC, Notional Organizational Chart ..................... 115 6.2. Comparative Market Sizes .............................. 120 6.3. Gross Margins as a Percentage of Revenues ................. 122 6.4. Indirect Staffing Levels ................................ 123 6.5. Direct Labor Rates, Fully Burdened ....................... 125 6.6. Revenues for WVA in the Five-Year Business Plan ............. 130 6.7. Revenues for RIA in the Five-Year Business Plan .............. 131 6.8. Staffing for WVA Business Plan .......................... 132 6.9. Staffing for RIA Business Plan ........................... 133 A.1. Production Equipment at Army Arsenals and Depots .......... 186 B.1. Arsenal Production, Replenishment Requirements, and Capacity ........................................... 191 ix x Rethinking Governance of the Army's Arsenals and Ammunition Plants B.2. Mix of Item-Lines on Active and Inactive Commercial and Government Lines ................................ 193