Air University Review, July-August 1969
Colonel Walker G. Vornbrock, Jr.
The fact is self-evident that the wealth and resources of the United States are not unlimited, that an equilibrium is required in the applications of these assets between national defense and other vital national objectives and programs. The ever increasing sophistication and cost of military systems and their operation have emphasized the urgency of acquiring only what is absolutely needed, obtaining these items at the least cost, and consuming these resources with the greatest efficiency consistent with mission effectiveness.1
Department of Defense Directive 7000.1, “Resource Management Systems of the Department of Defense,” published in August 1966, sets forth the objectives and framework for achieving maximum effectiveness and efficiency within the military establishment. This article is intended to serve as an introduction to the composition and interrelationship of the DOD resource management systems for those whose exposure or experience in this area has been limited.
Resource management systems include all the systems that aid DOD management in its task assuring that resources are obtained and used efficiently in the accomplishment of DOD objectives.2 Resources are defined as the manpower, materials, services, and money3 required to provide the degree of military defense deemed necessary for a given period of time. This definition, however, excludes nonresource possessions such as intelligence, tactical doctrine, military justice, etc. Management is the planning, budgeting, acquisition, use, consumption storage, and disposition, use, consumption, storage, and disposition of the resources to achieve the desired goals and objectives. Systems are the methods and procedures used in the conduct of management. Resource management systems affect the entire management process.4
The United States defense establishment has grown from an Army of 46 officers and 672 men in 1778 to the 3,500,000-man, multiservice force of today with worldwide commitments and costing an estimated $70 billion per year to operate. After World War II, the United States recognized that a peacetime standing military force larger than ever before maintained would be required to support its national goals and objectives in the cold war era. As this force grew, the need to further strengthen military efficiency became clear. Wilfred J. McNeil, the first Comptroller of the Department of Defense, set the foundations for improved management by developing the concept of a “performance-type budget,” focusing primarily on the financial/budgeting aspects of the comptroller task. Charles J. Hitch, as Comptroller under Secretary of Defense Robert S. McNamara, developed in 1961 the Planning-Programming-Budgeting System (PPBS). This system removed the military budget from its original service-oriented complexion and structured it around a five-year defense plan based upon mission-related programs such as strategic forces, general purpose forces, guard and reserve forces, research and development (R&D), etc. PPBS brought greater strength to Department of Defense influence, permitted better appraisal of the long-range implications of military plans, and defined the five-year cost of those plans already approved. It integrated and brought into focus the plans and programs of the three services. Robert N. Anthony, successor to Mr. Hitch, designed and implemented in 1968 an accounting system that will account for resources used rather than appropriations expended and will permit the managers at all organizational levels to measure the actual cost of each segment of defense against the planned cost of that segment.
A Presidential Memorandum of 24 May 1966 for heads of all executive departments and agencies emphasized the Chief Executive’s interest in the development of businesslike financial systems throughout the federal government. The Department of Defense response to the Chief Executive’s request was the directive on resource management systems, defining them as “procedures for collecting and processing recurring quantitative information that relates to resources and is for the use of management.”5 The systems are basically data information systems, predominantly expressed in dollar terms for the use of management. The DOD directive identified four systems: programming and budgeting systems; systems for management of resources for operating activities; systems for management of inventory and similar assets; and systems for management of acquisition, use, and disposition of capital assets.
programming and budgeting systems
The Planning-Programming-Budgeting System was introduced as an instrument to assist the Secretary of Defense in his management of the military establishment. It embraces two management techniques, programming and systems analysis. These techniques, however, are independent of one another; that is, one can be present without the other. Programming as an activity produces a program or program budget which
is organized by programs rather than by objects of expenditure . . . classified by “outputs” which are objective-oriented rather than’ inputs;”
links to these programmed outputs the resource requirements and the financial budget implications;
extends far enough into the future to show the full resource requirements and financial implications of the programmed outputs.6
Systems analysis evaluates possible alternatives of decision, to identify those which achieve a given objective at the least cost or achieve the most at a given cost. Dr. Alain Enthoven, then Assistant Secretary of Defense (Systems Analysis), describes systems analysis as “an effort to define the issues and alternatives clearly, and to provide responsible officials with a full, accurate, and meaningful summary of as many as possible of the relevant facts so that they can exercise well-informed judgment.”7 Mr. Hitch speaks of systems analysis as synonymous with cost effectiveness, weighing the benefits to be gained against the cost that must be incurred.8
The introduction of the Planning-Programming-Budgeting System permitted the Defense Department to categorize the defense plans by mission rather than by service, weapon system, or organization. The basic missions or programs are identified as
Strategic forces
General-purpose forces
Intelligence and communications
Airlift and sealift
Guard and reserve forces
Research and development
Central supply and maintenance
Training, medical, and other general
personnel activities
Administration and associated activities
Support of other nations.
Each of these is further subdivided into program elements, of which there are approximately 1100. The program elements identify specific types of organizations, functions, or activities (B-52 squadron, Army division, training, X-15 research, etc.) within each major program.
In addition to providing greater homogeneity of the elements to their parent programs, each element is made sufficiently discrete that it is mutually exclusive of other elements within its program. This singleness of output system definition permits a clear-cut chain of relationship to the lowest level of command, i.e., a specific organizational unit. The unit manager is no longer a faceless anonymity.
systems for management of resources
for operating activities
The system being implemented under the designation “Project PRIME” (for PRIority Management Effort) is fundamentally an accounting system. Its two main objectives are (1) to make consistent the accounting data used in programming, budgeting, and management; and (2) to disclose all costs in the conduct of military activities.9 The need for such a system has been apparent for many years. In 1955 the Second Hoover Commission pointed up the need for an accounting system that would reflect clearly all resources and liabilities and costs of operations, including military pay. The Hoover Commission recommendations were incorporated in Public Law 863 in 1956. In 1965 the House Committee on Government Operations issued a report expressing displeasure at the failure of the federal agencies to comply with the statute and recommended immediate remedial action by them to comply with the intent of Congress.
Mr. Hitch had recognized in 1961 the need for an accounting system that would fulfill Congressional requirements and complement the PPBS, but the task of developing and refining PPBS left no opportunity to develop concurrently a supporting accounting system. The task given Mr. Anthony, when he became Assistant Secretary of Defense (Comptroller) in the summer of 1965, was to develop an accounting system that would identify all costs incurred in the performance of each program in the current year’s operation of the Five Year Defense Program. Previous accounting systems had focused on funds obligated, comparing them with funds budgeted. Accounting reported the status of appropriated funds to assist officials in avoiding overobligations and resultant violations of the Anti-Deficiency Act, but no formal system existed to account for the cost of resources actually consumed. Changes in the existing accounting system were necessary to achieve this goal. The program elements of the PPBS were redefined to remove ambiguities; investment costs and operating costs were more clearly delineated; military pay was included in operating costs; working-capital funds were extended; and a uniform expense accounting structure for all services was prescribed.
The concepts of PRIME were endorsed by the Comptroller General in a report to the Congress on 12 April 1968, and implementation of Project PRIME was sanctioned by the Congress on 1 July 1968 in the Second Supplemental Appropriation Bill.10 This accounting system will provide data of greater reliability for programming and budget justification, permit greater emphasis on total expenses rather than bits and pieces, and reflect actual usage of resources in comparison with planned usage, thus encouraging commanders to seek out causes for any variances.
systems for management of inventory
and similar assets
An essential feature of the PRIME accounting system is the extension of working-capital accounts to permit a disciplined basis for accrual accounting of operating expenses. Working-capital accounts include stock funds for supply items and industrial funds for service items. Formerly, many items of supply were centrally procured, stocked in area depots, and available to units as needed without reimbursement. Similarly, maintenance requirements that were beyond base capabilities could be returned to area depots for repair without charge. Such gratuitous services were not reflected in base accounting records. Thus significant quantities of supplies and services were “free” to the consuming organizations. Conversely, supplies were brought into base warehouses and expensed in the appropriation accounting records even though they would not be consumed by a using organization for many months. Many service contracts for vehicle repair, real property maintenance, and utility repairs were recorded as obligations in a given year although the work might not be completed until well into the next fiscal year. By extending the application of working-capital accounts to hold all assets and services in suspense from the time they are ordered until they are received by the final user, the operating expense accounts will reflect only the expense of items consumed but not of items acquired and not yet consumed.
To implement the system for the management of inventories, service depots are being brought under working-capital accounts, supply depots under stock funds, and repair depots under industrial funds. Stock funds finance the purchase of materials and are reimbursed by sales of these items to their customers; industrial funds finance the costs of goods and services for the overhaul, repair, or maintenance of equipment and are reimbursed by charges to the accounts of customers responsible for the costs being incurred. Advantages to be gained from the use of stock funds include better financial item information on inventory levels, obsolescence losses, turnover, etc., and a better assessment by top management of the overall balance between inventory levels and activity levels.11
systems for management of acquisition, use,
and disposition of capital assets
Forty-one percent of the Department of Defense fiscal year 1969 budget request was for procurement and for research, development, test, and evaluation (RDT&E). With such a share of the defense program going to defense contractors, the Department of Defense obviously has a vital interest in the contractors’ capability to achieve planned production and timely delivery of specified quantities that meet well-defined performance criteria.12 Mr. Anthony described this fourth element as “the process of getting the weapon and support systems of the quality and configuration we need at the lowest cost.”13 Capital asset management systems will provide data for cost analysis and budgeting and historical records for evaluating estimated costs, data on the economic impact of defense spending and a measurement for cost, schedule, and technical performance. Previous efforts to obtain similar information had been plagued by uncoordinated duplications imposed upon contractors for the same information, unreasonable submission dates, excessive detail, and data that were not readily convertible to the form in which contractors’ records were kept.
In order to remedy these valid criticisms and yet achieve the objectives of the management system, data collection is being recast in a single program entitled “Selected Acquisition Information and Management Systems” (SAIMS). SAIMS is concerned with those selected acquisitions programmed in the Five Year Defense Program which require research and development funds in excess of $25 million or production funds in excess of $100 million and with those which have a significant price uncertainty or which warrant special attention. The central feature of SAIMS is the use of management control systems developed by contractors to produce information that DOD managers need to evaluate performance by measuring costs, schedules, and technical achievements in relation to plan. Rather than an externally designed and rigidly imposed system, the concept of SAIMS is that the contractor is being given only the basic criteria that his internal system must meet. The standardization of data criteria under one system will overcome the tendency toward system proliferations and will provide better information with fewer reports and better information to support the Programming- Budgeting-Accounting System.
National defense plans are prepared by the Joint Chiefs of Staff based upon the national objectives and policies enunciated by the National Security Council. Of these plans, the mid-range strategic objective plan, called the JSOP, is the most important for budgeting purposes. It is critically reviewed by the Secretary of Defense and when approved is reflected in the Five Year Defense Program (FYDP). The FYDP reflects the cost of the approved defense plans and projects that have been accepted in the total defense program for the next five years. The budget year of the FYDP becomes the basis for the military budget estimate, which, with adjustments, is included in the President’s budget request to the Congress. With the funds that the Congress appropriates for national defense, the resources of the Department of Defense are acquired. The management of these resources is the responsibility of the Department of Defense.
We have discussed the four distinct elements (or subsystems) of the DOD resource management systems. Let us now consider how these systems complement and interrelate with one another, recognizing that SAIMS, being concerned with acquisition, will have no significant relationship to PRIME or to inventory management.
relationship of SAIMS to PPBS
SAIMS is a management control system designed to permit DOD to measure the actual cost, economic impact, and progress of the military capital acquisitions against that which was planned and approved in the FYDP. The management systems are standardized in order that they will have a common data base, be meaningful and useful to both parties, and will eliminate the duplications and anomalies that had crept into previous systems. By establishing common criteria for all systems and requiring contractor systems to meet these criteria, the system permits rapid identification of those areas where costs are exceeding plans, work is falling behind schedule, or technical goals are not being achieved. It also provides a historical source for use in refining cost estimates for future plans. The information collected not only provides essential data for updating the FYDP when costs, progress, or technical changes necessitate such updating but also provides improved data for future cost-effectiveness studies. The systems permit both DOD and the contractor to have the same facts in their surveillance over production work in process. Thus SAIMS does have a significant interrelationship with PPBS; it provides both an alarm system for plans presently being executed and a data bank input to be used in developing future plans.
relationship of PRIME to PPBS
Prime is merely an improved accounting system. It puts the cost data on an expense basis rather than on an acquisition basis. PRIME brings an expense-oriented accounting system to management at all levels and permits each to see for the first time the true costs of operating a tactical or support unit. At the “doer” level where local management needed it, no such information previously existed. By the use of operating budgets that express the planned cost of mission accomplishment, PRIME integrates programming, budgeting, and accounting so that the operating data and management information produced are consistent and interrelated. The system permits the DOD managers and all subordinate levels of management to accurately measure actual costs of performance against planned costs, to identify at the lowest operating level (cost centers) the variances that exist, and to investigate the causes of these variances. With actual cost data rather than standard and prorated figures, the FYDP document will be more accurate in its cost estimates. Justification for budget requests will be more substantive and reliable. The full operating costs of program elements can now be identified.
relationship of inventory management to PPBS
The management of inventory and similar assets is the process of controlling the millions of items that flow through the supply system. Inventories are operating needs, consumable resources that must be charged to or expensed against the using organization if its true costs are to be accurately identified. There is frequently a difference in time, place, and individual responsibility between the acquisition of a resource and its consumption. In that interim, the item is inventory or, in accounting terms, working capital. With greater management emphasis on accounting for consumption rather than purchases, the need to expand the use of working-capital funds becomes a necessity. To the extent that working-capital funds are used, the availability of “free” issues decreases, and the proportion of unfunded costs diminishes. Working-capital funds help to focus the attention of operating managers on the resources consumed in their operation. The holding of inventories in stock funds until consumption results in improved management of inventories and a beneficial effect on the PPBS. With improved knowledge of inventory and activity levels, the level of stocks needed to meet consumption demands can be forecast with greater accuracy, a more balanced schedule of procurement can be achieved, and the amount of funds that might otherwise be tied up in higher inventory levels can be released to support other program needs.
relationship of PRIME to inventory management
Inventory management is being strengthened to provide greater control over the vast quantities of supplies and equipment required by the military forces. The use of working-capital accounts not only improves inventory control but is essential to PRIME’S objective of accounting for consumption rather than acquisition. The fulfillment of PRIME’s need for expanded working-capital accounts resulted in clearer definition of the distinction between expense items and investment items in procurement appropriation. This distinction was long overdue and indispensable for the proper accounting and control of long-lived assets.
The concept of planning-programming-budgeting systems and resource management systems is not new or unique. The DuPont company applied the principles of these systems in the early 1920s. General Motors (reflecting the DuPont management influence) has also used these systems in the management of its corporate operations.14 All highly successful organizations have had strong planning and accounting systems to assist their management in measuring the achievement of established goals.
That the Department of Defense has only in the past two decades emphasized the application of these principles can be attributed to several factors:
· the historical reluctance of the American public to plan ahead for defense prior to the nuclear age;
· the failure of the Congress to provide a workable budget vehicle upon which to operate until the Budget and Accounting Procedures Act of 1950;
· no demand by Congress (as analogous to stockholders) for improved management until the Hoover Commission reports;
· nonexistence of a strong, central leadership to bring competing services to a common mission or program approach until the establishment of the Department of Defense.
What are the strengths and weaknesses of the resource management systems? The strengths or benefits can be manifold, yet, as Mr. Anthony stated, the systems are no more than a collection of procedures, forms, and reports that help the managers do their job.15 Given good managers, the systems will
-give increased capability without a proportionate increase of resources;
-provide more accurate cost and budget estimates;
-make managers more conscious of costs and motivate them to manage total resources;
-further strengthen public confidence in the DOD ability to manage tax dollars;
-bring government and industry
into greater harmony and understanding of the problems of each.
On the negative
side, the systems will tend to
-further accentuate the centralization of authority in the hands of the Secretary of Defense;
-become a Pandora’s box for those who favor accounting for accounting’s sake rather than for management, or a basis for proliferation of clerical assistants in accordance with Parkinson’s Law;
-provide more management information than management can profitably digest and thus fall into disrepute.
With the growing concern over the great costs of defense, the management of all resources is an obvious trend. The Defense Department has been in the vanguard in developing unique and often dramatic management innovations. Concurrently the revolutionary effect that the development and growth of computers have had on all walks of life has permitted more rapid appraisal of options than was ever before possible. The Planning-Programming-Budgeting System as used in the Department of Defense was considered dramatic at the time of its introduction, yet today the President has directed its use in all the executive departments, and many foreign countries are applying its principles to their governmental operations. The resource management systems are no different; they are merely a logical extension-refinement, if you will-of the basic PPB systems. As the systems are “debugged,” as the benefits accruing become apparent to those outside the Department of Defense as well as those within it, as the very objectives sought are achieved, the benefits of the resources saved will be passed on to the public. The principles are sound. Only improper use of the product can tarnish the acceptance of the system.
Air War College
Notes
I. The distinction between efficiency and effectiveness is that efficiency measures the degree of economy achieved in consuming resources to attain an objective; effectiveness measures the extent to which an objective is achieved.
2. Robert N. Anthony, “Resource Management Systems,” Defense Industry Bulletin, April 1966, pp. 18-21.
3. “Resource Management Systems in the Department of Defense,” Department of Defense Directive 7000.1, 22 August 1966. Hereafter referred to as DOD 7000.1.
4. “A Primer on Project PRIME,” Department of Defense, Office of the Assistant Secretary of Defense (Comptroller), November 1966, p. 7.
5. DOD 7000.1.
6. Charles J. Hitch, “Decision Making in Large Organizations,” Royal Society Nuffield Lecture, London, 25 October 1966, as reprinted in the Subcommittee On National Security and Internal Operations, Selected Comment, U.S. Senate, 90th Congress, 1st Session, U.S. Government Printing Office, Washington, D.C., 1967, Pp. 10-17.
7. Alain C. Enthoven, “Management of Department of Defense Programs,” an address before the American Institute of Aeronautics and Astronautics and the Canadian Aeronautics and Space Institute at Montreal, Canada, 8 July 1968, as reprinted in Supplement to the Air Force Policy Letter for Commanders, August 1968, No. 8-1968, SAF-OII, p. 24.
8. Charles J. Hitch, Decision-Making for Defense (Berkeley and Los Angeles: University of California Press, 1965), pp. 43-44.
9. “A Primer on Project PRIME.”
10. Albert W. Buesking, “Comptrollership as a Service to Management in the DOD: Recent Developments,” Armed Forces Comptroller, July 1968, Vol. 13, No.3, p. 8.
11. “Financial Management Improvement; System Description,” a statement of the Assistant Secretary of Defense (Comptroller) to the Comptroller General of the U.S. and the Director of the Bureau of the Budget, Washington, D.C., 1 February 1968, pp. 31-35.
12. Herbert Waldman, “The Specification Approach and SAIMS,” Defense Industry Bulletin, Vol. 2, No. 10, October 1966, p. 15f.
13. Anthony. p. 18.
14. David Novick, “Origin and History of Program Budgeting,” RAND Corporation Paper No. P3427, October 1966, as reprinted in the Subcommittee On National Security and Internal Operations, Selected Comments, U.S. Senate, 90th Congress. 1st Session, U.S. Government Printing Office. Washington. D.C., 1967, pp. 28-35.
15. Anthony, p.18.
Colonel Walter G. Vornbrock Jr., (M.B.A., University of Texas) is a student, Air War College. Commissioned from OCS in 1942, he served as Adjutant and Group Supply Officer, 62d Troop Carrier Group, in Europe and North Africa, reverting to inactive status from 1946 to 1951. Subsequent assignments have been as Staff Supply Officer, Hq Eighth Air Force, to 1953; student, Air Command and Staff School; Comptroller, Biggs AFB, Texas, to 1955; student, University of Texas, to 1956; Comptroller, Saudi Arabia, to 1957; in administrative positions including Deputy Chief of Budget Division, Hq Strategic Air Command, to 1963; as Comptroller, RAF Brize Norton, England, and Torrejon Air Base, Spain, to 1966; and Professor of Air Science, Miami University, Ohio, until his present assignment.
Disclaimer
The conclusions and opinions expressed in this document are those of the author cultivated in the freedom of expression, academic environment of Air University. They do not reflect the official position of the U.S. Government, Department of Defense, the United States Air Force or the Air University.
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