November 8, 2006

1. U.S. Coast GuardLogistics Transformation: How Logistics Transformation Supports CFO Act ComplianceMr. Jeffery OrnerDeputy Assistant Commandant for Engineering and LogisticsCG-4DRemarks for: November 8, 2006

2. Briefing Outline • CFO Compliance: Shared Problems, Shared Solutions • Coast Guard Logistics Today and Tomorrow • Importance of Sound Logistics to CFO Compliance • Unified Logistics and Financial Management; A Coast Guard Perspective 2

3. Our Shared Responsibility “Transparency of Information Breeds Self-Correcting Behavior.” ADM Thad Allen Commandant of the Coast Guard 3

4. Typical Coast Guard Day • Save 15 lives & Assist 117 people in distress • Conduct 90 search and rescue missions • Protect $2.8 million in property • Enforce 129 security zones • Interdict and rescue 15 illegal migrants at sea • Board 4 high interest vessels • Board 192 vessels of law enforcement interest • Board 122  large vessels for port safety checks • Seize 71 lbs of marijuana and 662 lbs of cocaine with a street value of $21.1M • Conduct 317 vessel safety checks and teach 63 boating safety courses • Conduct 19 commercial fishing vessel safety exams • Respond to 11 oil and hazardous chemical spills • Process 280 mariner licenses and documents • Service 140 aids to navigation • Monitor the transit of 2,557 commercial ships through U.S. ports • Investigate 20 vessel casualties - collisions, allisions, and groundings 4

5. Our Shared Problem “GAO and other auditors have repeatedly found that the federal government lacks complete and reliable information for reported inventory and other property and equipment, and can not determine that all assets are reported, verify the existence of inventory, or substantiate the amount of reported inventory and property.” Source: GAO-02-447G, Executive Guide, Best Practices in Achieving Consistent, Accurate Physical Counts of Inventory and Related Property March 2002 5

6. Our Shared Problem (cont’d) “Further, the lack of reliable information impairs the government’s ability to (1) know the quantity, location, condition, and value of assets it owns, (2) safeguard its assets from physical deterioration, theft, loss, or mismanagement, (3) prevent unnecessary storage and maintenance costs or purchase of assets already on hand, and (4) determine the full costs of government programs that use these assets.”. Source: GAO-02-447G 6

7. Our Shared Problem (cont’d) “Consequently, the risk is high that the Congress, managers of federal agencies, and other decision makers are not receiving accurate information for making informed decisions about future funding, oversight of federal programs involving inventory, and operational readiness”. Source: GAO-02-447G 7

8. USCG OM&S Audit CFO Audit Findings re USCG: • You don’t know what you have • Accuracy and Completeness • You don’t know why you have it • What equipment your parts go to • You don’t know the value or condition • Local units expected to record and track • You don’t properly classify it • PP&E vs OM&S 8

9. USCG OM&S Problem Areas • Problem Areas • Count, valuation and classification • Substantial excess & obsolete • Removed $160M of inventory not used in 3yr/7yr timeframes • Much NRFI • Secondary storerooms not “on the record” • Completeness • Internal Control Problems • Who acquired it and why? • What does it go to? • Why is it still there? 9

10. Challenge for FY07: Completeness This is not on the books 10

11. Completeness Challenge for FY07: Completeness Neither is this 11

12. The Real Property Existence Test 12

13. What is Logistics? Definition of Logistics Logistics encompasses all the activities associated with developing, acquiring, sustaining, and eventually retiring the components of capability: • People, • Information, and • Material/Systems (COMDTINST 4000.5A) 13

14. Current State of LogisticsKey Characteristics We propose a logistics business model with centralized planning and control and distributed execution. Coast Guard Logistics Community Logistics Management & Control Centralized Distributed Shore Facilities Cutters Electronics Boats Aviation 14

15. Distributed Business Model tends to be weaker in the planning and control areas, resulting in a more reactive logistics process. Case For Change Characteristics of Distributed Logistics Responsibilities Higher inventory costs . . . . Not tightly linked to business needs (false sense of security) Higher purchasing costs . . Due to local buying and non-standard purchases Higher personnel costs . . . To handle exceptions, coordination between organizationally distributed logistics providers & unnecessary expediting higher Infrastructure costs . Handling & storage costs for unneeded parts Reduced capabilities . . . . . Poorly documented & controlled maintenance leads to lower asset availability Additional assets to cover lower availability Increased total ownership cost. Local buying, lack of CM discipline result in lack of equipment standardization and thus increased TOC. CFO Compliance Unlikely Supply & maintenance spending is widely distributed & unfocused, making CFO compliance unlikely 15

16. Case For ChangeCFO Non-compliance • Situation • Units have been carrying no/low-demand inventory • Units have been carrying no-allowance inventory ANALYSIS OF 60 CFO UNITS Parts Usage History by NIIN • Impact • Less than 6% of demand inventory is on the allowance • More than 46% of the parts carried by the unit have no/low-demand and are not on the allowance. • Difficult to find parts actually on board. • Some vessel classes are weight constrained • CGC MELLON alone had over 20-tons of no demand parts removed at a value of $4.9M. . . . And This is Just the Inventory We Knew About! .. . We also (SO FAR) have found >$500K Per Unit of Inventory We Didn’t Know About 16

17. Case For ChangeCGC MELLON Example • Situation • Excess inventory • Impact • Difficult to find parts actually on board. • Some vessel classes are weight constrained 17

18. Logistics Transformation Tenet #1 Support the mission, support the field: While we have grown a culture of field unit “heroes” who battle mightily to keep their units operating, we need to shift that energy and responsibility to the logistics infrastructure that should be responsible for it, so that unit commanders and their personnel can focus on preparation and performance. 18

19. Logistics Transformation • A transformation of our business processes, Coast Guard-wide is underway • Will improve effectiveness & efficiency of our logistics processes & outcomes & • Will contribute to accountability/CFO Act Compliance 19

20. Status Quo: Outside of Aviation, we have: High degree of reactive responsiveness by logistics providers to individual requirements of unit, District & Area Commanders Spending is not directed at measurable readiness metrics or enterprise-level priorities No clearly developed or articulated enterprise-level readiness priorities Largely decentralized priorities, decision making, & spending in maintenance & supply Lack of configuration control Non-standard & poorly documented maintenance practices Configuration data, maintenance & supply not linked Lack of formal accountability (non-CFO compliant) Highly agile, adaptable & reactive logistics at unknown cost In the New Logistics Business Model we will have: A set of CG-enterprise-level requirements (readiness-driven) A formal requirements process to weigh & prioritize local needs Spending & priorities driven by enterprise-level requirements All logistics $’s centrally controlled & spent by the logistics organization on enterprise requirements Standard Supply, Maintenance & CM Compliance Program Logistics providers accountable for providing assets & support IAW enterprise-level requirements Little discretion at the local level over investment & logistics spending Local desires/priorities subordinate to enterprise-level priorities. However, we have to manage the risk of inability of the enterprise to quickly respond/adapt to changing conditions at the local level Logistics Transformation Implications 20

21. Requirements Examples Statutory Requirements Federal Agency Business Requirements Best Practices (Derived Reqs.) • US Code • CFR • Executive Order • Public Law • Example: • “Survey real property under its control, maintain its inventory of real property at the absolute minimum consistent with economical and efficient conduct of the affairs of the Coast Guard, and promptly report to GSA real property that it has determined to be excess.” 41 CFR 102-75.60  • OMB Circulars • JFMIP Publications • Example: • “Evaluate and select capital asset investments that will support core mission functions performed by the Federal Government, and demonstrate projected returns on investment that are clearly equal to or better than alternative uses of available public resources.” OMB Circular A11 • DoD Acquisition Policy • Configuration Mgmt • Aviation Business Model Example: “Prime Unit shall perform prototyping and verification of configuration changes prior any change in configuration.” CONOP 21

22. Today’s Logistics 22

23. Future Operational Unit Support Construct Engineering support, technical authority, supply chain management, technical documentation, including: • Spares, maintenance manual, tools & test equipment, tech pubs • Depot maintenance (scheduled & unscheduled) • Materiel condition reports • Contract field teams (oversee PBL/CLS support & procure spares) • Time critical technical order kit delivery OPERATIONALUNITS (Sector, AIRSTA, Cutter, TRACEN etc.) Aviation Product Lines “Pushed” Products & Services Supporting Assets Surface Forces Product Lines C4I Product Lines Shore Infrastructure Product Lines 23

24. Commandant’s Intent “The inadequacy of the status quo as well as future requirements require that the Coast Guard develop and deploy an integrated, transformational business architecture that aligns with DHS and, above all, facilitates more effective mission execution.” ADM Allen Confirmation Testimony 24

25. Maintenance: The Missing Link Why Improve Maintenance Planning? • Reduce burden on field units • Reduce time/effort to conduct maintenance • Drive our inventory requirements & improve accountability • Remember this? • Increase Safety • RB-S MISHAP Report:“DISCOVERED THE WIRING HARNESS HAD BEEN INSTALLED INCORRECTLY DURING LAST ENGINE CHANGE OUT WHICH CAUSED THE ENGINE WIRING TO CHAFF AND GROUND OUT TO THE ENGINE BLOCK.”   • Improve Reliability/Availability • Reduce maintenance-induced failures • Reduce Cost • Preventive is cheaper than Corrective 25

26. MPC TodayInconsistent Maintenance Procedure Cards 378 MPC- Change Bow Thruster Hydraulic Oil & Filter • Situation • Different MPC standards for each community • Some non-aviation MPCs are vague • does not say “what” systems to tag out) • Some non-aviation MPCs do not quantify inventory requirements • Impact • Chance for mishaps • Chance for self-induced CASREPs • Allows for non-standard maintenance 26

27. MPC TomorrowAviation Maintenance Procedure Cards Specific Tools Specific Inventory Collect Data Clear Cautions Detailed Procedures Detailed Graphics 27

28. Coast Guard logistics is characterized by “stove-pipes” between current communities, who perform the same functions in different ways. Examples LEGACYVESSELS LEGACY AIRCRAFT SHORE FACILITIES DEEPWATER ASSETS VLS ALMIS SAM LIMS • Acquisition Logistics • Maintenance Mgmt. • Supply Management • Acquisition Logistics • Maintenance Mgmt. • Supply Management • Acquisition Logistics • Maintenance Mgmt. • Supply Management • Acquisition Logistics • Maintenance Mgmt. • Supply Management Centralized Policy Decentralized Control Distributed Execution Centralized Policy Centralized Control Mix of Centralized and Distributed Execution Centralized Policy Decentralized Control Distributed Execution No Configuration Mgt No Inventory Mgt Vision is Centralized Policy Centralized Control Execution TBD Current State of LogisticsSame Functions – Different Process Flows . . .and None of These Families of Logistics IT Systems are Seamlessly Linked with CG Financial Management Systems. 28

29. Logistics Transformation Implementation Strategy 29

30. Achieving CFO Inventory Compliance FY06 Focus & Accomplishments • Field Unit Inventory Repositioning Project • Primarily Addressed “The Symptom” • Targeted 694 field units • Removed 3.3M parts worth over $160M • Redistributed $1.9M to units (cost avoidance) • Saved over 96K labor hours annually • Reduced fuel consumption • Documented over 1,000 Best Business Processes in Logistics for Future CG-wide Implementation • Logistics CONOP & Transformation Plans 30

31. Achieving CFO Inventory Compliance FY07 Focus and Objectives • ICCP (Inventory Control and Compliance Program) • Begin to Address “The Cure” • Target “Completeness” • Provide Requirements-based Allowances (i.e. What you need!) • Provide detailed MPCs for 35% of mission-critical systems • Reduce Field-held Inventory & Putting in Place Repeatable Standard Processes • Putting New CM Practices in Place 31

32. How Transformation Will Impact Operational Units • CFO Compliance • Less to count, reduced CFO scrutiny • Improved Maintenance Documentation • All information needed to complete task • Parts push vice parts pull • Requirements driven allowancing • Account for what you have, don’t worry about what you need • Standard support practices & IT • Regardless of asset type • Centralized funding • Parts free to unit, controlled spending • Increased internal controls • Logistics compliance checks • 1-800 Logistics • Simplified support chain, increased reliance on central authority • Cultural Change • Reward casualty prevention vs. response • Balance availability vs. support cost • Our strength became our weakness: unit autonomy 32

33. Supply Provisioning ProcessA Difficult Reality ORD New Rqmts Current Process: Provisioning lists built without maintenance plan, or no parts information provided to unit at all. Current Process Result: Technician hopes the part they need is onboard. If not, buy locally with unit funds. Procure “extra parts” to avoid downtime risk. 33

34. Sound Logistics Configuration Mission Requirement Maintenance (Driven by Enterprise Readiness Requirements & Data) I need a boat that goes fast! Gotta do the PMS on the boat Chief! Supply Pull the parts SK. 34

35. Business Processes First New Logistics Business Model (Standard Best Practices) Property - Acquisition – Environmental – Configuration - Maintenance – Supply – ILS Single CG Logistics IT Backbone Integrated with FM First We Get the Needed Business Processes in Place (There isn’t an IT Magic Pill) 35

36. Tip of the Iceberg CFO Compliance The Logistics Enterprise 36

37. CFO Act Compliance Balancing Availability with Compliance* STATUTORY COMPLIANCE OPERATIONAL AVAILABILITY *Compliance is not optional 37

38. Q & A Questions? U.S. Coast GuardLogistics Transformation Mr. Jeffery OrnerDeputy Assistant Commandant for Engineering and Logistics 38