Army's Directorate of Logistics Saves

$6 Million with Activity Based Costing.

Armed Forces Comptroller - Wntr, 2001

Our activity-based costing/management/budgeting program at the Army's Directorate of

Logistics, Fort Riley Kansas, has produced remarkable results--a 34 percent reduction in
manpower and $6 million in annual savings.

Every employee in every activity center participated in defining step-by-step activities to

accomplish every task in the Directorate. By measuring the accomplishment time and
applying skill and grade and workload data, we were able to define the true manpower
requirement for each activity. And the requirement was almost always less than we had
expected. Using this methodology, we redefined our process and restructured our
organization to focus on the customer. The result was dramatic operating efficiencies.

The installation's Directorate of Logistics is a 650-employee organization with a $34-

million operating budget and a $ 130-million stock fund (supplies) budget. It is responsible
for transportation, supply, maintenance, services, and equipment readiness for the Army.
Facing the inevitable pressures that come when a nation begins to place a higher
proportion of its national treasures into programs other than defense, the Directorate of
Logistics at Fort Riley sought a method to systematically contend with fiscal reductions.

Our approach was to conduct an in-depth, process-oriented management study. We

decided to build a team and asked the members to start by examining our reason for
existing. We next asked them to lay out the step-by-step requirements to accomplish our
reason for being and then let a lean, minimum-overhead organization with attendant
resource requirements fall our. The study was also to provide for continuous improvement
opportunities. It was clear that one best approach existed: activity-based costing and
management (ABC/M)--the natural, common-sense approach to accomplishing the task at
hand.

We adopted an academic principle that Southwest Airlines has enjoyed success with: that
of turning the organization "upside down." To better focus our efforts on the essence of
this project--improved service to our customers--the soldier was placed at the top of our
organization chart. The top organizational line became those activity centers that touched
the customer on a day-to-day basis, the most important elements in our organization. The
empowerment of employees would prove to be extremely valuable.
Overhead, including the Director, became the lower element of our organization, with the
primary mission of providing resources to the first line in order to enable first-class
customer support. Learning from other businesses, we adopted their applicable best
practices. (We used practices from Toyota, SeaLand, Alcoa, Mars, Boeing, and others.)

Because Commercial Activities Study requirements loomed, we sought assistance from a

consulting agency that could give us an experience base to accomplish A76 requirements
as we proceeded with our ABC/M-based study. Fortunately, we received a demonstration
from Interactive Technologies Group.

While learning their approach, we discovered their Systems Process Assessment

Reengineering and Redesign Comparison (SPARRC) method to be a significant activity-
based costing/ management/ budgeting/planning (ABCIM/B/P) enabler. In fact, we quickly
discovered that ABC/M/B/P and SPARRC are joined at the hip. SPARRC enables an
organization to deploy ABC/M/B/P simultaneously and relatively quickly.

We examined our strategic plan by looking very closely at our reason for being. Our key
processes fell out of that examination, and they became our cost objects.

Then every employee of each activity center (generally aligned with organizational
elements) attended iterative workshops to lay out the step-by-step activities--the heart of
ABC--needed to accomplish our reason for being (cost objects). Using the Functionally
Enhanced Manhours and Workload (FENYX) routine in the SPARRC model, a resolute
ABC Activities Model was built and simultaneously workloaded using "per
accomplishment time" (PAT) and frequency as primary drivers. Thereby the first ABM
iteration occurred as the ABC model was being developed and populated because, for the
first time, employees focused on the frequency of activities and the time it took to
accomplish those activities. Reengineering inevitably resulted from the start.

A technical physical, an evaluation by ABC Technologies' (Beaverton, Oregon) technical

services team, was of central importance at this point. The physical propelled us months
ahead in the development of our approach. The refining process was enhanced through
Pareto and value-added analysis. The SPARRC/FENYX program automatically provides
the Pareto charts, which enabled all employees to see how they spent their time (instead
of having to maintain arduous daily time survey sheets).

Further, by measuring the PAT and applying skill and grade and workload data, we were
able to accurately define the true manpower requirement for the activity, almost always
significantly less than previously thought. Involving our customers in the process further
enhanced the refining process.
Attributes were used to conduct value added analysis. In addition to involving customers
in workshops, we conducted an installation-wide customer survey, and we used the
results to redefine our organization based on their assessment of value. In addition to
modifying and eliminating many activities, we reduced much overhead during this phase.
We also conducted iterative internal command climate surveys to give employees yet
another method to contribute their ideas. Also, every employee was given access to e-
mail and the Internet to facilitate open communication. The very best innovations came
from employees.

Within six months, our ABC model had become resolute and valuable. We found that
developing and linking the cost object module and the activities module were relatively
easy and enjoyable. It was, however, relatively difficult to link the resource module with
Defense Finance and Accounting Systems because the formats are so opposed.

Our goal was to have our resource managers build the activities-resource-Standard Army
Finance Systems links so that we could build our FY 2000 budget forecasts using the
ABC model. We desired to develop the means to manage, automatically, by populating
directly from Defense Automated Systems. We have largely broken the code. We now
have an FY 2000 budget based on ABC data, with month-by-month forecasts and a
means to populate them so that we can see actuals compared to forecasts monthly.

SPARRC has been a great enabler. In fact, SPARRC and ABC are quite similar. Indeed,
one of the significant merits of SPARRC is that it facilitates building the budget forecast
and execution paths as the ABC/M/B/P management model is developed.

Several ABC Technologies' applications assistance visits were critical to our success, and
they will be required as we continue to mature in our ABC/M effort. As a note, we
considered it very important to bring in ABC experts who had experienced multiple full
deployments. We viewed this change to ABM as an overarching change in management
methodology metaphorically akin to open-chest surgery, and we therefore sought out
experienced ABC "surgeons" whom we "interns" could watch and learn from.

ABC/M/B is too often viewed as a Financial technique or a financial management system.

If properly applied, it is instead a revolutionary means for the Army and, perhaps, the
Department of Defense to manage as it has never been able to do so before. Using this
methodology, tremendous efficiencies can be attained, and the cost associated with
maintaining trained and ready soldiers, ready equipment, and a satisfactory quality of life
can be seen much more dearly. Further, ABC/M may very well unveil from within the
resources required to underwrite necessary Army reshaping initiatives.
The results of our efforts have been significant. Most importantly, our organization is now
focused on the customer. Our "upside-down" organization now has two layers rather than
seven, with the customer at the top. Employees feel empowered and important. We have
eliminated deputies, division chiefs, branch chiefs, section chiefs, and subsection chiefs.
Communication channels are open, short, and quick. Administrative help has been pooled.
Collocations and consolidations have eliminated redundancies. We have reduced our
noncontracted manpower by 34 percent and our annual operating costs by $6 million.

And we are only beginning. Our next iteration will result in exponentially larger increases
in efficiency at much less cost.

Today we are in our second phase. ABC/M/B/P, all of which were simultaneously
deployed using SPARRC/FENYX, has become an institution. We have a long way to go to
reach maturity with ABC/M, but we speak the language. We refine monthly, even daily.

Our performance measures are ABC based; our internal action plan is ABC based and is
linked directly to installation and higher headquarters strategic plans; we are integrating
ISO 9000 into our model; our budget and execution data are in ABC format; we are
benchmarking with an array of internal and external entities. And, perhaps the most
compelling aspect, our employees and our customers are vested in what we do. It is their
product, their system, and the Army is much ahead as a result.

It's as easy as ABC.

Gory L LaGrange is Director of Logistics at Fort Riley, Kansas. He has championed the
deployment of ABC/M/B/P in the functions of Transportation, Maintenance, Supply,
Services, and Readiness. A retired Army colonel, Mr. LaGrange served as CEO and
President of a manufacturing and distribution corporation for five years before reentering
federal service. He holds a BBA and an MBA from the University of Iowa and an MS in
contract law and management from the Florida Institute of Technology.
COPYRIGHT 2001 American Society of Military Comptrollers Reproduced with permission of the copyright
holder. Further reproduction or distribution is prohibited without permission.

Copyright 2001, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

NOTE: All illustrations and photos have been removed from this article.