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Defense Transportation Coordination Initiative
The United States Department of Defense (DoD) is preparing to centralize the management of much of its domestic freight transportation activities. Contracting efforts are underway and the implementation of a three-phase program is scheduled for the beginning of 2007.
The importance of outsourcing logistics activities continues to increase as companies focus on core competencies and cost reduction. A recent study by Armstrong and Associates Inc. suggest almost 90 percent of the Fortune 100 companies outsource at least part of their logistics activities1. In one survey, respondents reported that, on average, 33 percent of their annual logistics operating budget in 2003 was spent on Third Party Logistics (3PL) companies. These same respondents expected the percentage to increase to 40 percent by 20062. Additionally, Davidson3 predicts outsourcing of logistics activities will continue to grow by 50 percent in the next five to ten years.
The benefits of outsourcing have long been touted in the logistics industry. Some of the benefits include: allowing a company to focus on its core business processes, enabling acquisition of the latest logistics expertise and resources without internal development, reducing capital expenditures, reducing costs, and improving supply chain visibility4. The efficiencies afforded by outsourcing are an opportunity not only for commercial industry, but have also become a key tenet for the U.S. military's transformation efforts aimed at modernizing and improving its logistics capabilities.
U.S. Military Logistics
The U.S. military spends roughly $150 billion a year to support military operations, according to Art Johnson, Senior Vice President for Strategic Development at Lockheed5. These expenditures sustain military forces stationed at thousands of locations around the world and include transportation, storage, equipment maintenance and supply support. In order to meet its commitments around the globe, the DoD has developed a robust and sometimes complex system to handle movement of troops, supplies and equipment as well as to support a variety of high tech equipment such as radar-evading aircraft, unmanned aerial vehicles, 60-ton tanks, and nuclear weapons.
In order to simplify and improve the chain of authority and clarify management responsibilities within this complex system, in 2003, the commander of U.S.Transportation Command (U.S. TRANSCOM) was designated the U.S. military's Distribution Process Owner and made responsible for improving the efficiency and effectiveness of the entire military distribution system. U.S. TRANSCOM became the single entity to direct and supervise execution of the entire logistics system - "from factory to foxhole."
One area of the system that was first targeted for improvement was the domestic movement of military freight. Generally, it is the policy of the DoD to rely on the commercial sector when it is capable of meeting its own requirements. Thus, the DoD has contracted much of its domestic freight movement for years with the objective of minimizing costs and capital expenditures. Practically every DoD installation in the United States depends on commercial carriers to distribute repairable and consumable inventory items which sustain both peacetime and wartime military operations. For example, the Traffic Management Office at one Air Force base in the Midwest handles almost 20,000 surface freight and household goods shipments annually and has contracts with several hundred commercial carriers6. These shippers unilaterally determine the transportation mode, provider, and level of service for each shipment with little collaboration or communication with other shippers in the system. Additionally, DoD organizations have adopted a variety of information systems that are not always able to exchange the necessary information for more centralized management and control of the shipping activity. Thus, there is only modest coordination or collaboration on thousands of military freight shipments every year. Commercial practices such as cross-docking, pooling, and back haul identification are typically not achievable by managers at individual DoD installations under such a system. The result is a decentralized decision-making approach which produces tremendous inefficiencies and a lack of confidence in the system.
The Defense Transportation Coordination Initiative
In an effort to improve transportation operations and increase efficiency, the Department of Defense and the U.S. transportation Command initiated a project to contract the management and oversight of a large portion of DoD freight transportation to a single coordinator. The project, identified as the Defense Transportation Coordination Initiative (DTCI), was originated by the Office of the Secretary of Defense, Acquisition, Technology and Logistics and is an attempt to adopt many of the best practices learned in the business community to reduce costs and improve effectiveness of the movement of domestic DoD freight.
"Coordinating the movement of DoD freight in the United States is a great opportunity for both government and industry," said Air Force Colonel Michael Hirka, DTCI Project Manager at U.S. TRANSCOM. "Best industry practices indicate optimal results are achieved by partnering with a world-class services provider. Doing so will allow us to manage cycle times, increase asset visibility, improve customer confidence, and provide better support to our warfighting forces."
The vision of DTCI is to "improve the reliability, predictability, and efficiency of DoD material moving within the Continental United States through a long-term partnership with a world-class coordinator of transportation management services"7. It is expected the 3PL coordinator will have greater visibility of the entire defense transportation system which will lead to greater efficiencies through LTL consolidations, pooling across multiple origins and destinations, more appropriate air/surface mode selection, and expanded use of cross docking. Expected benefits include improved intransit visibility, shipping reliability, and predictability as well as, reduced cycle times and improved customer confidence. Currently, cross-border movements into Canada or Mexico will not be included in the program, thus restricting some routes and consolidation efficiencies. However, the coordinator will be given autonomy to select and manage transportation subcontractors and manage the overall DoD freight movement process. Even with some restrictions, expected savings of 5-13 percent over current freight costs have been estimated8, and defence leaders are optimistic about the improved value which DTCI will provide.
During 2003, the DTCI concept was tested on a small scale in the Southeast region of the United States with Eagle Global Logistics participating as the transportation coordinator. While there were some initial growing pains, many of the distribution depots reported reduced transit times as well as, generally better pickup and delivery performance. The initial proof of concept produced many important lessons learned (see http://www.acq.osd.mil/log/dtci/). One of the most important lessons was the length of the contract in order for it to be effective. The prototype contract was for one year only with two one-year options. With such a short contract, the contractor had no incentive to invest in the necessary infrastructure and information system. Therefore, the expected efficiencies were limited and the full-scale DTCI contract is planned to be for a period of three to five years.
While the planning and analysis for DTCI began in 2003, industry review occurred in 2005. Some of the logistics firms that provided inputs to the Request for Information were Booz Allen Hamilton Inc., IBM Corporation, Landstar Carrier Group, Maersk Line Limited, Ryder Systems Inc., Schneider Logistics Inc., and UPS Supply Chain Solutions. The Performance Work Statement was released to the public in November 2005 and selection of the coordinator (prime contractor) is projected to occur in the Fall of 2006. The evaluation criteria for awarding the contract is as follows:
The three-phase implementation of the DTCI program is expected to begin January 2007 with the first phase including freight shipped by 18 of the Defense Logistics Agency's most important Distribution Centers (See Figure 1). In addition, this phase may also include the domestic freight shipped to and from the U.S. military's major aerial ports: Dover Air Force Base (AFB), Delaware; Charleston AFB, South Carolina; Travis AFB, California; and Norfolk, Virginia. During the second phase, military locations within fifty miles of these DLA facilities will also be included in DTCI freight shipments. In phase three, it is expected that all active force military installations and some Guard and Reserve installations will participate, and total implementation will be completed in just over a three year period (See Figure 2). Selected assets such as household Goods and Arms, ammunition, and explosives will not be included.
The U.S. Department of Defense is planning to adopt a proven "best practice" by awarding a long-term contract to a single transportation coordinator to manage, consolidate, and optimize a substantial portion of DoD freight movement within the United States. The potential number of shipments could exceed 2 million annually with a combined weight of more than 1 billion pounds9. This contract has the potential to change the environment within some defense freight segments of the transportation industry in various geographical regions of the United States.
For more information on the Defense Transportation Coordination Initiative please contact the DTCI Program Office at Scott AFB, Illinois or see US TRANSCOM's DTCI website: http://dtci.transcom.mil/.