Hampton Roads Area INCOSE/SCEA Decision Analysis Conference
Economic Benefits Analysis
The “Other-Side” of Cost
Paul Gvoth
EBA-Norfolk, VA
November 18, 2009
This document is confidential and is intended solely for the use and
information of the client to whom it is addressed.
Economic & Business Analysis - Norfolk
Pre-Decisional Analysis and Data
Agenda
 Introduction
 Similarities/Differences in Benefits Analysis Approach vs. Cost Analysis
 Tiered Approach
 Example
 References
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
1
Introduction
 Why this is important?
 Acquisition Requirements
– Nunn-McCurdy (15% , 25%, ‘82)
– Clinger-Cohen (ITMRA –’96, CIO)
 GAO Audits and Tracked Recommendations (IG reporting to Congress)
 Internal Competition for Resources (POM and FYDP, POPS)
 Justification to External Entities
 Decision Analysis – Selection of Preferred Alternative among all Viable Alternatives (AoA)
 Integral part of an overall Economic Analysis (EA), ROI
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
2
Agenda
 Introduction
 Similarities/Differences in Benefits Analysis Approach vs. Cost Analysis
 Tiered Approach
 Example
 References
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
3
Cost Analysis and Benefits Analysis Share Some Technical Points
Cost Analysis
Benefits Analysis
– Analogy
– Analogy
– Parametric
– Parametric
– Engineering Build-Up
– Engineering Build-Up
– Expert Opinion
– Expert Opinion
– Extrapolation from Actual
– Extrapolation from Actual
– Cost Element Structure (CES)
– Benefits Elements Structure (BEM)
Both analyses sensitive to up-front important analytical decisions about allocations and
application of economic concepts (NPV, ROI, BE)
Benefits Element Structure
•R&D and T&E
•Military Personnel
•Operations and Maintenance
•Procurement
•Construction
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
4
However, there are important differences…
Cost Analysis
Benefits Analysis
– Well recognized published sources of cost
information
– Analogies for new programs do not exist
and little published benefits data
– Risk is better understood (CSPT)
– Parameters are often unknown
– Common Accepted Terms- of-Reference
Across Field
– Terms-of-Reference
– Less Reliance on Expert Opinion
– Risk not well defined
– Certification for Analysts
– Navy Center for Cost Analysis (NCCA)
– Cost Analysis Improvement Group (CAIG)
– Heavy use of Expert Opinion
– No organized Benefits Analysis
Community
– Quality of Benefits Analysis dependent
upon client environment
– Less scrutiny then costs but high impact
on Decision Metrics
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
5
Agenda
 Introduction
 Similarities/Differences in Benefits Analysis Approach vs. Cost Analysis
 Tiered Approach
 Example
 References
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
6
Benefits Analysis Methodology - Four Steps:
 Identify the functional capabilities of the Preferred Alternative (PA) and the Status Quo (SQ).
 Develop the benefits model by allocating benefits to the four tiers of the framework described
below.
 Estimate the monetary value of the quantitative benefits by combining the LCCE, cost savings,
and operational efficiencies. This will yield an ROI, NPV, and Payback Period calculations.
 Address the improved operational capabilities resulting from the preferred alternative’s
implementation within the context of risk.
Produce LCCE
Develop
Benefits
Framework
Estimate
Benefits
Evaluate Risks
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
7
Benefits are Classified According to a 4-tier Approach*
Cost Savings/Avoidance
 Tier 0 consists of monetary cost savings determined by subtracting the costs associated with
the PA from the current cost to maintain the SQ.
 Tier 1 includes mission critical operational efficiencies directly related to the drawdown of
inventory in terms of cost avoidances.
 Tier 2 includes achievable operational efficiencies subordinate to the efficiencies received in
Tier 1, but which still provide cost avoidances to the Marine Corps.
 Tier 3 consists of qualitative benefits associated with the implementation of the Preferred
Alternative.
Cost avoidances account for the bulk of GCSS benefits and is the focus today
*Based on Guidance from OSD PAE: Methodology captures inherent subjectivity and relative risk. Cost
savings increase incrementally and cumulatively from “initial outlay” benefits to the inclusion “must have”
benefits to the inclusion of “nice to have” benefits.
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
8
Benefits Analysis
Operational Drivers:
•Inventory Carrying
Costs
•Demand
Planning/Forecasting
Means of Measure:
•Discounted Payback
•Net Present Value
•Return on Investment
Achievable
Operational
Efficiencies: Costs
avoided
Operational Drivers:
•Procurement Savings
•Military Manpower
Reduction
Means of Measure:
•Discounted Payback
•Net Present Value
•Return on Investment
Qualitative Description
Mission Critical
Operational
Efficiencies: Costs
Avoided
Tier 3
Tier 2
Financial Analysis
Tier 1
Qualitative Benefits
Improved Capabilities
•Supply Management
•Capacity and Production
•Maintenance Management
Means of Measure:
Qualitative Description
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
9
Agenda
 Introduction
 Similarities/Differences in Benefits Analysis Approach vs. Cost Analysis
 Tiered Approach
 Example
 References
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
10
GCSS-MC EA Up-Front Summary
 Preliminary ROI calculations demonstrate that sufficient Operational Efficiencies are
achievable in GCSS-MC to generate a positive ROI for Block I, and its increments,
providing support to proceed with program development
 GCSS-MC business value resulting from the investment in new system capabilities is
expressed as Operational Efficiencies that can be evaluated using USMC Logistics
Chain Management (LCM) Balanced Scorecard Metrics and Joint Staff LCM Metrics
 Reconciled NCCA LCCE amounts will be included in future ROI analyses
 Benefits Analysis and LCCE will be finalized prior to the MS C decision
 Analyzed all that we could gather data on, but not as much as we wanted
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
11
Global Combat Support System (GCSS) Marine Corps (MC)
Benefits Analysis – Purpose:
 Review Preliminary Financial Results of GCSS-MC Economic Benefits Analysis relative to the
Marine Corp’s investment in the capabilities set out in the Capabilities Production Document
(CPD)
 Discuss GCSS-MC Economic Benefits resulting from program investment in Logistics Chain
Management (LCM) Capabilities
 Review Economic Metrics expressed as monetized business value returning to the USMC from
GCSS-MC program investment
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
12
Data Sources, Tools, Applied Analysis
 Collected Marine Corps data from:
 USMC LOGCOM – Albany,
 GA, USMC HQ I&L, DC, and from
 USMC Maintenance and Supply Records.
 Applied business analytics tools such as:
 Expert Choice (AHP),
 SPSS,
 Excel
…to collect capability attribute weights, calculate averages, and graphically display data.
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
13
Economic Analysis Products
 Performance Improvement Metrics Table (PIMT) Effort (Briefed April 2009)
– Identified the functional/operational capabilities of the GCSS-MC/LCM Block 1 Alternative and
the SQ sourced from the Capabilities Production Document (CPD)
– Developed metrics that are linked to each operational capability
 Economic Viability to Support IRB Certification (August/September 2009)
– Develop the benefits model by extracting benefits to the benefits analysis framework
– Allocate benefits into the four tier break-out of Tier-0, Tier-1, Tier-2, Tier-3
– Estimate the monetary value of the quantitative benefits by combining the Program Office LCCE
(PLCCE), cost savings, metrics results, and operational efficiencies
– Calculate the NPV, ROI, and Payback Period calculations using PLCCE data
 Milestone C (Through January 2010)
– Update the Benefits Analysis, NPV, ROI, and Payback Period calculations with the NCCAreconciled LCCE
– Achieve OSD PA&E review and approval
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
14
Economic Analysis Process
Block 1 Economic Analysis Process
Outputs
Data Collection
SQ LCCE
Cost Analysis
Requirements
Description
(CARD)
Economic
Analysis
Development
Plan (EADP)
Develop Status Quo
LCCE
Develop Preferred
Alternative LCCE
Develop
Performance
Improvement
Metrics Table
Establish Ground
Rules & Assumptions
Risk &
Sensitivity
Analysis
NCCA
Reconciliation
PA LCCE
Update
and
Finalize
Cost
and
Benefit
Analyses
Benefits Analysis
Return on
Investment (ROI)
Net Present Value
(NPV)
Conduct Benefits Analysis
Payback
Establish Economic
Analysis Approach
Economic Analysis
Document
Current
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
15
Capabilities Linked to Joint and USMC LCM Balanced Score Card Metrics
 Capabilities Produced by Investment in GCSS-MC
– Investment in GCSS-MC produces capabilities in the following Logistics Chain Management (LCM)
Areas:
• Request Management (22.5%)
• Supply (30.6%)
• Maintenance (30%)
• Finance (5.2 %)
• System Administration (11.%)
 New and improved capabilities create performance improvements or operational efficiencies
 Performance of capabilities are evaluated using Joint and USMC Balanced Score Card Metrics
– GCSS-MC tracks and balances capability performance relative to the scorecard metrics, creating
Operational Efficiencies
– The amount of Monetized Economic Benefit derived from the implementation of GCSS-MC Block 1 is
directly related to the degree of Operational Efficiencies generated by the new or improved capability
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
16
Capabilities Linked to Balanced Score Card
Joint Chiefs of Staff Joint Integrated Capabilities (JIC) Joint Attributes1
Sustainability
GCSS-MC Capabilities2
Impact
(Weight)
Responsiveness
Survivability
Responsiveness
(20%)
Reliability
(20%)
22.5%
X
X
X
Supply
The system provides the capability to plan and execute the functions
necessary for supply operations. This includes functions related to
capacity, operations and fulfillment as it pertains to inventory,
warehousing, and asset management.
30.6%
X
X
X
Maintenance
The system provides the capability to plan and execute the functions
necessary for maintenance operations. This includes functions to
conduct capacity and production management of maintenance
resources and to plan and control maintenance execution.
30%
X
Finance
The system provides the capability to conduct financial accounting for
assets and inventory. This includes functions to capture costs and
other financial data related to inventory and asset values required for
Clean Audit compliance.
5.2%
System Administration
The system provides the capability to support the on-going system
setup, configuration, and maintenance required for the GCSS-MC/LCM
BLOCK 1 enterprise and deployed environments.
Attainability
Flexibility
(15%)
X
Expenses
(10%)
Assets
(10%)
X
X
X
X
X
11.7%
Total
Economy
USMC Balanced Scorecard Attributes (Weight)
Readiness
(25%)
Request Management
The system provides the capability to create, update, validate, approve
and manage customer requests for logistics support including supply,
service, maintenance, and returns or combinations of these requests.
Flexibility
X
X
100.0%
The “Simplicity” Joint Attribute has been omitted because it does
not map to a specific USMC Balanced Scorecard Attribute
1
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
2
GCSS-MC Capability Production Document (CPD) Draft October
2008
Pre-Decisional Analysis and Data
17
Performance Improvement Metrics Table (PIMT)
– “The Performance Improvements Metrics Table must reflect metrics which quantify
the performance improvements that will result from the modernization as justification
for the investment.” – DITPR-DON Tier 1-3* Certification Reporting Requirements
– Shows the performance metrics associated with operational efficiencies (OE) gained
by implementing the new system increment
Purely operational improvements – no costs or monetized
benefits are associated with the PIMT
Compares operationally the differences between the legacy and
future system
Provides the expected time for the improvement
*DoD and DoN Business System Investment Tiers based on total development costs. Tier 1-3 are greater than $1million.
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
18
Performance Improvement Metrics Table
Tier
1
Description of Performance
Improvements
GCSS-MC Capability
Affected
Supply response time The
speed at which the logistics
chain provides products to
supported units.
Supply
Request Management
Maintenance
Operational Availability
Captures how often equipment
is mission ready.
Inventory Reduction
Inventory carrying
requirements, order timing, and
costs
Demand Planning and
Forecasting
The process of determining the
type, location and quantity of
products needed to support the
warfighter.
Current System Performance
(As-is)
Post GCSS-MC
Performance
(To-Be)
Performance
Improvement
Order to Ship Time (OST) measures
this process. Requests take 24 to
48 hours to process
GCSS-MC will reduce OST to
approximately 2 hours
Decrease the response
time by 96%
Supply
Maintenance
Mean Logistics Delay Time (MLDT)
factors into this metric. It is not
currently measured
GCSS-MC will be able to
monitor and reduce MLDT
GCSS-MC can
potentially reduce
MLDT by 50%
Request Management
Supply
Maintenance
Replenishment action initiated
whenever on-hand quantity plus the
dues, less back orders, is equal to
or less than the reorder point.
Inflates Inventory
GCSS-MC will use advanced
supply chain planning engine
at retail level and Oracle
min/max planning tool
Potential decrease in
inventory by 25%
Inventory Carrying Costs can be
20% or higher of inventory value
and are directly linked to inventory
size which may be larger than
needed due to poor visibility,
obsolescence, and replenishment
business rules
Inventory Carrying Costs will
be reduced in direct proportion
to the reduction in inventory
size
Potential 25% reduction
in inventory X 20%
Inventory Carrying
Costs = 5% overall
reduction in Inventory
Carrying Costs
Long order-to-ship times,
incomplete parts kits, erroneous
orders, and stock-outs all delay
maintenance throughput and
increase equipment downtime
Increase maintenance
throughput, maintain
personnel utilization, reduce
unneeded parts in pipeline or
in storage
Potential 15% Cost
Reduction (unneeded
Parts)
Supply
Maintenance, Repair & Overhaul
(MRO)
• Maintenance
Process, support, and downtime
for repairable parts operations
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
19
Performance Improvement Metrics Table
Tier
Description of Performance
Improvements
Inventory Cycle Time
The total time required to
complete the process of
receiving and issuing inventory.
1
Order Management
Addresses the ability to
streamline and automate the
entire inventory management
process from order capture to
transportation and shipment.
Resource Management
Ensures the timely management
and processing of orders
2
Realignment of Maintenance
Personnel
Encompasses the decrease in
staff or FTE support and the
increase in employee utility and
productivity
GCSS-MC Capability
Affected
Supply
Maintenance
Request Management
Request Management
Flexibility
System Administration
Procurement Improvement
Includes the purchase of
Supply
equipment, materials, software or
Finance
hardware to support the logistics
process
Current System Performance
(As-is)
Post GCSS-MC
Performance
(To-Be)
Inventory Cycle Time is not optimal
because USMC systems cannot
directly access vendors, track
orders, or efficiently process
requests
2 hour order processing time
vs 48 hour processing time,
order tracking, asset
visibility, direct reach to
supplier
Order Management is measured
through fill rates, which are
currently inconsistent, sometimes
incomplete, and untraceable
Traceable, measurable fill
rates that increase supply
chain velocity and cash-tocash transactions
Performance
Improvement
Potential 25% reduction in
inventory, 5% reduction in
inventory carrying costs,
and items in the pipeline
Potential 25% reduction in
inventory, 5% reduction in
inventory carrying costs,
and items in the pipeline
The timeliness with which orders
are processed is not optimal (24-48
hrs) because there are multiple
points of access increasing the
probability of errors in completion
of customer orders
Orders are processed in a
timely manner (2 hrs) through
a single point of access,
which allows for the accurate
completion of customer
orders
FTE’s are being used for
reconciliation of StovedPiped
systems
FTE’s released from system
reconciliation duties and
realigned to their job
resulting in an increase in
operational availability
Potential one time 10%
realignment of Marine
Corps Support FTEs
Four legacy systems, many
‘ungoverned’ systems, material
handling equipment
Reduction in system and
material handling equipment
costs as a result of GCSS-MC
implementation
Potential additional 5%
Reduction in Material
Handling Equipment Cost,
and Systems Costs
Reduction in erroneous
orders, double orders, an
order cycle time
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
20
Performance Improvement Metrics Table
Tier
Description of the
Performance Improvements
Shipping Status
Refers to tracking down the
status of an item
Improved lifecycle management
Provides Total Asset Visibility
Logistics plans
Creating, saving and reutilizing
logistics plans .
3
GCSS-MC Capability
Affected
Request Management
Supply
Maintenance
Request Management
Supply
Maintenance
Supply
Maintenance
Current System Performance
(As-is)
GCSS-MC will provide status to
end customer/requisition from
intermediate supply activities
Increases confidence
in the USMC managed
logistics chain
There are no enterprise level
metrics available to capture this
information
Improved enterprise level
visibility of assets throughout
enterprise including warranty
status, and serial number
tracking of secondary
repairables and end items
Enables and Improves
USMC logistics chain
management and
decision making
There are currently no enterprise
level ability to capture an archive
metrics available to capture this
information
GCSS-MC will include a process
for archiving these documents
into a database
Enables and Improves
USMC logistics chain
management and
decision making
Streamlined and timely table of
allowance and equipment (T/O
and T/E) item
update/management through
daily interface with TFSMS
Enables and Improves
USMC force structure
management and
decision making
Supply
Maintenance
Currently no interface with TFSMS
Budgeting
Ensures the system provides
updated figures.
Finance
Information is retained locally and
manually computed in Excel
spreadsheet
•System Administration
•Finance
Performance
Improvement
System does not provide an
estimated time. Requires phone
call to supplier in order to obtain
information
Interface with Total Force
Structure Management System
(TFSMS)
Streamlines table of allowance
and equipment item
update/management daily.
Requirements
USMC is subject to numerous
DOD wide requirements which
GCSS-MC will satisfy
Post GCSS-MC
Performance
(To-Be)
USMC currently adapting to
compliance requirements within
current system constraints
Automated processes will
handle most functions
Enhances USMC Compliance
with:
• JFIMP
• SFIS
• IUID
Improved visibility of
maintenance and
supply costs
Improves processes
Increases USMC
credibility with
internal and external
resource reporting
requirements
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
21
Performance Improvement Metrics Table
Additional Tier 3 Metrics
Tier
Ability to report more accurate and timely operational availability of all equipment/weapon systems
Establishes automation of maintenance history including major sub-component (SL-4) configuration of end items
3
Ability to task organize units with their associated equipment, supplies, and personnel within the GCSS-MC.
Marines, Sailors, contractors, and government civilians
Ability to create and submit service requests for logistics support in forward operating areas through mobile field service (MFS) and centrally manage
requests through fulfillment
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
22
EA Results - Block I
 ROI calculated using the Program’s LCCE
 Benefits Based on Total Block I (Release 1.1 + Release 1.2)
– PV of Benefits:
$1,219.07M
– PV of Costs:
$603.87M
– Benefit Cost Ratio:
2.02
– ROI:
3.40
Then-Year $
(Discounted)
GCSS-MC
Block I Cumulative Net Benefits vs Yearly Program Investment
$700.000
$600.000
$500.000
$400.000
$300.000
Break Even at 2014
Yearly Program
Investment
$200.000
$100.000
$0.000
($100.000)
2010
2011
2012
2013
2014
2015 2016 2017
2018
2019
2020
2021
2022
2023
Cumulative Net
Benefits
($200.000)
($300.000)
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
23
Top Ten Benefits
 $53M IT Direct Cost Savings
 $273.4M Inventory Reduction
 $797.4M Inventory Carrying Cost (ICC) Reduction
 $191.6M Repair Part Reduction
 $196.9M MLDT Reduction (Asset Value Recapture & Availability)
 Expanded User Base - GCSS will expand user base to approximately 40 percent of
57,000 potential users
 Improved readiness
 Enables compliance
 Expanded Capability
 USMC Integration with Joint Chiefs of Staff Joint Integrated Capabilities (JIC) Joint
Attributes for Logistics Chain Management (LCM)
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
24
EA Results - Release 1.1
 ROI for Release 1.1 is a sub-set discount analysis of Block I
 Benefits Analysis for Release 1.1
Then-Year $
(Discounted)
– PV of Benefits:
$896.69M
– PV of Costs:
$309.51M
– Benefit Cost Ratio
2.90
– ROI
5.32
GCSS-MC
Release 1.1 Cumulative Net Benefits vs Yearly Program Investment
$600.000
$500.000
$400.000
$300.000
Break Even at 2013
Yearly Program
Investment
$200.000
$100.000
Cumulative Net
Benefits
$0.000
($100.000)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
($200.000)
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
25
EA Results - Release 1.2
 ROI for Release 1.2 is a sub-set discount analysis of Block I
 Benefits Analysis for Release 1.2
– PV of Benefits:
$317.50M
– PV of Costs:
$293.94M
– Benefit Cost Ratio
1.08
– ROI
1.20
Then-Year $
(Discounted)
GCSS-MC
Release 1.2 Cumulative Net Benefits vs Yearly Program
Investment
$80.000
Break Even at 2019
$60.000
$40.000
$20.000
$0.000
($20.000)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Yearly Program
Investment
($40.000)
Cumulative Net
Benefits
($60.000)
($80.000)
($100.000)
($120.000)
($140.000)
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
26
Direct Cost Savings
 $53M IT Cost Savings
– After Release 1.2 FOC (FY13), the four legacy systems will be phased out
– Approximately $4.5 Million per year after legacy system phase-out
– Assume legacy costs will not increase annually due to long term maintainability issues
– Researching potential SQ investment and increased sustainment costs due to SW and HW
obsolescence
– Initial cost savings are typically negative
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
27
Inventory Reduction
 $273.4M Inventory Reduction
– USMC Class IX inventory estimated at $1.2 Billion
– Block I one-time inventory reduction (IR) draw-down estimated between 15% and 25%*
– Used 20% figure in PIMT analysis
– One time drawdown of inventory for this analysis is spread across the first 5 years after
FOC
– Inventory is shown to be 90% within the Enterprise, and 10% Deployed
– Release 1.1 IR estimate for the ROI is $189.83 Million; Release 1.2 IR Estimate $53.54
Million
*Based on proprietary BAH industry studies and USMC I&L Business Case
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
28
Inventory Reduction
Class IX Secondary Repairables Inventory by
Location (wholesale & retail)*
Location
Quantity
Cost
Percent Distribution
Quantity
Dollar Value
LOGCOM
106,129.30
$702,408,282.91
58.95%
57.72%
Deployed
17,810.80
$119,144,713.19
9.89%
9.79%
Camp Pendleton
14,012.14
$103,607,173.43
7.78%
8.51%
Camp Lejeune
11,546.97
$84,890,792.23
6.41%
6.98%
Okinawa Hawaii
13,811.82
$83,823,358.27
7.67%
6.89%
MFR
7,562.94
$65,063,257.12
4.20%
5.35%
BIC
4,596.96
$25,544,323.91
2.55%
2.10%
29 Palms
2,384.44
$17,215,849.77
1.32%
1.41%
Quantico
2,113.86
$13,695,195.53
1.17%
1.13%
ILC Cycle
68.77
$1,468,656.88
0.04%
0.12%
180,038.00
$1,216,861,603.25
100.00%
100.00%
Total
*Based on proprietary BAH industry studies and USMC I&L Business Case
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
29
Inventory Reduction by Release
Reduction in Class IX Inventory
Inventory Benefit
Distribution
100%
Block 1
Inventory Dollar Value
78%
22%
FOC 2012
FOC 2013
Release 1.1
Release 1.2
$1,216.9 Million
$949.2 Million
$267.7 Million
$243.4 Million
$189.8 Million
$53.5 Million
$48.7 Million
$38.00 Million
$10.7 Million
20% Inventory Reduction
Numbers may not add due to rounding
Annual Benefit Over Each
of First 5 Years After FOC
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
30
Inventory Carrying Costs Reduction
 $797.4M Inventory Carrying Cost (ICC) Reduction
– Inventory Carrying Cost (ICC) factor is 25% of inventory reduction value. ICC is a recurring
cost avoidance that will be used to write down the future investment
– Release 1.1 ICC estimate $47.6M; Release 1.2 ICC Estimate $13.39M
– ICC avoidance will occur every year after FOC
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
31
Inventory Carrying Costs Reduction
Reduction of Class IX Inventory Carrying Costs Linked to Reduction
of Class IX Inventory
Inventory Carrying Cost
Reduction Benefit
Distribution
100%
Block 1
20% Inventory Reduction
25% Inventory Carrying
Costs Avoidance From
FOC Forward Based on
Inventory Reduction
78%
22%
FOC 2012
FOC 2013
Release 1.1
Release 1.2
$243.4 Million
$189.8 Million
$53.5 Million
$60.8
$47.5
$13.4
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
32
Repair Part Reduction
 $191.6M Repair Part Reduction
– Analyzed SOE maintenance transactions for the period FY 2007 thru April 2009
– 37,480 unique consumable NSNs from maintenance transactions representing 335,648
appearances in 87,500 Equipment Repair Orders (ERO)
– 626,677 parts were required, but 948,020 were ordered valued at approximately $551.7
Million
– Difference of 321,343 “over-ordered” parts for the period of analysis is valued at
approximately $36.5 Million
– Annualized adjustment for the period of analysis indicates that approximately 128,537
extra parts were ordered, valued at $14.6 Million per year, every year
– Annual Benefit for Release 1.1 is $11.4M and Release 1.2 is $3.22M
– Cost avoidance will occur every year after FOC
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
33
Repair Part Reduction
Consumables and Repair Parts NSNs FY 2007 Through April 3, 2009
NSN
Count
EROS Parts
Required
37,478
626,677
Parts
Ordered
948,020
Value of Parts
Ordered
Excess of
Required
Parts Ordered
$551.66 Million
321,343
Yearly Benefit
Value of
Excess Parts
Ordered
$36.54 Million
$14.62 Million
Benefit Proration to Each Release
Block I (100%)
Yearly Benefit
Release 1.1 (78%)
$14.62 Million
$11.4 Million
Release 1.2 (22%)
$3.2 Million
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
34
MLDT Reduction
 $196.9M MLDT Reduction (Asset Value Recapture & Availability)
– For our period of analysis, (FY 07 thru April 3 FY 09), $23.1B dollars of USMC assets
were sitting idle due to a total Maintenance Down Time (MDT) of 3.8M days,
representing 87,427 Equipment Repair Orders (ERO)
– The average MDT per ERO is approximately 41 days, which is comprised of Labor
Hours, Average Logistics Delay Time (ALDT), and other MDT attributes
– ALDT is approximately 21 days
– Modest 10% reduction in ALDT to 19 days results in a one-time benefit of $175.31M in
Asset Value and Equipment Availability
– Benefit allocated to Release 1.1 is $136.74, and to Release 1.2 is $38.57
– Prorated across five years starting at FOC
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
35
MLDT Reduction
Value of USMC Asset-Availability and Use Loss Due to Maintenance Down Time as
Related to Average Logistics Response Time (LRT)
2.5 Fiscal
Year’s Data
Data Element
Total Number of EROs Analyzed in 2.5
Fiscal Years
All numbers are rounded
FY 2007 thru 1/2 FY
2009 (April 3, 2009)
EROs Total $ Asset Value in 2.5 Fiscal Years
10% Reduction in Average
LRT
87,427
$23,105.125 Million
MDT Total Days
3.794 Million
Average asset value in MDT per Day
$6,090
Average LRT in Days per ERO
X
21.14
19
=
$128,730
$115,857
/2.5 =
$51,492
$46,343
X
34,047
34,047
$1,753.143 Million
$1,577.829 Million
Average Total Value of Assets Unavailable to the
USMC for Each ERO due to Average Logistics
Response Time (LRT)
Average Annualized Loss per Fiscal Year
Fiscal Year Annualized Adjusted Average Number of
EROs
Average Estimated Total Asset Value Use-Loss to
the USMC for a Fiscal Year that’s Related to Avg.
LRT
Release:
Reduction in Asset Value Loss ($35.1 Million
per year benefit each of first 5 years after FOC)
Total One-Time Benefit (annualized delta)
1.1 (78%)
$27.4 Million
$136.7 Million
1.2 (22%)
$7.7 Million
$38.6 Million
Block I (100%)
$35.1 Million
$175.3 Million
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
36
User Base Expansion
 Expanded user base should increase supply chain velocity through greater user access,
increased order accuracy and increased transaction speed.
 Current legacy system user base is approximately 13,000
 GCSS will potentially expand user base to approximately 56,965
 There is no reduction in FTEs resulting from implementation of GCSS-MC.
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
37
Readiness and Compliance
 Readiness
– Improved visibility of assets throughout enterprise including warranty status, and serial
number tracking of secondary repairables and end items
– Inventory posture and readiness is visible throughout enterprise allowing for improved
resource allocation and optimal stockage at wholesale, retail and consumer level
– Establishes automation of maintenance history including major sub-component (SL-4)
configuration of end items
 Compliance
– Enables USMC to comply with Joint Financial Management Improvement Program
requirements
– Enables USMC to comply with SFIS requirements
– Enables USMC to comply with IUID requirements
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
38
Legacy System Risks
 Cost Avoidance
– Annual increased legacy systems costs due to long-term maintainability issues
– Legacy systems are currently grandfathered and do not have to comply with SFIS and IUID
due to the imminent replacement of the legacy systems
– If GCSS-MC is not implemented, support for the legacy systems in their current
configuration would become untenable. USMC would need to commission a revision to
modernize the code and functionality. Due to the revision, the legacy systems would then be
forced to comply with Standard Financial Information Structure (SFIS) and Unique
Identification (IUID).
– Need to develop costs for SFIS and IUID compliance
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
39
Additional Capability
 Expanded Capability
– Ability to report more accurate and timely operational availability of all equipment/weapon
systems
– Ability to create, save, and reutilize logistics plans and bills of material for TEEP events and
real world operations
– Ability to task organize units with their associated equipment, supplies, and personnel within
the GCSS-MC
– Streamlined and timely table of allowance and equipment (T/O and T/E) item
update/management through daily interface with TFSMS
– Streamlined budgeting, improved visibility of maintenance costs, ability to establish financial
responsibility at any echelon
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
40
Balance Scorecard Attributes
(% = Attribute Weight)
Logistics Measures of Effectiveness
Customer
25%
20%
Readiness
Responsiveness
Operational
Availability
Total Logistics Chain
Cycle Time
(External Effectiveness)
(External Effectiveness)
Process
20%
Reliability
Quality Order
Fulfillment
(Internal Effectiveness)
Resources
10%
15%
USMC
USMC Logistics
Logistics
Balanced
Balanced
Scorecard
Scorecard
Flexibility
Logistics Chain
Capacity
(Internal Effectiveness)
10%
Expenses
Assets
Total Logistics Chain
Expense
Asset Utilization
(Internal Efficiency)
(Internal Efficiency)
Economic & Business Analysis - Norfolk
41
41
Attribute: Readiness
 The Tier 1 performance metric for Readiness is Operational Availability, measured through
lower-tier metrics with the following formula and illustrated in the figure below:
Operational Availability =
___________Uptime__________
Uptime + TTR + SRT + DART
Operational
Availability
Availability
due to
Maintenance
(TTR)
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Availability
due to
Supply
(SRT)
Availability
due to
Distribution and Admin
Delay Time (DART)
42
42
Attribute: Responsiveness
 The Tier 1 performance metric for Responsiveness is Total Fulfillment Cycle Time, measured
through lower-tier metrics with the following formula and illustrated in the figure below:
Total Fulfillment Cycle Time =
Request Cycle Time + Order Fulfillment Cycle Time
Total Fulfillment Cycle Time
Request Cycle Time
Order Fulfillment Cycle Time
(CWT)
Order Mangement Section
Cycle Time
Order Entry Complete to
Product Ready to Ship
Transportation Time
Maintenance Cycle Time
(MCT)
Purchase Cycle Time
(backorders)
OST (w)
Purchase Cycle Time
(non-backorders)
Order and Shipping Time
OST(r)
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
43
43
Attribute: Reliability
 The Tier 1 performance metric for Reliability is Quality Order Fulfillment, measured through
lower-tier metrics with the following formula and illustrated in the figure below:
Quality Order Fulfillment =
[# Repair Orders X %QOF (Maintenance)] + [# Requisitions X %QOF (Supply)]
(# Repair Orders) + (# Requisitions)
Quality Order Fulfillment
Quality order fufillment
maintenance/Distribution
Order delivered
complete
maintenance
Repaired
by agreed
upon date
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Quality order fulfillment
Supply/Distribution
Order delivered
complete
supply
Order delivered
by agreed
updon date
44
44
Attribute: Flexibility
 Flexibility is measured with the Tier 2 metric Fulfillment Capacity, which is the highest-level
metric used to measure logistics chain capacity. Fulfillment capacity is measured through
lower-tier metrics through the following equation and as illustrated in the figure below:
Fulfillment Capacity =
Upside Make Capacity + Upside Warehouse Capacity + Upside Purchase Capacity + Upside
Transportation Capacity
Fulfillment Capacity
Upside Make
Capacity
Upside Warehouse
Capacity
Upside Purchase
Capacity
Upside Transportation
Capacity
Upside Warehouse
Space Capacity
Upside Personnel
Capacity
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
45
45
Attribute: Expense
 The Tier 1 performance metric for Expense is Total Logistics Expense, measured through
lower-tier metrics with the following formula and illustrated in the figure below:
Total Logistics Expense =
Total Maintenance Expense + Total Supply Expense + Total Distribution Expense
Total Logistics
Expense
Total
Maintenance
Expense
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Total
Supply
Expense
Total
Transportation
Expense
46
46
Attribute: Asset Utilization
 The Tier 1 performance metric for Asset Utilization is Asset Utilization, measured through
lower-tier metrics with the following formula and illustrated in the figure below:
Asset Utilization =
(Maintenance Asset Utilization, Supply Asset Utilization, Transportation Asset Utilization)
Asset Utilization
Maintenance
Asset
Utilization
Maintenance
Personnel
Utilization
Maintenance
Space
Utilization
Maintenance
Equipment
Utilization
Supply
Asset
Utilization
Supply
Personnel
Utilization
Supply
Personnel
Manning
Inventory
Asset
Utilization
Transportation
Personnel
Utilization
Transportation
Equipment
Utilization
Supply
Personnel
Time
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Warehouse
Space
Utilization
Transportation
Asset
Utilization
47
47
Way Forward
 Expanded Risk Analysis
 Life Cycle Return on Investment Analysis
 Optimized Benefits Relative to Cost
 Post Investment Analysis
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
48
Agenda
 Introduction
 Similarities/Differences in Benefits Analysis Approach vs. Cost Analysis
 Tiered Approach
 Example
 References
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
49
References
 DFAS ROI Calculator; www.dfas.mil/technology/pal/ssps/slc/roinpvcomputation.xls
 Department of the Army - Economic Analysis Manual;
www.asafm.army.mil/pubs/cdfs/manual/economic.pdf
 DoD Automated Information Systems Economic Analysis Guide – 1995;
http://www.ncca.navy.mil/resources/DoD_AIS_EA_Guide_1995_DRAFT_RCW.pdf
 Analysis of Alternatives (AoA) Handbook: Practical Guide to Analyses of Alternatives, July
2008, Office of Aerospace Studies, Air Force Materiel Command (AFMC) OAS/A9,1655 1st
Street SE, Kirtland AFB, NM 87117-5522; http://www.oas.kirtland.af.mil/
 Benchmarking Cost Savings & Cost Avoidance - NASPO BENCHMARKING WORKGROUP
Research Brief September 2007;
http://www.naspo.org/old_site/whitepapers/documents/BenchmarkingCostSavingsandCostAvoi
dance.pdf
 There are many more resources, but these are a good start.
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
50
Paul Gvoth
Associate
Booz | Allen | Hamilton
Suite 400
5800 Lake Wright Drive
Norfolk, VA 23502
Mobile (757) 646-4762
gvoth_paul@bah.com
Economic & Business Analysis - Norfolk
Benefits Analysis Brief 11.18.09 HRA SCEA/INCOSE
Pre-Decisional Analysis and Data
51