Depot Maintenance Activity Group Funding - Insights from Expenditure and Fight-Hour Data

Air Force Journal of Logistics, Fall, 2003 by Edward G. Keating, Frank Camm

How do logistics costs in Air Force Materiel Command (AFMC) relate to operating command activity levels?

The Planning, Programming, and Budgeting System currently requires operating commands to develop budgets that will cover costs of relevant AFMC support services. The operating commands use the Air Force Cost Analysis Improvement Group (AFCAIG) process to do that. Very roughly speaking, this process divides expected expenses into fixed and variable components and develops a budget estimate for each. We are particularly interested in how the methods used to address the variable component, expressed in terms of cost-per-flying-hour factors, relate to actual costs in AFMC.

In this article, we try to understand better the cost structure of depot support services. How much do these costs actually change when operating command activity levels change? In particular, how much do AFMC depot-level costs change as flying hours change, given that the AFCAIG factors are flying-hour based?

We believe the analysis presented raises questions about how variable costs are reflected in the Air Force command-based budgeting system. Specifically, we find that the expenditures of AFMC's Depot Maintenance Activity Group (DMAG) are inconsistently correlated with flying hours across different systems.

Depot-Level Fixed Costs

We hypothesized ex ante that a large portion of depot-level costs is unrelated to operating command activities. For example, programmed depot maintenance (PDM) is scheduled years in advance and is unrelated to current operations. The current AFCAIG process recognizes this phenomenon.

The Air Force command-level budgeting process treats unscheduled maintenance costs in the year of execution as though they were driven by operating command flying hours in that year. We will show that costs actually incurred by AFMC are not related to flying hours in the short run.

For example, materiel procurement has long lead times. Items bought with funds obligated in the year of execution need not be delivered to support flying hours for a year or more. Similarly, items delivered and paid for in the year of execution need not experience a demand in that year.

As we will discuss in more detail below, the organic DMAG has considerable general and administrative (G&A) and overhead costs. By definition, these costs are essentially independent of system activity in any year of execution.

There are also considerable rigidities in the government-employed civilian labor force. (1) Government civilian personnel policy strongly limits AFMC's ability to use temporary labor to match the workforce in place during any period with the demand experienced in that period. Also, the skills required in one maintenance shop are typically too specialized to allow much substitution of available workers between shops to match fluctuations in shops' demands over time.

Even if labor were freely flexible, AFMC only now is systematically attempting to match maintenance shop priorities to priorities in the operating commands. Until a systematic match can be taken for granted, there is no reason to expect a demand generated by an operating command flying hour to match a maintenance action in AFMC.

What depot-level costs vary, in the short run, with operating command activity levels? The major commands employ operating and support cost factors for depot-level reparables (DLR) based on calculated costs to them per flying hour. Although these factors are quite helpful in forecasting the DLR costs to the major commands, they are much less successful in predicting how a change in flying hours in any month would affect actual AFMC costs during the months following that month. Our analysis suggests that cost factors, like average cost per flying hours, relevant for long-term purposes, have great difficulty explaining how changes in operating command activity levels affect actual depot-level costs to the Air Force in a particular month.

Research Approach

Our analysis focuses on the DMAG, where the majority of AFMC logistics support costs are incurred. The DMAG funds all programmed and nonprogrammed maintenance in AFMC. The DMAG buys materiel from the Supply Maintenance Activity Group (SMAG), but unless this materiel is new, the DMAG is responsible for returning it to serviceable status, so much of what the DMAG pays the SMAG simply covers DMAG costs incurred earlier. The only SMAG costs not actually incurred in the DMAG at some point in the past cover purchases of new materiel and administrative costs within the SMAG; as a result, costs in the DMAG drive total costs in the Air Force working capital fund (WCF).

We examine recorded DMAG expenditures, not AFCAIG cost factors. AFCAIG cost-per-flying-hour factors attempt to capture what the operating commands pay AFMC for services. In this analysis, we do not focus initially on what the operating commands pay AFMC; this is a paper transfer within the Air Force. Instead, we are concerned with the actual costs to the Air Force, as a whole, of supporting the operating commands. AFMC incurs these costs when it pays its labor, buys materiel, pays for utility services, and so on. These are the costs we focus on. We also focus on DLR repair expenditures, not programmed depot maintenance. According to the data we obtained, repair represented 42 percent of DMAG expenditures in fiscal year (FY) 2000.