The Swedish Agency for Public Management

The reform of defence logistics. Final report (2015:11)

Defence logistics is a collective term for the armed forces' supply of materiel and logistics. This covers support to military activities in the form of a flow of materiel and services, e.g. weapons, vehicles, warehouses, transport, maintenance and communications systems.

The Riksdag decided on a new direction and a change to the organisational structure of defence logistics in June 2012. Since 2013, the Swedish Agency for Public Management (Statskontoret) has been undertaking a Swedish Government commission to monitor and analyse the work carried out by the Swedish Armed Forces (SAF) and Defence Materiel Administration (FMV) to streamline defence logistics on the basis of this decision. We have previously submitted two interim reports to the Government. This is the final report on this commission.

A new direction for defence logistics

The Riksdag's decision means that large parts of the logistics activities that were at the time carried out by the SAF would be transferred to FMV on 1 January 2013. Thanks to a unified supply of materiel and logistics, in which the SAF are the client and FMV are the suppliers, the Government and the Riksdag expect these activities to become more efficient.­­ The intention is for the two agencies to reduce the cost of defence logistics by SEK 760 million per year from 2015. This is to be achieved by reducing the costs of staff and purchasing. The funds released are to be used to convert the SAF's front-line organisation into units that are more usable and available.

Since the agencies began the conversion process, the Government has increased the requirements in terms of the SAF's preparedness and availability. This has an impact on both the units and the logistics that are to support their activities. For example, more logistics have come to be regarded as front-line logistics, i.e. activities carried out by the SAF's logistics unit FMLOG and other units. This means that the SAF needs to run a more extensive logistics operation than was predicted when the decision was made on this reform.­

A complicated and delayed change process

The SAF's and FMV's change processes have been extensive and complicated. The Government has delegated joint responsibility for implementing the decreed changes to both agencies. For example, this has involved agreeing on the transfer of activities, how the total savings requirement is to be allocated between them and how a new client-supplier model will be designed. In addition, the agencies have been given responsibility for specifying their reciprocal roles and how they are to collaborate within the scope of the new allocation of roles.

The work to transfer activities from the SAF to FMV and introduce new working practices is delayed by at least two years in relation to the Government and the Riksdag's estimate. The transfer of activities from the SAF to FMV has taken place in three phases, the last of which took place on 1 January 2015. The agencies then began the work of introducing the new client-supplier model they have developed together. In their joint quarterly reports to the Government, the agencies have gradually pushed back the time by which they say they will be able to achieve the Government's savings target. It is estimated that only in 2017 will the total savings be close to the target, amounting to just over SEK 730 million at that time. According to the agencies' assessment, it will not be possible to fully implement the new client-supplier model until 2018.

The reform has had several positive effects thus far …

Despite the SAF and FMV having yet to achieve the aim of the reform of defence logistics, Statskontoret's assessment is that it has had several positive effects thus far. As intended, the division of responsibility between the agencies has become clearer and the duplication of work has reduced, although these ambitions have yet to be fully realised. Thanks to the reform, defence logistics resources – such as time spent on work – have been assigned a price to a greater extent than was the case in the past.­­ This has probably contributed to resources being utilised more efficiently.

As intended, the agencies have also been able to implement large cost reductions, although the target of SEK 760 million per year has not yet been achieved. Within the field of stores, service and workshops, which is one of the four areas the Government has earmarked for streamlining, the agencies have already achieved the target of a saving of SEK 300 million per year. For 2014, the agencies have reported an accumulated saving of SEK 487 million. However, the net savings are lower if the transition costs are taken into account.

… but great challenges remain

Despite some success, great challenges remain when the agencies are to implement the reform. The new client-supplier model is an important tool for achieving a more efficient and more unified supply of material and logistics.­ At the same time, the model involves a great change in the way the agencies work. Even though its introduction into the agencies respective line organisations has already begun, several important issues remain for both the agencies to investigate. The new way of working is to be introduced into their regular activities. For example, they are to place and process, respectively, orders at a higher system level, i.e., the orders are to be fewer and more accumulated.­ The agencies also need to agree on certain issues. These include reasons for stipulating how the maintenance of materiel is to be undertaken, what joint and long-term IT support is to be chosen for defence logistics and how defence logistics is to be adapted to operational requirements. Other challenges are that the SAF must be able to demonstrate that units and the front-line organisation will benefit from the cost reductions.­

Orders at a higher system level introduced gradually

One main idea of the reform is for the SAF to order defence logistics at a higher system level. Costs are expected to decrease as a result. For example, all the equipment for a soldier is to be regarded and ordered as a combined technical system. So far, the SAF has submitted two orders to FMV that are larger and more accumulated than previous orders, but they were not processed according to the new model.­ The two new orders relate to supply solutions for international operations.

The defence logistics plan is the agencies' new governance document for the procurement of material at a higher system level. The plan is being introduced in phases, beginning in 2015. The first complete defence logistics plan is expected to be complete ahead of the procurement for 2018.

Risk of the costs of maintenance remaining high

The maintenance of material is covered by the greatest change in relation to the agencies' previous way of working.­­ In the past, this was part of the SAF's logistics supply. Thanks to the reform and the intentions of a unified supply of materiel and logistics, FMV will both procure materiel systems and take greater responsibility for maintaining them. This means that the costs of maintenance, i.e. the cost of maintaining the systems' characteristics throughout their entire life cycle, is to be taken into account and calculated when the materiel is procured. According to its own internal audit, FMV does not have sufficient expertise to calculate life-cycle costs. Consequently, there is a risk that the costs of maintenance remain high.

In addition, there is some uncertainty as to how maintenance will be managed in the new client-supplier model. Because the agencies have agreed on sharing the responsibility, there is a risk, for example, that they build up duplicate expertise in this area. The agencies have not agreed on the timescale for which maintenance is to be ordered. FMV, which has previously worked with long-range planning with respect to the supply of materiel, believes that the SAF should order maintenance by unit and for three years at a time. The SAF believes that it needs to be able to change its order at short notice when there are changes to the situation in the surrounding world. Statskontoret believes it is important that the agencies agree on an appropriate model for the management of maintenance.

System support for defence logistics is a vital issue

The new client-supplier model requires the SAF and FMV to share more information than they have in the past. The agencies have, in general, different solutions for system support and they are, all in all, very costly. The SAF use the standardised business system Prio.­­ When the last parts of Prio are introduced in spring 2015, it will be possible for maintenance and logistics to be ordered in the system. However, the system is still not adapted to orders for maintenance. FMV mainly uses a large number of other systems. The question of which IT system or systems they will use together has been discussed for several years. The agencies are still very far from reaching an agreement. Statskontoret believes that it is of the utmost importance that the agencies agree on which system support will apply to those aspects of defence logistics that are shared.

The operational requirements should govern defence logistics

One further issue the agencies need to resolve is how defence logistics is to be adapted to the new requirements for units' preparedness and availability. The requirements placed on the SAF mean that the agencies may need to make another assessment to rebalance the cost effectiveness of logistics against the freedom of action of the SAF.

Regardless of the requirements placed on the defence capability, Statskontoret is of the opinion that operational requirements must always govern the direction of defence logistics. What this balance between freedom of action and cost effectiveness will look like may, however, vary. It must be possible to adapt the processes the agencies are now streamlining to conditions other than those that applied prior to the reform. At the same time, it is necessary to pay heed to and further develop the positive effects the reform has involved thus far.

The savings are difficult to trade to units

The SAF has been given responsibility for ensuring that, within its area of responsibility, units and the front-line organisation benefit from the reductions in the cost of defence logistics. When the change process was begun, there was no follow-up model that could trace savings due to the defence logistics reform. Only for 2015 has the SAF been able to trace certain savings and reallocate the funds to units.

The Government should continue to monitor the agencies' work

There is much still to do in the implementation of the reform of defence logistics. When the new client-supplier model is introduced into the agencies' line organisations, new issues that were never touched on in the agencies' work to draw up the new model will also arise.

Statskontoret presumes that many of the problems we have observed will be dealt with in the agencies' continued work to implement the reform. But we also see a great need for the Government to continue monitoring the change process and ensure that the agencies meet the demands placed on them.­­

The reform may need to be reviewed

Statskontoret's commission has not involved evaluating the defence logistics reform as such. The delay to the implementation of the reform means that it is now difficult to make any pronouncement on its effects. It will only become possible in three to four years for the Government to conclusively assess the effects of the reform and judge whether its aims have been achieved.

Some of the problems we have identified with the way the agencies have implemented the reform are possibly partly the result of the way the reform was structured. One example is the fact that the Riksdag's decision involved less refined roles for the agencies than the commission of inquiry forming the basis of the reform had proposed. This may have contributed to the agencies having become involved in a drawn-out and complicated effort to define their reciprocal roles. Another example is that the SAF lacks the substantial opportunity to exert pressure that the client normally has in client-supplier models, namely the opportunity to turn to more than one supplier. This rule makes it more difficult for the SAF to force through cost-effective solutions. A third example is that the issue of any joint system support was not resolved before implementation of the reform began. Against this background, Statskontoret is of the opinion that there may now be cause for the Government to initiate a review of the substance of the defence logistics reform.