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The Reform of Defence Logistics. Interim Report 1 (2013:14)

The Swedish Armed Forces (SAF) and the Swedish Defence Materiel Administration (FMV) have been commissioned by the Swedish Government to jointly reform the defence logistics, i.e., logistics services and the procurement of materiel. The aim is to free up resources from support operations so that these can be used to bolster the SAF front-line units. The government has commissioned the Swedish Agency for Public Management (Statskontoret) to monitor and evaluate the work of the agencies concerned to make defence logistics more efficient. This interim report is the first of three reports from Statskontoret.

An extensive reform with requirements for cost savings

In July 2012, the government decided that responsibility for a number of the defence logistics services currently provided by Armed Forces Logistics (FMLOG) would be transferred to FMV. This was the first stage of an extensive reform that will tidy up with division of roles and responsibilities between the two organisations. The aim is to create a more expedient client and supplier organisation for the provision of materiel and logistics. The most extensive part of the logistics reform, the change to the materiel procurement process, is delayed and will be conducted in 2014. From 2015, when the new working practice has been introduced the SAF will be able to concentrate on military capability requirements, while the FMV will gain a greater responsibility for delivering the most efficient solutions. The government's decision was motivated by the proposal submitted by the Defence Structural Committee in 2011.

The government has decided that the two organisations will together save SEK 760 million per year from 2015. The saving will be distributed between three areas that can be made more efficient: storage, service and workshop (SEK 300 million); purchasing activities, incorporating the purchasing cost reduction project known as UEFA (SEK 330 million, of which 300 million relates to UEFA); and management and ordering activities (SEK 130 million).

The first transfer to FMV was prepared and conducted in a short time

In June 2012, when the government formalised the decision regarding the transfer, there were only six months remaining in which to conduct it. The transfer would primarily involve moving activities that were not part of FMLOG's front-line units to FMV. In certain cases this involved entire organisational units being transferred from FMLOG over to FMV, and in other cases the units were divided between the two. The activities that were transferred to FMV have been organised as a new accounting unit within FMV: "Storage, Service and Workshop" (FSV). The total number of people employed by FMV has doubled as a result of the transfer. The organisations thus had only a short time to prepare for and conduct the reform, but despite this there has been little or no impact on the ongoing performance of these activities.

Serious risk that the government's required cost savings will not be realised

Statskontoret has ascertained that there is a serious risk that the government's required cost savings will not be achieved. The organisations do not believe they will be able to achieve the government's cost savings of SEK 760 million per year as of 2015. They do however believe that they will achieve the cost saving targets for the storage, service and workshop and for the purchasing activities. It is also possible that they will achieve the cost savings required for the management and ordering activities, but one year later than stated by the government. However, the organisations can only achieve half of the purchasing costs savings that are to be realised through the UEFA project. According to the organisations, the reason for this is a lack of staff with the correct expertise. In all, they can only achieve a cost saving of SEK 610 million of the required SEK 760 million, and this will be realised only in 2016, i.e., one year later than the government dictated. Above all, it is uncertain when the cost savings stipulated as part of UEFA can be realised. The organisations report that they have in total saved SEK 189 million in the period 2011–2012.

Uncertain starting point for the savings

Statskontoret notes that the government has given the organisations an overall cost saving requirement, which they must distribute and implement. The governments' requirement has, however, been changed with regard to both the schedule for implementing the cost savings and how these are to be reported. This makes monitoring the reform more difficult.

The contracting of defence logistics has been abandoned

Initially, FMV was commissioned by the government to contract the provision of logistics services to private providers. Statskontoret has ascertained that such contracting has been abandoned for the time being, because the Riksdag would like to make a decision on this issue. It is thus uncertain when this stage will take place and the work to increase efficiency may therefore primarily be directed at measures that can be implemented in other ways.

Unclear financial consequences of the transfer

Statskontoret has ascertained that the relationship between the SAF and FMV is uncertain when it comes to the question of which organisation is responsible for assets, costs and income concerning the transferred activities. The fixed assets related to the logistics activities should have been transferred to FMV as part of the transfer of responsibility. However, such a transfer has not yet taken place, which means that FMV does not have the assets at its disposal. Consequently, FMV does not have the full and proper business conditions to conduct these activities and implement measures to improve efficiency.

The cost of overheads has increased by SEK 60 million as a consequence of the transfer, mainly related to the system support provided. Statskontoret has ascertained that there is a serious risk that the costs will be passed from one organisation to the other. The financial perspective has been added afterwards and it is the assessment of Statskontoret that the organisations may have taken on accounting problems that will be difficult to resolve retrospectively.

Complex logistics flow between organisations make efficiency savings more difficult

The government decided on a division of logistics services that involves a sharing of responsibility for the supply chain between central and local storage, and also for the associated transport services. This has created a complex logistics flow between the two organisations. The supply chain must, however, flow smoothly even when responsibility is transferred from one organisation to another. This requires there to be well-functioning coordination between organisations, otherwise there is a danger that the administration costs rise and that resources are used suboptimally.

The most extensive portion of the logistics reform remains

The greatest change in the logistics reform has yet to occur and involves the introduction of new management and ordering activities in stages over the course of 2013-2015. The working practices of the organisations will be streamlined so that the SAF becomes the client and FMV the supplier for the entire materiel and logistics procurement process. This requires changes to the organisations and the transfer of additional activities to FMV.

Statskontoret understands that the organisations are currently involved in a conversion process that provides them with limited opportunities to implement large cost reductions within the scope of the affected logistics activities. Only once the reform has been completed, i.e., in 2015 at the earliest, will they be able to find more long-term cost-effective solutions. The organisations have a challenge ahead of them in achieving this in parallel with the growth of the SAF's front-line units, with increased requirements for the provision of materiel and logistics services.

Statskontoret's ongoing work

Statskontoret will monitor the implementation of the new client and supplier model, and will follow up on the first part of the logistics reform, including the development in the logistics activities in relation to the augmentation of the front-line units. In addition, we are planning to place the emphasis on how the organisations approach the issue of providing effective system support for the activities that are affected. In advance of the next progress report in April 2014, we will also monitor how the organisations have managed to resolve their financial relationships.