Report Questions Military Logistics Contract, Says DOD Has Failed to Monitor Program

This story appears in the Sept. 10 print edition of Transport Topics.

A new report has raised questions about whether a Department of Defense contract to outsource freight shipments has produced huge savings claimed by Menlo Worldwide Logistics, in large part because of DOD’s failure to scrutinize the program closely.

In 2007, Menlo, a Con-way Inc. subsidiary, was awarded a seven-year, $1.7 billion contract to oversee nearly one-third of all military freight movements within the continental United States. It was said to be the largest defense logistics outsourcing in history and was intended to bring best commercial business practices to the military.

DOD officials had boasted that it would cut military transportation costs by at least 19%. Menlo has said the program already has saved the military millions of dollars in shipping costs.

However, a DOD Inspector General audit report made public last week concluded the Defense Transportation Coordination Initiative program was not closely scrutinized by the U.S. Transportation Command, or Transcom, and as a result, shipping costs may have been higher.

“Program management office personnel did not provide sufficient oversight of the DTCI contract, and Menlo reported unverified cost reductions of $167.4 million for 669,157 freight shipments from March 2008 through September 2010,” the IG report said. “The reductions were not verifiable because of questionable data.”

Randy Mullet, Con-way’s vice president of government relations and public affairs, called the IG report “much ado about nothing.”

“This audit has been going on for about a year,” Mullet told Transport Topics. “The report was ended on data based in 2010, which was the first iteration of the contract. In the second phase of the contract, almost all of these things were addressed. So for us, it’s kind of much ado about nothing and old news.”

However, the IG said that, of that $167.4 million in savings reported by Menlo, $118 million was based on “flawed baseline transportation costs,” and $56.9 million in program costs should have been deducted from the savings.

“If the $167.4 million in cost reductions were offset by the $118 million in questionable cost reductions and $56.9 million in program costs, then costs were about $7.5 million greater than cost reductions,” the IG said.

As a result, the IG recommended that Transcom “not exercise future options on the DTCI contract” until it can verify the cost reductions.

The contract stretches over a seven-year period, which includes four one-year extensions after the initial three years. The next extension is due in October.

“We’re confident and ex-tremely proud of the savings and know that we have outperformed, and Transcom believes we have outperformed the requirement,” Mullet said. “And this third-party validation beyond DOD’s IG report has apparently proven that out, according to Transcom and DOD officials.”

However, IG spokeswoman Bridget Serchak said that Transcom has not yet certified the cost data.

“The commander agreed to establish procedures and certify the costs,” Serchak said. “He stated that the first certification would occur by the end of June 2012. The certification was rescheduled for October 2012. We will follow-up with U.S. Transcom, once the certification is completed.”

Mullet also questioned the baseline data methodology that the IG used to compute the savings.

“That isn’t the baseline that is used anymore,” Mullet said. “The baseline was changed in the second phase of the contract. This [the IG] is commenting on the first part of the contract, which isn’t reality now.”

However, Serchak said the contract modification “will not correct the questionable information from the baseline used to justify continuing the contract.”

Mullet said he had received no indications from Transcom that the IG audit would be an obstacle to Menlo’s being granted another one-year contract extension.

Cynthia Bauer, a Transcom spokeswoman, said that the command is currently in internal discussions on how to strengthen the program.

“The DTCI program is currently operating and is in option year two,” Bauer said. “The decision on the next option year is in process and will be made before October.”

The IG report questioned whether DTCI should continue.

“We concluded that the questionable cost reductions, distorted on-time delivery information, and weak contract oversight cast doubt on the benefits of continuing the DTCI contract,” the audit report said. “The cost benefits are questionable, and performance indicators for on-time deliveries were overstated and did not show improvement over past practices.”

The IG audit also noted that had the DTCI cost savings actually occurred, DOD transportation budgets would show a decrease and cause reprogramming actions.

“However, we found no evidence that this had occurred, which cast further doubt on the validity of the reported cost reductions,” the report said.

American Trucking Associations said that the IG’s report will “help both industry and the Department of Defense move the Defense Transportation Coordination Initiative from its initial phases to being a more cost effective and efficient way of managing freight movements for the Department of Defense.”

ATA is ready to work with the government “to build new efficiencies into how Department of Defense freight is procured and managed,” the group said.