Dec 31, 1999
Supporting the U.S. military's warfighting units is a large infrastructure of personnel and facilities that fixes equipment; provides sustenance, weaponry, and compensation to military members; and pays the government civilian employees and contractors who support them. Many of these Department of Defense (DoD) support organizations do not receive appropriations from Congress. Instead, they earn funds by selling their services to warfighters. The transfer of funds between customers and providers is managed through a working capital fund, and support organizations use revenue from this fund to pay their employees, buy supplies, and buy services from other providing organizations. Each support organization is supposed to break even over time: if it incurs losses or gains in a particular year, future prices are to be adjusted upward (or downward) as an offset. Recent research, however, suggests an incompatibility between current working capital fund pricing policies and the cost structures of providing organizations. One suggested reform is that prices should be set at the support organizations' incremental or marginal, not average, cost, with certain fixed costs (installation costs, depreciation, excess capacity needed for surges or replenishment) excluded from customers' prices. The author speculates that if support organizations' fixed costs were funded separately, utilization rates at support facilities would increase and customers would make more appropriate workload decisions.