Funding Product Support Strategies (PSS) - Working Capital Funds (WCF)
DAU GLOSSARY DEFINITION
WCFs are a unique type of funding that allows DoD activities to operate similar to a commercial business when financing inventories of supplies or executing industrial-type or commercial-type activities that provide common services within or among departments and the DoD. Often called “revolving funds”, WCF can finance inventories of supplies and industrial-type activities that provide common services such as repair, manufacturing, or remanufacturing. WCF can also enable Performance Based Logistics (PBL) product support arrangements (PSA) by facilitating the use of long term contracting strategies. This is accomplished by using WCF’s revolving funds to finance PBL PSAs which are then replenished by payments from customers.
WCF were established by Congress to more effectively control and account for the cost of programs and work performed in the DoD. Under the provisions of 10 USC 2208, the goal of WCF's goal is to break even by returning any monetary gains to appropriated fund customers through lower rates or collecting any monetary losses from customers through higher rates in follow-on years. Thanks to WCF's revolving fund structure, a customer-provider relationship can be created between the military operating units and the WCF. The WCF organization generates a forecasted requirement based on the projected demand of material by the military operating unit, and then the material is made available for sale to the customer (military operating unit) at the time of need. In essence, WCFs finance lead-time for their customers so that an obligation of the WCF can be made in advance of the military operating unit requirement. Congress establishes an initial fund for the working capital fund (the “corpus”). After the initial establishment, WCF is replenished through customer payments for goods. The customer uses their annual appropriations from Congress to make these payments. In turn, the product support provider is reimbursed by the WCF.
According to the DoD Product Support Manager’s [PSM] Guidebook, WCF provides a dedicated, integrated, DoD-owned and operated worldwide supply, transportation, and maintenance system. The advantages for financing product support strategies are listed below:
- Unlike other DoD organizations, the WCF sells its products and services to its customers much like a private business and, with a few exceptions, it does not receive a direct appropriation.
- Unlike private-sector companies that provide similar services, the WCF activities are chartered to support the DoD Warfighter using DoD civilians and military personnel. The workforce is therefore stable, which is not always the case in a contract environment where contractors can change with each new competition.
What does the WCF offer the PSM?
- Placing work with a WCF activity is fairly straightforward, and, since the transaction is internal to DoD, Federal procurement rules do not apply.
- Since the WCF is not operated for profit, it can retain capabilities that private sector companies may choose to divest. For example, it retains inventories of spare parts with low demand, an important consideration with aging weapon systems. It retains excess maintenance capacity during peacetime for use during extended contingencies.
- For new weapon systems, the PSM purchases and provides the CF with initial spares which the WCF sells. The WCF then uses the cash collected from the sale of parts and supplies to purchase replacement stocks.
- Because the WCF has budgetary contract authority, it can order replacements prior to the receipt of funded orders, an important consideration for long-lead-time items.
- The prices the WCF charges for parts or maintenance once set in the budget are not normally changed during the execution year. So, the PSM is protected from inflation; the price the PSM budgets for an item or labor hour is the price the PSM pays.
- The WCF has extensive procurement expertise to seek the best price for spare parts from the industrial base and find new sources of supply when manufacturers decide to discontinue support.
- When necessary, the maintenance activities can fabricate the needed items.
- Several WCF maintenance activities have special authorities that permit them to enter into partnership with private sector companies that permit the PSM to take advantage of the best of the public and private sectors. The private companies may operate in a DoD maintenance Depot dividing the work between the public and private workforce.
The WCF has also been a key enabler for effective PBL PSAs by facilitating the use of long-term contracting strategies. PBL is synonymous with performance based product support, where outcomes are acquired through PSAs that deliver Warfighter requirements and incentivize product support providers to reduce costs through innovation. These arrangements are contracts with industry or inter-governmental agreements. Sources of support may be organic, commercial, or a combination, with a primary focus of optimizing customer support, increasing weapon system availability, and reducing ownership costs.
A key tenet of successful PBL efforts with industry identified in OSD’s PBL Guidebook is the requirement to provide sufficient contract length for the product support provider to recoup investments on improved product and sustainment processes. The primary funding mechanism for the military operating unit is Operations & Maintenance (O&M) funding which is restricted to one-year obligation authority. The structure of the WCF allows for contracts with multiple year performance periods. These long-term performance periods have included multiple base years as well as multiple year options. All the Services have utilized WCF to fund some of their PBL efforts. The Air Force and the Army have used WCF to fund PBL sustainment services type contracts, while the Navy typically uses supply type contract. The Naval Supply Systems Command – Weapons Systems Support (NAVSUP WSS) has used the Navy WCF Fund – Supply Management (NWCF-SM) for many successful long-term PBL contracts.
As WCF has a break-even requirement as well a statutory requirement to maintain a sufficient level of cash in the treasury to meet their expenditure, all activities require some type of cost benefit analysis before entering into a PBL PSA. As an example, NAVSUP-WSS requires a detailed contract cost benefit analyses to validate the benefits of a PBL solution before proceeding. The analysis results should support two key factors for WCF financing. First, the BCA needs to show a "break-even or better" cost position over the life of the contract when compared to traditional (transactional) product support. Second, the WCF must be able to absorb any negative cash flow in the early years of the contract. The total cash flow of the entire contract must show zero or positive when compared to traditional support.