Proof of savings key hurdle for merger

Tom Philpott: Military Update columnist

The biggest obstacle to consolidating three military exchange services into a single system will be proving to Congress and skeptical service leaders that the effort actually will save money for patrons, says retired Air Force Maj. Gen. Charles J. Wax, director of the Unified Exchange Task Force.
“My most difficult challenge is to produce the empirical evidence that proves what appears to be intuitively obvious,” that moving to a single exchange service will eliminate “redundant overhead and duplication of processes‚” and, in turn, raise profits, Wax told Military Update last week.
The task force is to deliver a plan on exchange consolidation to Congress by late January. Various studies over the past 30 years have recommended combining the three exchange systems, Wax said. Annual projected savings have ranged from $13 million to $206 million.
Will actual savings be closer to the smaller or larger figure?
“I would like to be able to say definitively one way or the other,” said Wax. “I cannot.”
Previous studies all had weaknesses, he said. Indeed service leaders “have yet to be convinced” consolidation is a good idea.
“They are asking the same kinds of questions you are: ‘How many people (impacted)? How many dollars (saved)?’ And that level of analysis is not yet complete.”
What drives exchange consolidation for now is a May 8 memo to the services from Deputy Defense Secretary Paul Wolfowitz.
“I have decided,” he wrote, “that a single optimized Armed Service exchange system would best serve the department and exchange patrons.”
Wolfowitz directed Charles Abell, principal deputy under secretary of defense for personnel, to oversee the effort. Abell, in turn, formed the task force to develop an integration plan. He made Wax, former commander of the Army and Air Force Exchange Service (AAFES), task force director.
About 30 percent of exchange profits are used to staff, maintain and modernize stores. Seventy percent goes to the services as “dividends” to fund their morale, welfare and recreation (MWR) programs.
If consolidation can cut costs, Wax said, military people gain. The extra dollars would be used to lower prices, improve store operations and increase the MWR dividend, all of which would benefit patrons and allow exchanges to compete more effectively with off-base retailers like Wal-Mart.
The three exchange services — the AAFES, Navy Exchange Service (NEX) and Marine Corps Exchange (MCX) — have combined worldwide sales of $10.5 billion. Average savings to patrons on a market basket of goods range from 21.9 percent in AAFES to 15.8 percent in Navy-run stores.
After months of work by 10 task force teams, comprised of officials from every exchange service, Navy and Marine exchange commanders criticized the consolidation process in congressional testimony last month.
Rear Adm. William Maguire, days before retiring as NEX commander, said he still had not seen a “sound business case” to support system integration.
Retired Brig. Gen. Michael P. Downs, director of Personnel and Family Readiness Division at U.S. Marine Corps Headquarters, said the task force only provided “cover” for a pre-ordained consolidation plan.
In written comments for this article, Downs again took exception to those who argue a merger of systems will benefit Marines.
“To date, we have seen no factual evidence that contradicts our analysis that an integrated exchange environment would result in a significantly reduced dividend for our Marines and their families, and substantially increase the cost to our severed MWR and Family Services organization,” Downs wrote.
Before Congress, Downs complained that too many members of his MCX staff were burdened with task force duties, which distracted them from the real work of delivering the exchange benefit to shoppers.
In response to such complaints, Wax last week ordered all task force teams to “take a strategic pause.” In our interview, Wax likened the pause to halftime at a football game when coaches and players can reassess the game plan. But integration planning will resume, he said. He and Defense leaders remain committed to exchange consolidation.

Tom Philpott can be contacted at Military Update, P.O. Box 231111, Centreville, Va. 20120-1111, or by e-mail at: