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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 April 13.The task force is to deliver a plan on exchange consolidation to Congress by late January 2005. 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, 2003, 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 undersecretary 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 - AAFES, the 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, comprising 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 preordained consolidation plan.

If task force analyses can show real savings, Wax said, opposition to consolidation will have to ease.

"Just for discussion, let's say the number comes out to be $100 million" in savings annually. "Then the question would be, 'Who in the room does not want to save soldiers, sailors, airmen and Marines $100 million this year and every year thereafter?'"

Timothy M. Laseter, a professor at the Darden School of Business Administration at the University of Virginia, and under contract to the task force, has written a six-page article arguing for "exchange unification."

Despite all the past studies favoring it, Laseter wrote, "the three exchanges have always managed to avoid or postpone consolidation. Fear of loss of control over MWR contributions, and fear of the potential pain of losing staff made redundant by consolidation, generates a natural, visceral resistance to unification."

But with competition stiffening off base, shoppers showing less brand loyalty and exchange profit margins in decline, Laseter said, the exchanges "to survive ... must leverage economies of scale to lower costs."

"It is the customers who really should be marching outside my office, picketing as to why we are not moving faster to get this accomplished," Wax said. At stake is "money generated by the individual two-striper who puts his dollar on the point of sales. He is paying for everything in those exchanges, including duplicating processes."

— Comments are welcomed. Write to Military Update, P.O. Box 231111, Centreville, VA 20120-1111, e-mail or visit:


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