Activity Groups

Supply Management

The Supply Management activity group acquires and manages spare and repair parts for sale to its customers, primarily Army operating units. This activity group remains critical to building and sustaining Army readiness in the face of evolving threats and changing operational demands in FY 2027. The Army’s equipment and operational readiness, and the strength to win the Nation’s wars, are directly linked to the availability of spare parts. The Supply Management activity group administers spare parts inventory for Army Managed Items and Non-Army Managed Items (NAMI). The Life Cycle Management Commands assigned to the AMC, manage the Supply Management activity, which consists of four major commodity groups: aviation and missile; communications-electronics; tank-automotive and armament; and NAMI. The continuous modernization of Army formations will drive targeted additions to the supply inventory. With the Army focused on continuous transformation, the demand for technically complex, high-velocity spare parts continues to increase.

Industrial Operations

The Industrial Operations activity group delivers the Army’s Organic Industrial Base (OIB) capability, supporting depot-level maintenance, repair, recapitalization, and upgrade efforts. In FY 2027, the focus remains on executing the Army’s OIB Modernization Implementation Plan – one of the largest reinvestment efforts in the industrial base in four decades. Industrial Operations encompasses 13 government-owned, government-operated sites, including five hard-iron maintenance depots, three arsenals, two munitions production plants, and three key storage and distribution sites. These installations support other DOW services and all Army Commands by executing maintenance, producing munitions and large-caliber weapons, storing and demilitarizing materiel, and retrograding combat systems. The complex operational environment continues to place tremendous demands on equipment, resulting in higher usage rates than in routine peacetime operations.

The Industrial Operations activities play an integral role in resetting equipment as it retrogrades from combat operations. The activity group supports recapitalization, repair, and sustainment efforts that ensure Army equipment remains operationally capable and aligned with mission requirements. The Industrial Operations budget accounts for workload associated with high-demand operating environments, elevated usage rates, and emerging threat response.

Budget Highlights

Overview

The FY 2027 budget represents a business plan that supports Soldier and weapon systems readiness for both peacetime training and overseas operating requirements. The AWCF provides materiel readiness to operating units in support of the Army’s training and modernization objectives, ensuring sustained warfighting capability under evolving strategic conditions. This posture aligns with DOW and Army guidance to drive materiel transformation, enable continuous readiness, and ensure fiscal and industrial agility.

The predictability of resources is critical for accurately forecasting and executing workload. Operational tempo assumptions help inform budget formulation; however, changes in mission demands or funding levels may significantly alter AWCF execution forecasts. To mitigate these risks, both Supply Management and Industrial Operations activity groups must remain agile – adjusting to evolving workload requirements while managing cost pressures to ensure the Army retains materiel readiness at an acceptable cost to the taxpayer.

In FY 2027, a unit cost ratio set to 0.99 will fully replenish the projected sales and balance future readiness with forecasted cash affordability. Potential readiness impacts will be monitored and can be addressed with variability target to respond rapidly to unexpected variances in costs or customer demands during the year of execution. The Industrial Operations activity group budget request includes a mix of permanent, temporary, and term-appointment employees, in addition to contract labor, to better respond to unanticipated increases or decreases in new orders.

Personnel

In FY 2027, there will be a reduction in civilian end-strength and full-time equivalents. Changes to personnel levels are discussed within the narrative of each activity group. The reductions are part of the Army’s initiative to align end strength with operational requirements and support transformation efforts across both the Supply Management and Industrial Operations activity groups. Civilian and military end strength and civilian full-time equivalents are shown below in Table 1.

Table 1 – Personnel

Army Working Capital Fund (AWCF) Fiscal Year (FY) 2027 Budget Estimates

Revenue and Expenses

Revenue reflects the volume of work executed by the AWCF activity groups, while expenses capture the cost of goods and services produced or sold. In FY 2027, both revenue and expenses are projected to decline compared to prior years. The reduction in expenses is largely due to lower labor and material costs in Industrial Operations and lower cost of goods sold in Supply Management. Table 2 and Chart 1 show revenue and expenses for Supply Management and Industrial Operations.

Table 2 - Revenue and Expenses

$ Millions

Supply Management

Gross Sales 8,842.6 9,088.8 9,040.9 Less Credit 1,640.7 1,588.8 1,517.7

Supply Management Net Sales 7,201.9 7,500.0 7,523.1 Industrial Operations 5,027.8 4,707.3 4,281.5

Fund Balance with Treasury

The Defense Working Capital Fund Fund Balance with Treasury, account symbol 97X4930, is subdivided at Treasury into five sub-numbered Treasury accounts. The Army’s account is 97X4930.001. The current balance of funds with Treasury is equal to the amount at the beginning of the fiscal year plus the cumulative fiscal-year-to-date amounts of collections, appropriations, and transfers-in minus the cumulative fiscal-year-to-date amounts of disbursements, withdrawals, and transfers-out. The AWCF is required to maintain a positive cash balance to prevent an Anti-deficiency Act violation under Title 31, USC, § 1517(a), Prohibited obligations and expenditures. Unlike appropriated funds, the AWCF cash balance is not equal to outstanding obligations. Cash on hand at Treasury must be sufficient to pay bills when due.

The operational requirement may include any positive Accumulated Operating Results returned to customers, cash equal to undisbursed direct appropriations, and an appropriate level of reserves to address risk mitigation factors. The cash balance is primarily affected by cash generated from operations, but the balance is also impacted by appropriations, transfers, and withdrawals. Maintaining a proper cash balance is dependent on setting rates to recover full costs, including prior year losses, and accurately projecting workload.

Cash From Operations

The day-to-day operation of the AWCF consumes cash with disbursements and replenishes cash with collections. The FY 2027 cash plan includes all expected collections and disbursements from the operation of both the Supply Management and Industrial Operation activity groups, including appropriations and transfers.

Chart 2 displays collections and disbursements from operations; however, it does not include receipt of appropriations or transfers. The Army forecasts a slight decrease to collections in FY 2027 as sales and revenue are projected to decrease. Disbursements are projected to decrease due to lower contract authority requirements in FY 2026 and FY 2027.

Chart 3 displays the potential risk to the AWCF cash balance through FY 2027 due to unliquidated obligations (ULOs). The ULOs represent the dollar value of material and services ordered but not yet received by the AWCF. The ULOs will result in future disbursements, reducing cash. There is increased risk to cash when ULOs are high even though collections from backorders mitigate a portion of this risk. Fund managers must maintain a sufficient cash balance to cover future disbursements as the material and services are delivered. The Supply Management activity group projects an increase in overall cash liability due to an increase in ULOs and a reduction in backorders, even though cash is projected to increase.

Chart 3 – Cash Liability

Appropriations

Table 6 shows a consolidated overview of the AWCF appropriation for both the Supply Management and Industrial Operations activity groups. A more detailed breakdown is shown in each activity group’s specific section. The Army is requesting $20.6 million for FY 2027 for Industrial Mobilization Capacity (IMC) requirements. This appropriation request sustains OIB equipment required for mobilization that is idle for more than 80 percent of the time in any one month but used at least once during the year. The Army OIB workload has steadily declined over the past ten years, resulting in some equipment being utilized at these lower rates. The Army requires IMC funding to sustain this equipment, enabling the OIB to rapidly surge in support of a future mobilization.

Table 6 – Appropriations

War Reserve Secondary Items 3.6 0.0 0.0 Industrial Mobilization Capacity 21.8 20.6 20.6 Arsenal Sustainment Initiative 120.0 100.0 0.0 Industrial-focused Charrettes 0.0 5.0 0.0

Capital Budget

The AWCF activities develop and maintain operational capabilities by acquiring or replacing production equipment, executing minor construction projects, and developing software. New equipment is acquired to replace obsolete and unserviceable equipment, modernize production and maintenance processes, and eliminate environmental hazards. The cost of capital projects is recouped through capital investment recovery, which is included in customer rates. Unlike the operating budget, which contains the annual operating costs of each activity, the capital budget justifies the purchase of assets that equal or exceed a unit cost of $250,000 and have a useful life of two or more years.

A more in-depth discussion and detailed exhibits are provided in the Capital Budget section. Table 8 summarizes the AWCF CIP request.

equipment sustainment,

assumptions with Army appropriated funding

operational readiness, and

requests in support of Soldier and weapon

combat capability.

systems readiness. The bulk of demands originate from Operation and Maintenance, Army customers, who primarily request spare parts to maintain combat equipment readiness for the Army operating forces.

The Army prices spare parts based on the most recent acquisition cost from a commercial vendor, or the most recent repair cost from a contract or organic source of repair. The price of each item includes a surcharge known as the cost recovery rate (CRR), to recover the cost of AWCF operations. The intent of the CRR is to:

The core financial measures for Supply Management are the net operating result (NOR) and accumulated operating result (AOR). The NOR measures the activity’s gain or loss within a single fiscal year and is used to monitor how closely the activity performs compared to its budget. The AOR measures the activity’s accumulated gains and losses since the fund’s inception. Rates are set during budget development to break even by bringing the AOR to zero over a budget cycle. This method returns accumulated gains through reduced rates and recovers accumulated losses through increased rates. The cash management section describes the impact of cash balance analysis on rate setting. The unit cost is another core financial measure, and relates operating costs to each dollar of sales. The unit cost can be set at, above, or below 1.0 depending on projected sales volume; the unit cost section discusses this metric.

Efficiencies and Business Process Improvements

Cost efficiency is an inherent attribute of the AWCF. The revolving fund construct promotes total cost visibility, full cost recovery, and fosters a businesslike, competitive atmosphere. Although commercial businesses focus on their bottom-line profit, the Supply Management activity focuses on unit cost and other indicators to gauge the efficiency of the operation. Supply Management activities are reducing overhead costs, also known as logistics operations (LOGOPS), by streamlining command and control structures and relying on technology to create efficiencies.

Army Materiel Command (AMC) continues proactive measures to reduce inventory and optimize supply chain management through the Sales and Operations Planning (S&OP) process. The S&OP process allows management better oversight and improves the supply chain review process and financial planning. The supply chain review process has shifted from the legacy review of inventory by segmentations to total inventory holdings. The S&OP decisions and action plans align to established strategic goals and are executed through the Army's supply action module, Material Requirements Planning (MRP), in the Logistics Modernization Program (LMP), AWCF’s Enterprise Resource Planning (ERP). Army’s current focus is on improving inventory turns, establishing new inventory reduction goals, and reducing forecast errors. AMC also facilitates quarterly reviews of unserviceable assets to better assess the ability to repair rather than initiating new procurement.

AMC has also adopted two automated processes to complete its annual price and credit review:

Inventory Management

The Army uses a monthly Supply Chain Planning and Reporting Tool (SCPRT) to calculate inventory requirements. SCPRT aligns reporting requirements with LMP’s MRP. MRP uses backwards planning of requirements to improve forecasting and supports Warfighter requirements. The volume of inventory purchases is largely based on future projections of customer orders and the need to replenish past unplanned sales.

Army continuously takes proactive measures to ensure forecasted inventory meets future demands. Army reviews and validates requirement levels versus inventory levels, maintaining focus on buying and repairing items needed by customers, and not retaining excess inventory.

Functional Description

The Supply Management activity group buys and manages an operating inventory of Army-managed and non-Army managed spare and repair parts for sale to its customers, primarily Army operating units. The AWCF operating inventory is stored and maintained primarily at more than 200 supply support activities (SSA). SSA management includes, but is not limited to, stocking the items needed for customer readiness, monitoring performance metrics, and conducting inventories. Inventory is managed at national and below national levels as described below:

Activity Group Composition

Figure SM 1 below displays the locations of Headquarters, Army Materiel Command (AMC), each Life Cycle Management Command (LCMC), and the Army Sustainment Command. The AMC mission is complex and ranges from developing sophisticated weapon systems, to advancing research, to maintaining, and distributing spare parts. Three core competencies encompass AMC’s mission: acquisition excellence, logistics power projection, and technology generation and application. AMC works closely with industry, colleges and universities, the other Services, and other government agencies developing, buying, and maintaining state-of-the-art materiel for Army.

Figure SM 1 - Supply Management locations

The LCMCs, assigned to AMC, manage the activity group. Each LCMC acquires and manages consumable supplies and spare parts for distinct categories of weapon systems. The Army Sustainment Command acquires and maintains the Army Prepositioned Stocks, which contain materiel from each LCMC.

The mission of the Tank-automotive and Armaments Command (TACOM) LCMC includes developing, acquiring, equipping, and sustaining ground and support systems for Soldiers and other joint operations through the integration of effective and timely acquisition, logistics, and technology. The TACOM LCMC item managers support a diverse set of product lines through their life cycles, ranging from tracked combat and wheeled tactical vehicles, armaments, and watercraft, to Soldier-specific gear and biological/chemical equipment. Major weapon systems supported include the M1 Abrams Tank, M2 Bradley Fighting Vehicle, Mine Resistant Ambush Protected (MRAP) vehicle, and Stryker family of vehicles. TACOM LCMC is also responsible for providing clothing and heraldry products to Soldiers, units, and veterans. Included in TACOM LCMC is a small retail business of high-demand non-Army managed items (NAMI). TACOM LCMC Headquarters activities are located at Detroit Arsenal in Warren, Michigan and U.S. Army Soldier Systems Center in Natick, Massachusetts.

The Communications-Electronics Command (CECOM) LCMC mission is to develop, provide, integrate, and sustain command, control, communications, computers, intelligence, surveillance, and reconnaissance capabilities for the Army. CECOM LCMC Headquarters activity is located at Aberdeen Proving Ground, Maryland.

The mission of the Aviation and Missile Command (AMCOM) LCMC includes developing, acquiring, fielding, and sustaining aviation, missile, and unmanned vehicle systems, ensuring readiness with seamless transition to combat operations. Major weapon systems supported include the AH-64 Apache, UH-60 Black Hawk, CH-47 Chinook, Multiple Launch Rocket System, and Patriot missile. AMCOM LCMC Headquarters activity is located at Redstone Arsenal in Huntsville, Alabama and has operational control of all aviation

logistics management functions at Fort Rucker, Alabama, home of the Army Aviation Center.

The mission of the Army Sustainment Command (ASC) includes synchronizing the distribution and sustainment of materiel to and from the field. Army Prepositioned Stocks are acquired and maintained as part of this mission. These stocks include combat equipment, supplies, and humanitarian mission stocks at worldwide land and sea-based positions. ASC is located at Rock Island Arsenal, Illinois.

Budget Highlights

Assumptions

The FY 2027 budget represents a business plan that supports Soldier and weapon systems readiness for both peacetime training and overseas operating requirements. The AWCF provides materiel readiness to operating units in support of the Army’s training strategy to build and sustain critical warfighting capabilities focused on multidomain operations. The AWCF provides support to ensure the Army remains the most lethal and ready land force in the world, prepared to meet any challenge, and defend the nation’s interests.

If customer demand levels exceed budget estimates during the year of execution, variability target is included in the budget to ensure supply contract authority is available to remain ready and responsive to changing operational requirements. Variability target is further discussed in the Operating Contract Authority section.

Personnel

The personnel end strength reflects actual execution in FY 2025 and authorized levels in FY 2026 and FY 2027. The reduction to authorizations is part of the Army’s initiative to streamline the civilian workforce to better align with operational requirements. Personnel levels include supply planners, logistics management specialists, and general and administrative support positions. Military end strength in FY 2027 is two.

Chart SM 1 – Civilian Personnel

Sales

Sales reflect income from operations and do not include direct appropriations for war reserve materiel. Credit is issued to customers for materiel turn-ins that can be used by the supply activity to support a future sale. The amount of credit issued offsets revenue from Gross Sales. Chart SM 2 reflects actual execution in FY 2025 and projected levels in FY 2026 and FY 2027. FY 2027 sales total includes an $80 million surcharge to support cash levels. Several exhibits display Sales: Fund 14, Revenue and Costs; Fund 11, Source of New Orders and Revenue; and SM 1, Supply Management Summary (sales net of credit).

Chart SM 2 – Sales

10,000.0

Expenses

Expenses consist of materiel and operational costs. The decrease in projected FY 2027 expenses is attributed to lower sales volume. Expenses are displayed on exhibit Fund 14, Revenue and Costs.

Chart SM 3 – Expenses

Operating Contract Authority

The budget requests operating contract authority (CA) for the acquisition, repair, and replenishment of spare parts. The FY 2027 CA request is consistent with projected sales to replenish inventory sold in FY 2027, to balance future readiness with cash affordability. Army’s FY 2027 hardware CA request is structured to replenish materiel sold in FY 2027, after the FY 2026 CA request was reduced to address the FY 2025 sales variance. The budget includes $2 billion in variability target to ensure CA is available to respond rapidly to unexpected surges in customer demands during the year of execution. Operating CA is displayed on exhibit SM 1, Supply Management Summary and SM 3b, Operating Requirements by Weapon System.

Chart SM 4 –Operating Contract Authority (CA)

Inventory

Inventory values shown in chart SM 5, include operational inventory, carcasses awaiting repair, inventory required beyond the budget year, economic and contingency retention stock, and secondary items included in war reserve. Supply Management inventory levels will increase due to higher inventory receipts than materiel sales. Inventory is displayed on exhibit SM 4, Inventory Status.

Operating Results

The net operating result (NOR) represents the difference between revenue and expenses within a fiscal year. The accumulated operating result (AOR) represents the summation of all operating gains and losses since activity group inception, along with any prior period adjustments. AWCF operates on a break-even basis during the budget cycle. The Supply Management AOR is projected to be zero in FY 2027. In the next budget cycle, Supply Management will evaluate its AOR projections, cash position, and impact on future rates to determine the amount of AOR to recover or return. NOR and AOR are displayed on exhibit Fund 14, Revenue and Costs.

Table SM 1 - Operating Results

Cost Recovery Rate

The Supply Management cost recovery rate (CRR) is set to recover full costs and adjust for gains and losses. Typical costs recovered include civilian pay, distribution depot costs, transportation costs, other bills associated with supply operations, and costs of replacing inventory washouts. The FY 2027 CRR increases with the inclusion of an $80 million cash surcharge to support the Army’s cash balance. The revised price change to customers is the change of the estimated standard price of an item in the budget year from the standard price of an item in the previous year, to include the change in overhead costs as well as the projected materiel inflation that will raise the price of an item.

Army Working Capital Fund (AWCF) Fiscal Year (FY) 2027 Budget Estimates

Table SM 2 – Cost Recovery Rate (CRR) and Price Change

Unit Cost

The unit cost is a metric relating operating cost to each dollar of sales. Unit cost is calculated by dividing net operating costs (the sum of total obligations to include capital investment program (CIP) minus any prior year de-obligations) by net sales. A unit cost below 1.0 indicates that the enterprise is selling and not replenishing, thus reducing the CA executed below the sales amount. A unit cost above 1.0 indicates the Army is purchasing inventory in anticipation of future need based upon inventory management forecasts or is replenishing inventory sold from previous years. FY 2026 unit cost is set below 1.0 to sell off inventory that was not sold in FY 2025. FY 2027 unit cost is set to 0.99 to fully replenish FY 2027 projected materiel sold but not make purchases against the $80 million surcharge included in sales. Potential readiness impacts are monitored and can be addressed with variability target to respond rapidly to unexpected variances in costs or customer demands during the year of execution. Chart SM 6 shows unit cost for FY 2025 through FY 2027.

Chart SM 6 - Unit Cost

1.25

1.00

0.75 Unit Cost

1.05

0.96

0.99

Ratio

Collections, Disbursements, and Outlays

Collections are projected based on forecasted sales and changes in accounts receivable. Disbursements are projected based on monthly operating obligations, changes in accounts payable, and Capital Investment Program obligations. FY 2027 sales and collections are forecasted to decrease as the Army projects less flying hours. Disbursements are projected to decrease due to reduced materiel deliveries. The values in Chart SM 7 do not include direct appropriations or cash transfers into the AWCF.

Performance Measurement

Supply Availability

Supplying and maintaining Army’s equipment remain key components of readiness. The supply availability (SA) goal is a key performance measure indicating the ability of the supply system to fill requisitions. The Army’s goal is 85 percent of customer demands fulfilled immediately. SA is administered through adequate funding of hardware, proper management of the supply chain, and reliable oversight of materiel stockage requirements. Chart SM 8 displays SA throughout FY 2025 below the 85 percent goal and ending the fourth quarter at 84 percent. The Army’s contract authority requirement supports the 85% SA goal in FY 2027.

Army Working Capital Fund (AWCF) Fiscal Year (FY) 2027 Budget Estimates

Chart SM 8 – Supply Availability (SA) 1.00

0.75

Percent

0.50

0.25

Appropriations

In FY 2025, the Army Working Capital Fund (AWCF) made an annual request to purchase War Reserve Secondary Items (WRSI) for operational project stocks. Operational project stocks are equipment stocks above the Modification Table of Organizational Equipment (MTOE)/Table of Distribution and Allowances (TDA) requirements tailored to key contingency operations or to support civil disturbance relief, disaster relief, humanitarian assistance, or other approved missions. As part of the initiative to reduce Army Prepositioned Stocks (APS) to minimum sustainment posture, the AWCF is not requesting appropriations for WRSI in FY 2027. SM 4, Inventory Status and SM 6, War Reserve Materiel exhibits displays War Reserve inventory. Exhibit Fund 14, Revenue and Costs displays requested Appropriations.

Table SM 4 -Appropriations

War Reserve Secondary Items 3.6 0.0 0.0

Army Working Capital Fund Fiscal Year (FY) 2027 Budget Estimates Supply Management

Source of New Orders and Revenue ($ in Millions)

FY 2025 FY 2026 FY 2027

1. New Orders

a. Orders from DOW Components:

Department of Army Operation & Maintenance, Army Operation & Maintenance, ARNG Operation & Maintenance, AR

Subtotal, O&M Army

Aircraft Procurement Missile Procurement Weapons & Tracked Combat Vehicles Procurement of Ammunition Other Procurement

Subtotal Procurement

RDT&E BRAC Family Housing Military Construction Chem Agents & Munitions Dest, Army Other Army

Subtotal All Other Army

Subtotal, Department of the Army

Department of Air Force O&M Department of Air Force Investment Department of Navy O&M Department of Navy Investment US Marines O&M US Marines Investment Other Department of War

Subtotal Other DOW Services

6,039.4 739.1 142.3

6,920.8

41.2 1.5 85.0 7.2 32.8

167.7

37.8 0.0 3.5 0.0 0.0 2.0

43.4

7,131.9

0.0 0.0 22.4 0.0 46.8 0.0 179.6

248.9

6,178.8 6,102.2 591.2 593.4 98.4 97.7

6,868.4 6,793.3

56.8 56.5 4.8 4.8 38.4 38.2 1.8 1.8 33.4 29.2

135.2 130.5

49.3 49.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.0 1.9

51.2 50.8

7,054.9 6,974.7

34.3 34.4 0.0 0.0 87.3 88.1 0.0 0.0 49.5 47.9 0.1 0.1 225.6 209.0

396.9 379.6

EXHIBIT FUND-11

Budget Highlights

Assumptions

The budget reflects workload assumptions developed in coordination with customers and incorporates historical trend analysis when developing future workload requirements. However, as unit rotations and weapon system delivery schedules shift, annual projections can change significantly between when budgets are developed, and actual maintenance occurs. To offset these risks, the IO activity remains poised to increase or decrease output to accommodate customers’ changing requirements.

Personnel

Civilian end-strength represents the number of personnel employed at the end of each fiscal year. Full Time Equivalents (FTE) represent the manpower level of effort necessary to accomplish the projected workload on an annual basis. The IO labor pool includes a mix of permanent, temporary, and term-appointed employees, in addition to contract labor, which allow for workforce flexibility to accommodate changing requirements.

Maintaining a trained and ready workforce is critical to this labor-intensive business. IO activities engage in various workforce revitalization efforts to include interns,

apprenticeship programs and a Pathways program which offers clear paths to Federal internships for students from high school through post-graduate school and to careers for recent graduates. Due to the specialized nature of the work and skill level requirements, training may require two to three years before an employee is able to perform specific tasks without supervision.

The Army is focused on optimizing processes across the industrial base. Guided by its Continuous Transformation strategy and the Organic Industrial Base Modernization Implementation Plan (OIB-MIP), the U.S. Army is executing a comprehensive modernization of its industrial base to meet future threats. These initiatives prioritize the strategic alignment of resources and increased efficiency to develop and field next-generation capabilities while adapting formations, training, and warfighting concepts to the character of modern conflict. In addition to civilian personnel, 21 military personnel are assigned to IO activities in FY 2027.

Direct Labor Hours (DLH)

Total DLHs represent the number of hours required to complete the IO direct mission workload. DLHs decrease proportionately with the expected decline in workload. IO activities remain prepared to increase overtime and contractor DLHs in the event workload estimates increase.

Chart IO 2 -Direct Labor Hours

Army Working Capital Fund (AWCF) Fiscal Year (FY) 2027 Budget Estimates

Direct Labor Hour Rate

The composite revenue rate is an aggregate hourly rate established in the budget cycle and used to price rate-stabilized workload. It is comprised of direct labor and material costs, overhead costs (mission indirect and non-mission indirect costs) and accumulated operating result adjustments that are designed to return gains or recover losses. In contrast to rate-stabilized workload, cost-reimbursable workload reflects prototype or low-volume repair efforts and is excluded from the stabilized rate until repair history supports its inclusion.

The composite revenue rate calculation is influenced by several factors: (1) the commodity mix of workload planned (labor and material intensive or both), (2) planned gain/loss recovery across the budget cycle, (3) the volume of stabilized DLHs available to distribute overhead, and (4) the total number of DLHs supporting both stabilized and non-stabilized workload. A change to the composite revenue rate directly affects the total revenue and new order values for the budget year.

The FY 2027 composite rate decreases to $226.29 per DLH, reflecting ongoing efforts to reduce indirect and overhead costs. These cost reduction measures directly support the Army’s strategic guidance to optimize the Organic Industrial Base (OIB), emphasizing the need for data-informed decision-making, business process reengineering, and cost efficiency to ensure readiness in a constrained budget environment. The Army is reducing overhead and mission indirect expenses at the depot level, sustaining the Army’s ability to meet future demand.

Unlike the composite revenue rate, which incorporates the AOR and is applied to rate-stabilized workload, the unit cost per DLH captures actual total cost execution for both prior and current year orders.

Army Working Capital Fund (AWCF) Fiscal Year (FY) 2027 Budget Estimates

Revenue and Expenses

Chart IO 4 -Revenue and Costs

6,000

The IO revenue amount represents earnings from work performed on customer equipment plus any direct appropriations designated to IO. Total expenses cover full costs, including material, labor, storage, and other direct or indirect costs associated with the products or services being provided. Revenue and expenses are displayed in more detail on Exhibit Fund 14, Revenue and Costs.

Operating Result

The Net Operating Result (NOR) represents the difference between revenue and expenses within a fiscal year. The recoverable Net Operating Result (NOR) includes direct appropriations in Table IO 3 -Appropriations. The Accumulated Operating Result (AOR) represents the summation of all operating gains or losses since activity group inception along with any prior period adjustments. The Recoverable NOR and AOR are displayed in the following table and on Exhibit Fund 14, Revenue and Costs.

Table IO 1 -Operating Results

Recoverable NOR 123.8 80.6 (72.9) Accumulated Operating Result (7.7) 72.9 0.0

New Orders

IO activities develop workload projections based on close coordination with customers and their delivery schedule requirements. With fluid requirements and fiscal uncertainty, accurately predicting workload two to three years in advance has proven difficult. The budget includes workload assumptions that support the base program, contingency operations, and Foreign Military Sales (FMS). The projected workload in FY 2027 is commensurate with customer projections and budgeted depot maintenance requirements. Exhibit Fund 11, Source of New Orders and Revenue, displays total new order estimates by fund category.

Chart IO 5 -New Orders

6,000

Carryover

Carryover, or unfilled orders, represents the dollar value of the production orders (parts, labor, and overhead) that have been ordered and funded by customers but not completed by the industrial activities at the end of each fiscal year. Some carryover is necessary; it leads to better planning, better decision making, and cost efficiencies at the depots and arsenals. It provides lead time to assemble necessary workforce skill sets, to establish supply chains, and to coordinate workload routing. Carryover also prevents production line stoppages and ensures the activities have funded work to provide a smooth transition between fiscal years.

The FY 2023 National Defense Authorization Act (NDAA) allows a material end of period exclusion for the Army while the FY 2024 NDAA provides an exclusion for Foreign Military Sales workload. Current policy recognizes up to seven months of carryover workload as optimal to ensure a smooth flow of maintenance work between fiscal years. Conversely, less than three months of carryover workload could pose execution challenges that put production continuity at risk. For FY 2027, the Army projects an end-of-year carryover of less than six months, accounting for exclusions authorized under the NDAA. The Army continues to improve carryover management through improved workload planning, acceptance, and execution.

Managing Carryover

The Army is focused on reducing carryover by leveraging policy and process improvements aimed at increasing production, improving customer-provider communication, and strengthening controls over the acceptance of new orders. These initiatives were developed in response to the Government Accountability Office’s FY 2013 carryover audit recommendations. The policy for accepting new workload requires:

All AWCF activities have fully implemented these criteria for accepting new orders. Additionally, Army program acquisition managers are required to identify organic procurement funded requirements to the appropriate LCMC no later than the end of the first quarter of the year of execution. The Army’s goal is to ensure procurement funded depot maintenance workloads are inducted into the depots no later than the end of the second quarter of the fiscal year. The intent is to reduce orders placed late in the fiscal year that increase carryover.

Army leadership is committed to monitoring carryover and production goals on a recurring basis through senior leader forums. The Army plans to reduce carryover by $238 million by the end of FY 2027. Carryover, Revenue and New Orders as they are displayed on the Exhibit Fund 11, Source of New Orders and Revenue, and Exhibit Fund 11a, Carryover Reconciliation.

Army Working Capital Fund (AWCF) Fiscal Year (FY) 2027 Budget Estimates

Chart IO 6 -New Orders and Carryover

Performance Measurements

Performance measurements for the IO activity group include Recoverable NOR and Productive Yield. FY 2025 actual results and projections for FY 2026 and FY 2027 are shown in the following table.

In FY 2027, the beginning AOR is projected to be positive, and the composite rate has been reduced by consuming some of the projected AOR, resulting in a NOR loss of $72.9 million.

Productive Yield represents the average number of regular DLHs for each full-time equivalent position involved in production and is an indicator of whether direct labor employees can support projected workload. The productive yield projections for FY 2026 and FY 2027 are above the expected parameters as workforce is sized to workload in FY 2026 and FY 2027.

Table IO 2 -Performance Measurements

Recoverable NOR 123.8 80.6 (72.9) Productive Yield 1,473 1,557 1,562

Appropriations

Direct appropriations for IO activities are displayed in Table IO 3 -Appropriations. The Arsenal Sustainment Initiative supports competitive rates at the Army’s arsenals. Industrial Mobilization Capacity (IMC) funding sustains industrial base equipment required for mobilization that is idle for more than eighty percent in any one month but used at least once during the year. The Army requires IMC funding to sustain this equipment, enabling the OIB to rapidly surge in support of a future mobilization or increased workload such as Foreign Military Sales. The Army received $5 million in FY 2026 for Industrial Charrettes, which support planning for the development of capital investments.

Table IO 3 – Appropriations

Collections, Disbursements, and Outlays

Collections are calculated based on projected revenue and changes in accounts receivable. Disbursements are projected based on monthly operating expenses, changes in accounts payable, and Capital Investment Program obligations. Net outlays reflect the return of accumulated operating result to customers.

Chart IO 7 -Cash Management

Minimum Capital Investment Requirement

The NDAA for FY 2023 continues the supportive effort to modernize the Army’s infrastructure and increases the amount of investment required by the five Army maintenance depots (Anniston, Red River, Letterkenny, Tobyhanna, and Corpus Christi), the three arsenals (Rock Island, Pine Bluff, and Watervliet) and Tooele Army Depot to the equivalent of at least eight percent of funded workload beginning in FY 2023. The NDAA also requires that at least 2% of the total investment be from Facilities Sustainment, Modernization, and Restoration (FSRM) projects.

Chart IO 8 – Minimum Capital Investment Requirement

* FY26 includes $960.5M in reconciliation funding

The chart displays the total investment target and total investment amount planned. Since the minimum capital investment became law, the Army has invested over $6 billion. IO activities review future production and infrastructure requirements and project return on investment when developing capital budgets. The Army is committed to meeting the investment requirement of eight percent in each year. Exhibit Fund 6, Minimum Capital Investment Requirement provides investment details by category for each activity.

Army Working Capital Fund Fiscal Year (FY) 2027 Budget Estimates Industrial Operations

Changes in Cost of Operations ($ in Millions)

Costs

Army Working Capital Fund Fiscal Year (FY) 2027 Budget Estimates Industrial Operations

Minimum Capital Investment Requirement ($ Millions)

Software 10.7 15.5 23.6

Capital Cash Outlays 13.3 15.3 19.4

The following table shows categories and respective values of the Industrial Operations capital budget and the projected capital cash outlays.

Table CIP 2 -Industrial Operations Capital Budget

Equipment 51.6 108.5 70.2 ADPE & Telecommunications 2.8 20.1 0.0 Software 4.0 6.8 10.1 Minor Construction 1.3 3.7 4.0

Total CIP 59.7 139.0 84.3

Capital Cash Outlays 75.4 95.0 104.3

Note: Numbers may not add due to rounding.

Army Working Capital Fund Fiscal Year (FY) 2027 Budget Estimates Supply Management

Capital Investment Summary ($ in Millions)

EXHIBIT FUND 9a CAPITAL INVESTMENT SUMMARY

Army Working Capital Fund Fiscal Year (FY) 2027 Budget Estimates Supply Management

Capital Purchase Justification ($ in Millions)

Line No. 00-02 Software Development -Externally Developed Supply Management Logistics Modernization Program (LMP)

Narrative Justification

LMP requires ajustments to remain relevant and maintain superior supply chain functionality, supporting National Level Logistics. LMP Increment 1 was fully fielded in October 2010 and enhanced by LMP Increment 2 in September 2016. These increments combine to comprise the current LMP capability which is currently used by approximately 19,000 users at more than 50 Army locations worldwide. LMP is a key enabler for the Army to achieve its commitment to having fully auditable AWCF financial statements. LMP continues to seamlessly enable continuous process improvements to the LMP solution to achieve and meet compliance requirements and trading partner requirements.

In FY 2026-2027, LMP will continue to design, develop, test, and deploy approved improvements to the existing business processes supported by the Army Working Capital Fund (AWCF). These efforts include addressing continuing auditability requirements and ensuring financial accountability, implementing changes to financial data structures, and integrating common tools from Army Enterprise Resource Planning (ERPs). LMP will also focus on integrating the Army Contract Writing Systems (ACWS) by deploying funding interfaces with General Fund Enterprise Business Systems (GFEBS) and migrating contracts from the Procurement Desktop Defense System (PADDS) to ACWS, with corresponding Purchase Order conversations within LMP.

Enhancements to the reporting functionality will address current technical limitations and provide improved data to AMC Life Cycle Management Commands (LCMC's), alongside technical upgrades to the Business Technology Platform (BTP) Integration Suite as SAP ends support for current products. LMP will implement Identity, Credential and Access Management (ICAM) to meet the audit and cybersecurity objectices through Zero Trust implementation. These tasks also include technical upgrades, minor enhancements, compliance, auditability, and providing of data to support Army data analytics.

LMP will analyze and test G-Invoicing 2.0 Release 2, collaborate with stakeholders to improve Order Modifications and G-Invoicing interfund transaction capabilities, as directed by the Department of the Army. Addressing AMC Manufacturing and Remanufacturing requirements and migrating from Computerized Assisted Maintenance Systems (CAMS). CAMC reached the end of mainstream support in December 2024, is currently in extended maintenance and will be end-of-life in December 2028. SAP Production Engineering and Operations (PEO) is the successor product to CAMS. LMP will perform a technical upgrade from CAMS to PEO to ensure continued support for AMC's Organic Industrial Base operations.

All tasks will adhere to AWCF rules to ensure appropriate use of funds, with cybersecurity and auditability remaining paramount, and continued interface development with Army ACWS. Failure to fund LMP would prohibit AMC functional requirements from improving operations and put continuing financial compliance and cyber security at risk. In addition, LMP would not be in compliance with directives for Zero Trust putting the solution at risk from a cyber security perspective. It also would not be able to meet all Federal and Army milestones as developed in the Army Standard Line of Accounting implementation plan for auditability.

EXHIBIT FUND 9b CAPITAL PURCHASE JUSTIFICATION

Army Working Capital Fund Fiscal Year (FY) 2027 Budget Estimates Supply Management

Capital Budget Execution ($ in Millions)

EXHIBIT FUND 9c CAPITAL BUDGET EXECUTION

Army Working Capital Fund Fiscal Year (FY) 2027 Budget Estimates Industrial Operations

Capital Purchase Justification ($ in Millions)

Army Working Capital Fund Fiscal Year (FY) 2027 Budget Estimates Industrial Operations

Capital Purchase Justification ($ in Millions)

Line No. 05-13 Non - ADPE Equipment Capabilities Industrial Operations Non - ADPE Equipment