When Internal Transfer Prices and Costs Differ: How Stock Funding of Depot-level Reparables Affects Decision Making in the Air Force, Issue 307
Typically large, complex organizations include many separate activities that provide goods and services to one another. Such organizations must develop methods to govern the relationships among these activities that promote the goals of the organization as a whole. The Department of Defense (DoD) faces this problem in the same way as any other large organization. In the late 1980s, DoD began an effort to change dramatically the way it managed the relationships among its constituent activities. As part of that effort, DMRD 904 mandated in November 1989 that the Air Force should apply stock funding to the management of depot-level raparables (DLRs). A stock fund is a revolving working capital fund that facilitates transactions between depots and their customers. To use such a fund, the Air Force must establish an extensive system of internal transfer prices for depot services. The Air Force issued an implementation plan for such a system in November 1990 and is continuing to put it in place. This report presents and example of how the internal transfer prices being implemented under DMRD 904 affect substantive decisionmaking to raise doubts about the current approach to pricing and to suggest the need for an alternative approach.
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