[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
                 IMPROVING DEFENSE INVENTORY MANAGEMENT
=======================================================================



                                HEARING

                               before the

                   SUBCOMMITTEE ON NATIONAL SECURITY,
              INTERNATIONAL AFFAIRS, AND CRIMINAL JUSTICE

                                 of the

                        COMMITTEE ON GOVERNMENT
                          REFORM AND OVERSIGHT
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION
                               __________

                             MARCH 20, 1997
                               __________

                           Serial No. 105-20
                               __________

Printed for the use of the Committee on Government Reform and Oversight






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              COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois          TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland       ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
STEVEN SCHIFF, New Mexico            EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          PAUL E. KANJORSKI, Pennsylvania
ILEANA ROS-LEHTINEN, Florida         GARY A. CONDIT, California
JOHN M. McHUGH, New York             CAROLYN B. MALONEY, New York
STEPHEN HORN, California             THOMAS M. BARRETT, Wisconsin
JOHN L. MICA, Florida                ELEANOR HOLMES NORTON, Washington, 
THOMAS M. DAVIS, Virginia                DC
DAVID M. McINTOSH, Indiana           CHAKA FATTAH, Pennsylvania
MARK E. SOUDER, Indiana              TIM HOLDEN, Pennsylvania
JOE SCARBOROUGH, Florida             ELIJAH E. CUMMINGS, Maryland
JOHN B. SHADEGG, Arizona             DENNIS J. KUCINICH, Ohio
STEVEN C. LaTOURETTE, Ohio           ROD R. BLAGOJEVICH, Illinois
MARSHALL ``MARK'' SANFORD, South     DANNY K. DAVIS, Illinois
    Carolina                         JOHN F. TIERNEY, Massachusetts
JOHN E. SUNUNU, New Hampshire        JIM TURNER, Texas
PETE SESSIONS, Texas                 THOMAS H. ALLEN, Maine
MICHAEL PAPPAS, New Jersey                       ------
VINCE SNOWBARGER, Kansas             BERNARD SANDERS, Vermont 
BOB BARR, Georgia                        (Independent)
------ ------
                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                       Judith McCoy, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

Subcommittee on National Security, International Affairs, and Criminal 
                                Justice

                      J. DENNIS HASTERT, Chairman
MARK E. SOUDER, Indiana              THOMAS M. BARRETT, Wisconsin
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
STEVEN SCHIFF, New Mexico            ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         GARY A. CONDIT, California
JOHN M. McHUGH, New York             ROD R. BLAGOJEVICH, Illinois
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
JOHN B. SHADEGG, Arizona             ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           JIM TURNER, Texas
BOB BARR, Georgia

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
            Robert Charles, Staff Director and Chief Counsel
                       Jim Wilon, Defense Counsel
              Andrew Richardson, Professional Staff Member
                          Ianthe Saylor, Clerk
          Mark Stephenson, Minority Professional Staff Member








                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 20, 1997...................................     1
Statement of:
    Emahiser, James B., Assistant Deputy Under Secretary of 
      Defense for Materiel and Distribution Management; and 
      Jeffrey A. Jones, Executive Director for Logistics 
      Management, Defense Logistics Agency.......................     3
    Gansler, Jacques, vice chairman, Defense Science Board; and 
      Admiral Luther F. Schriefer (USN, retired), executive 
      director, Business Executives for National Security........   108
    Hinton, Henry L., Jr., Assistant Comptroller General, General 
      Accounting Office; Kenneth R. Knouse, Jr., Assistant 
      Director, General Accounting Office; and Robert L. Repasky, 
      senior evaluator, General Accounting Office................    48
Letters, statements, etc., submitted for the record by:
    Emahiser, James B., Assistant Deputy Under Secretary of 
      Defense for Materiel and Distribution Management:
        Information concerning dollar totals for maintenance 
          performed..............................................    32
        Information concerning purchases made that result in a 
          larger excess inventory................................    31
        Prepared statement of....................................     6
    Gansler, Jacques, vice chairman, Defense Science Board, 
      prepared statement of......................................   112
    Hastert, Hon. J. Dennis, a Representative in Congress from 
      the State of Illinois, followup questions and responses....   100
    Hinton, Henry L., Jr., Assistant Comptroller General, General 
      Accounting Office, prepared statement of...................    52
    Maloney, Hon. Carolyn B., a Representative in Congress from 
      the State of New York, prepared statement of...............    28
    McInerney, Thomas G., Lieutenant General (USAF, Ret.), 
      president and CEO, Business Executives for National 
      Security, prepared statement of............................   121
    Souder, Hon. Mark E., a Representative in Congress from the 
      State of Indiana, followup questions and responses.........    33






                 IMPROVING DEFENSE INVENTORY MANAGEMENT

                              ----------                              


                        THURSDAY, MARCH 20, 1997

                  House of Representatives,
  Subcommittee on National Security, International 
                     Affairs, and Criminal Justice,
              Committee on Government Reform and Oversight,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:40 a.m., in 
room 2154, Rayburn House Office Building, Hon. J. Dennis 
Hastert (chairman of the subcommittee) presiding.
    Present: Representatives Hastert, Souder, Shadegg, Barrett, 
and Maloney.
    Staff present: Robert Charles, staff director and chief 
counsel; Jim Wilon, defense counsel; Andrew Richardson, 
professional staff member; Ianthe Saylor; clerk; and Mark 
Stephenson, minority professional staff member.
    Mr. Hastert. Good morning. Thank you all for coming. The 
Subcommittee on National Security, International Affairs, and 
Criminal Justice will come to order.
    Today, we have our first hearing on defense inventory 
management, a subject which will occupy our attention through 
the whole 105th Congress. Proper defense inventory management 
is crucial to America, because it relates to two of the most 
important functions of our Government: maintaining the strength 
as well as the readiness of the U.S. armed forces and ensuring 
that we spend the American taxpayers' money responsibly and 
effectively.
    Our oversight of the Defense Department in general and 
defense inventory management in particular will consist of 
regular public hearings supported by a series of ongoing 
investigations. This sustained effort will be designed to 
identify more modern and efficient inventory management 
practices and ensure that they are fully implemented by the 
Department of Defense.
    By doing this, we will be able to free up defense dollars 
for procurement, research and development, combat training, and 
other military readiness priorities. One thing is absolutely 
clear: There is the potential for enormous savings here. GAO 
recently estimated that DOD presently holds almost $70 billion 
worth of inventory, of which they say roughly $35 billion worth 
of that inventory is not needed.
    According to GAO, this unneeded inventory results, at a 
minimum, in a bill to the American taxpayer of hundreds of 
millions of dollars for unnecessary storage each year. Even 
now, DOD is continuing to purchase more inventory than it 
really needs.
    While DOD disagrees with some of the GAO's conclusions, the 
Department recognizes that it is holding billions of dollars 
worth of excess inventory. This inventory is sometimes 
difficult to dispose of properly, but doing so is absolutely 
necessary. More, the American taxpayer deserves that kind of 
action.
    Speaking more broadly, we must remember that in recent 
years, as the U.S. military has been severely downsized, the 
combat forces, which you might call the military's ``tooth,'' 
have suffered much more than the supporting infrastructure, or 
what we might call the ``tail.'' Both DOD and Congress are 
committed to improving the ``tooth-to-tail ratio,'' and DOD 
knows that inventory management is one part of the tail where a 
great amount of money may be saved.
    One way to save money is to learn from private enterprise. 
American businesses have developed many modern and 
sophisticated methods of inventory management which ensure 
quick delivery and also save money. Many of these methods, like 
just-in-time delivery, supplier parts, and prime vendor 
contracts, can be applied to DOD's operations and tailored to 
the need for military readiness.
    The Defense Department also can benefit from adopting more 
modern accounting and information management systems, which 
will increase visibility and accountability over all inventory 
and purchases.
    Finally, DOD can privatize or outsource more supply and 
maintenance needs. Functions which have historically been 
performed by DOD personnel could often be done better and 
cheaper by private companies. Reforming defense inventory 
management will almost certainly result in a significant 
downsizing of DOD's logistic infrastructure, and thousands of 
DOD personnel could be affected.
    Even as we improve our readiness, or the military's combat 
tooth, we must move forward gradually.
    I now recognize the ranking member, Mr. Barrett of 
Wisconsin, for his opening statement.
    Mr. Barrett. Thank you, Mr. Chairman. I am glad that you 
have called this hearing on inventory management at the 
Department of Defense. It is an area in which it appears 
considerable savings could be achieved. These savings are 
desperately needed in this time of ever increasing budgetary 
pressures.
    The Defense Department accounts for almost half of all 
discretionary spending, and if we are to make wise choices 
about the allocation of resources in other areas of 
discretionary spending, programs which protect the health and 
safety of our citizens, preserve our social safety net for the 
most needy, and make investments in our Nation's 
infrastructure, it is vital that the Defense Department be run 
in the most efficient manner possible.
    I am distressed both by the magnitude of the inventory 
management problem at DOD and by the length of time it has 
existed. DOD currently has a secondary inventory valued at $67 
billion. Of that amount, it is reported that a staggering $41.2 
billion of inventory is not needed to support war reserves or 
operating requirements, and almost $15 billion of the unneeded 
inventory will likely never be used.
    This is a shocking and totally unacceptable waste of 
taxpayer dollars, made all the worse by the fact that these 
problems have existed for a long time.
    So, Mr. Chairman, I am very glad that you have called this 
hearing today. I understand that you plan to hold a number of 
additional hearings on this issue, and I look forward to 
working with you and the Department of Defense to eliminate 
this monumental waste of precious resources. Thank you.
    Mr. Hastert. I thank the ranking member, and at this time I 
would like to ask our first panel to come forward. Now, from 
the Department of Defense we have the Honorable James Emahiser, 
Assistant Deputy Under Secretary of Defense for Materiel and 
Distribution Management; and Mr. Jeffrey Jones, Executive 
Director for Logistics Management in the Defense Logistics 
Agency.
    Gentlemen, welcome, and if you would please rise and raise 
your hand and take the oath.
    [Witnesses sworn.]
    Mr. Hastert. Let the record show that the witnesses 
responded in the affirmative, and, Secretary Emahiser, would 
you please begin your testimony.

    STATEMENTS OF JAMES B. EMAHISER, ASSISTANT DEPUTY UNDER 
SECRETARY OF DEFENSE FOR MATERIEL AND DISTRIBUTION MANAGEMENT; 
    AND JEFFREY A. JONES, EXECUTIVE DIRECTOR FOR LOGISTICS 
              MANAGEMENT, DEFENSE LOGISTICS AGENCY

    Mr. Emahiser. Mr. Chairman, members of the committee, and 
staff, thank you for the opportunity to appear before you today 
to discuss the Department of Defense's inventory management 
program and the initiatives we have underway to increase 
efficiency while maintaining support to the war fighter's 
needs. I would like to enter into the record my written 
statement responding to the four questions in your letter of 
invitation and make a brief oral statement.
    Mr. Hastert. Without objection, it is entered into the 
record.
    Mr. Emahiser. The DOD inventory management system affects 
every soldier, sailor, airman, and Marine and is crucial to 
their ability to perform their peacetime and wartime roles. Our 
inventory management system exists to support the war fighter 
and maintain readiness. Our gaol is to continue to support war-
fighter requirements while executing our stewardship 
responsibility to the taxpayers.
    In keeping with our acknowledgement in the DOD Logistics 
Strategic Plan that DOD infrastructure must be reduced in 
parallel with force structure, the Department has aggressively 
pursued inventory reduction since 1990. This first chart--and I 
draw your attention to the charts to your right--displayed 
shows that in constant 1995 dollars, the inventory has gone 
from $107 billion in 1989 to $67 billion in 1996, a 37 percent 
reduction over 7 years, and is forecast to decrease to $48 
billion in 2003, a reduction of 55 percent.
    The second chart displayed shows that 73 percent of DOD 
inventory by dollar value is repairable items. These are 
relatively expensive items, such as engines and avionics, that 
are used, returned for repair, and then reissued. Measured in 
dollar value, DOD inventory tends to be inventory that has been 
used. Only 27 percent of the inventory is in consumable items, 
which are items expended or used up beyond recovery in the use 
for which they were designed or intended. This chart also shows 
that the bulk of DOD's inventory characterized as ``inactive,'' 
that is, neither projected to be used in the next 2 years nor 
authorized war reserves, is primarily composed of repairable 
items.
    The third chart shows one result of inventory reduction: 
actual and projected decreases in the DOD distribution depots. 
From 30 depots in 1991 through a projected decrease to 19 by 
2003.
    Mr. Hastert. Could I interrupt?
    Mr. Emahiser. Yes.
    Mr. Hastert. Would you place the mic a little bit closer? 
We are missing some of your testimony.
    Mr. Emahiser. The final chart shows reductions in storage 
space. We are reducing storage capacity from 788 million cubic 
feet in 1992 to 411 million cubic feet by 2003, a 52 percent 
projected reduction. We are also reducing our occupied storage 
area from 631 million cubic feet in 1992 to 368 million in 
2003, a projected 58 percent reduction.
    It is crucial to note that inventory reductions are 
actually exceeding force structure reductions. Between 1990 and 
1996, force structure reductions were approximately 30 percent. 
By contrast, in the same period, inventory reductions, as 
measured in constant 1995 dollars, were 35 percent. Planned 
force structure reductions continue through 2000, when the 
reduction for the 1990 base will exceed 32 percent but 
inventory during that same timeframe will amount to 46 percent 
overall reduction.
    To accomplish the inventory reductions thus far, the DOD 
has implemented a series of aggressive initiatives. We are 
reducing cycle times such as it takes to fill a requisition. We 
are making greater use of existing inventory initiatives 
through such things as Total Asset Visibility in order to 
reduce the need to buy new inventory. We are retaining less 
materiel and disposing of more materiel that is no longer 
required.
    Finally, we are significantly increasing our use of 
commercial logistics support capabilities, ranging from Prime 
Vendor for food and medical supplies and Virtual Prime Vendor 
for hardware items. We have also increased local purchase 
authority and are making greater use of the Government purchase 
card in order to meet our materiel requirements without 
bringing items into the DOD inventory.
    Virtual Prime Vendor represents our effort to enhance 
supply support to depot maintenance activities by incorporating 
the best commercial logistics practices as identified by the 
successful bidders. The pilot site at Warner-Robbins Air 
Logistics Center initiated Virtual Prime Vendor in January 
1997. Contractor proposals are being requested through a broad 
agency announcement for Air Logistics Centers as well as Army 
and Navy maintenance activities.
    In another initiative to modernize our processes, we have 
contracted with Caterpillar and Andersen Consulting to 
benchmark our inventory management practice and performance 
against the private sector. We intend to use the results of 
this study to further increase responsiveness and efficiency.
    The Department of Defense is both proud of the progress we 
have made in reforming DOD inventory management and committed 
to further improvements. We are confident that management 
improvements, ambitious deployment of technology advances, and 
our expanded use of commercial logistics support capabilities 
will enable us to continue progress in this area.
    We appreciate the interest of the subcommittee in defense 
inventory management and reform and look forward to working 
with you in the future to ensure success in this crucial area.
    Thank you for your interest and support, and I will be glad 
to respond to any of your questions.
    [The prepared statement of Mr. Emahiser follows:]
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    Mr. Hastert. Thank you. Mr. Jones.
    Mr. Jones. Thank you, Mr. Chairman. I will make mine very 
short.
    I want to echo Mr. Emahiser's thanks to the committee for 
the opportunity to be here today. GAO will testify after we do, 
and as they go through their report and their discussion, I 
would ask you to bear in mind a few facts. Our role is combat 
support. It is not to make sales. Lives are at stake in what we 
do.
    The GAO has made some astute observations from time to 
time, and some of those have led to changes in the way we do 
business in the Department, and we understand their role and 
appreciate their role very much. But it does not serve this 
discussion well to have some of the facts presented this 
morning as facts, and I will give you the example of the 100-
year supply of parts, and I can explain that later if you would 
like to.
    Billions of dollars could, in fact, be wasted by throwing 
away the inventory that we have on hand. Even though we may not 
have bought it for the right reasons, looking backward 
historically, we certainly bought it for the right reasons at 
the time. For the 2 cents that we get on the dollar for 
throwing away inventory through the disposal system, the cost 
of buy-back would be extremely expensive.
    We have made mistakes. There is no doubt about it. We are 
sensitive to that, and we plan to take all kinds of corrective 
action, as Jim has said, to make sure we minimize the number of 
mistakes we make in the future.
    DOD logisticians are on the front lines to support any 
contingency. We agree with using commercial sector practices, 
and we agree with bringing the commercial sector into our 
business and letting them do our business where they can, and 
we have several examples that we can bring out today in more 
discussion about how we have done that. But the parallels do 
end rather quickly in some areas.
    Our national strategy now is much more of a get-up-and-go 
than it ever has been. We have to be prepared on day one to 
support our forces. Leaner is better, but leaner has to be 
extremely capable; it cannot just be smaller. We cannot 
restructure the logistics system without permission from 
others. We need BRAC; and as you saw, the last chart on the 
depot drawdown, that has been accomplished through base 
realignment and closure, with the help of the Congress.
    That is how we do that, and reducing inventory is part of 
the equation, but it is not the answer to reducing our 
facilities. The environment that we work in is not stable. 
Optempo changes. The amount of engagement changes constantly. 
National policy changes constantly. We make decisions with the 
best information we have at the time, and we make every attempt 
to make the right decision, but given the instability of the 
environment, some decisions can be judged wrong in retrospect, 
and that is true.
    I would like to have a productive discussion today. I think 
this is a good opportunity to lay out some of the issues for 
the record, but there is a high risk in assuming there is a 
large savings to be made in inventory. There are no 
recommendations in this report. GAO does not recommend that we 
dispose of the inventory that they claim is unneeded. We will 
dispose of some of it, but we will try to dispose of it 
responsibly, looking at the cost to dispose versus the cost of 
repurchasing.
    We will close more warehouses. We will probably come to the 
Congress and ask for permission to do that, assuming that the 
Department decides that it wants another round of BRAC. That 
decision has not been made.
    There is lots of data--and I will repeat that--lots of data 
saying that disposing items, once bought, without considering 
the potential for their reuse in the future wastes money, and I 
cannot overemphasize that.
    I will finish right now by saying that lives depend upon 
our being right in the Department of Defense. We want to be 
efficient. Believe me, inventory is not fun to manage. 
Improvements can be made, and we are making them as quickly as 
we can, given the broad responsibility and the shared 
responsibility across the Department and the various different 
missions of the services and agencies.
    We agree with the GAO on many items. We agree with a lot of 
their instincts. We do not always agree with the way they do 
their analysis, but we have to be careful that we do not get 
ourselves in the position where we have to tell a sailor, or an 
airman in this case, ``Sorry, the C-135 wing spar is not a 
popular item. We do not carry it anymore.''
    That is all I have. Thank you, Mr. Chairman.
    Mr. Hastert. Thank you.
    Mr. Emahiser, in your explanation, could you walk through 
with us one more time what is--you called ``reused equipment''? 
For example, let's say you take an engine or components off an 
F-14 and you rebuild that engine and you replace that engine 
with something that you had in inventory. Once that engine is 
rebuilt, then it goes into inventory. Is that what you are 
saying?
    Mr. Emahiser. Basically, sir, you are correct. The what we 
would call ``repairable items,'' engines, are----
    Mr. Hastert. Repairable.
    Mr. Emahiser [continuing]. Repairable. They can be 
repaired----
    Mr. Hastert. Repairable. All right, yes.
    Mr. Emahiser [continuing]. In the commercial system. When 
they are brought into the inventory, the planning is such that 
that is how we are going to maintain that engine or 
transmission. When it is broken, we bring it into the depot 
system, or we put it into a commercial contractor where it is 
repaired and then once repaired, brought back into the 
inventory for reuse again.
    Many of our engines and transmissions go through that cycle 
five, six, eight times over their life span, and so that is why 
they are more expensive in general than consumable items, items 
like spark plugs that are used up and thrown away once what 
they are bought for, their useful life, expires. But you are 
correct. That is what a repairable item is. It is used, broken, 
fixed, put back into the inventory, and reissued.
    Mr. Hastert. So let's take an F-15 or an F-14, whatever we 
are using here, and saying that that piece of equipment has an 
engine or several engines in it; it is part of the plane. There 
may be one or two engines in inventory to back up every plane 
that we have. Is that correct?
    Mr. Emahiser. I cannot tell you, in all honesty, how many 
engines there are in the inventory that would back up the F-15 
or the F-18, but there would be several engines in the 
inventory to support the fleet of aircraft, and there would be 
a computation that the Navy or the Air Force would go through 
to decide how many engines need to be brought into the 
inventory to support the readiness of that aircraft fleet.
    Mr. Hastert. Well, I mean, let's back up here a minute. If, 
in fact, and I am just conjecturing, but if, in fact, that 
there are two engines to back up every airplane and that is 
needed, or if there are 1,000 engines to back up 1,500 
airplanes or something, I think that is something that you 
ought to have a handle on.
    Mr. Emahiser. I personally do not know----
    Mr. Hastert. Well, I would like some written answers----
    Mr. Emahiser. OK.
    Mr. Hastert [continuing]. To those types of questions, and 
we will submit those to you.
    Mr. Emahiser. All right.
    Mr. Hastert. Mr. Jones, you cautioned us to go slow here 
and make sure that what we are counting is what we are really 
counting. In my opening statement, I said that we need to use 
just-in-time philosophy and some of these things that are being 
practiced in the private sector. Just to preface what--so to 
set the stage for what the GAO may say later, what is practical 
and what is not practical in those types of situations, in your 
opinion? Again, pull that mic up as close as possible.
    Mr. Jones. Yes, I will do it. Is that good enough?
    Mr. Hastert. Yes.
    Mr. Jones. Well, let me give you two examples, Mr. 
Chairman. Let me give you the example of maintenance process in 
the Department versus manufacturing process. We hear that 
Toyota or Honda or Chrysler or Ford has a just-in-time 
inventory process. As a matter of fact, when there is a strike 
in the parts business, they bring their production line to a 
halt.
    The difference between that process and what we do in 
repair is that most of our repair, a lot of our repair is 
inspect and replace, inspect and repair. Until we open up the 
item, we do not know what is going to be needed.
    Now, clearly, if you have a programmed overhaul, there are 
some things you can predict, and there other things that you 
cannot predict until you open the boxes. So one of the examples 
that frequently gets miscarried is that the manufacturing 
example being applied to the Department does not fit exactly 
because we do not know exactly what the production is going to 
be. Am I making myself clear?
    It is sort of like taking your television to the repair 
shop, and you do not know what it is going to cost to fix it 
until they open it up and look at it. So there are some limits 
there that are real limits on how we can do just in time.
    The other one is in the commodity areas that we manage in 
the Defense Logistics Agency. When we went to the Prime Vendor 
Program, we looked at the market and said, where is the market 
in managing various different commodities? We found that there 
was a robust market out there delivering pharmaceuticals to 
hospitals, and we were not taking advantage of that, and that 
made no sense, and anybody that would have criticized us for 
not using that capability would have been correct.
    So we went out, and we basically worked contracts with 
vendors to allow pharmaceutical products to be delivered 
directly to our customers on a just-in-time basis. Now, there 
is one twist in this, and if I can just summarize quickly, and 
that is that we still have storage requirements for wartime, so 
we had to work with our vendors to be able to exact from them 
an increased production volume in order to meet the kinds of 
requirements that we would have if we were suddenly to deploy 
or if we had to suddenly take twice the volume to a ship that 
was about to sail from port.
    So there were a lot of things we had to do even in that 
area of highly commercial business in order to be able to make 
it work; and the further you get away from commercial items, 
the harder it is to apply those principles, but we are trying, 
and that is exactly the challenge before us.
    Mr. Hastert. Mr. Emahiser, what is the value of DOD's 
inventory at this time and how much of that, in your opinion, 
is excess?
    Mr. Emahiser. The current value of the DOD inventory is 
approximately $69.6 billion when GAO did their study. 
Currently, the number is about $67 billion for this decrease 
from the 1995 base to 1996.
    In our view, the excess, or what we predict would be 
excess, is about $300 million.
    Mr. Hastert. $300?
    Mr. Emahiser. $300 million.
    Mr. Hastert. Million?
    Mr. Emahiser. Yes, sir.
    Mr. Hastert. Out of $67 billion?
    Mr. Emahiser. Yes, sir.
    Mr. Hastert. Thank you. Mr. Barrett.
    Mr. Barrett. One of the criticisms in the GAO report is 
that there continues to be a storage of a large amount of 
hardware items, such as bolts, valves, and fuses, that cost 
millions of dollars to manage and store, that these hardware 
inventories could last for more than 2 years. To date, there 
has not been tested the most innovative commercial practices 
GAO has seen used by companies to reduce inventories and costs, 
such as using supplier parts and other techniques that could 
give established commercial distribution networks the 
responsibility to help with the inventory. Would you respond to 
this, please?
    Mr. Emahiser. Well, first of all, I think that the 
Department is trying to make steps to bring themselves what I 
would just call into utilization of commercial best practices. 
In my opening statement, I mentioned the contract that we have 
got with Caterpillar and Andersen benchmarking the Department 
with them to be able to take in, pick up things from them that 
they are using in their overall system. Jeff has mentioned 
earlier the movement to prime vendor for medical and for 
subsistence. Those are extremely positive moves by the 
Department.
    I mentioned the Virtual Prime Vendor, which is being tested 
now at Warner-Robbins, where a contractor, in fact, comes in 
and runs the supply side, the distribution side of the 
businesses that support the actual maintenance production line. 
The contractor is, in fact, responsible for assuring that parts 
are there just in time so that the maintenance line can 
maintain its integrity and produce whatever equipment it is. In 
this case, it is part of the propeller system for the C-130 
aircraft.
    There are other areas that we have looked at. Direct Vendor 
Delivery. The Army has a program utilizing Direct Vendor 
Delivery for tires, commercial tires, to support the equipment, 
which has been extremely successful.
    So I would say that the Department is making positive 
progress, and we are moving. It is not like it was 5 years ago, 
so I think that, in fact, we are moving ahead.
    Mr. Hastert. What kind of defense functions do you think 
should not be privatized, that you should not have that type of 
arrangement with?
    Mr. Emahiser. I think you need to go back and look at what 
are basically the core functions of the Department--and I do 
not mean core depot maintenance, so I am not talking depot 
maintenance kinds of core; what are the core functions?--and 
then step back from there to see what we need that could move 
into the private sector.
    Certainly, we are looking at things like the distribution 
system. We are looking at things like the Defense Reutilization 
and Marketing Service--we are part of that--to move into the 
private sector. Other areas that are being looked at in the 
overall area are things in the automation, which is outside my 
scope, but we are looking at automation support, financial 
support, and those kinds of things, which would have an impact 
on the overall inventory management system.
    Mr. Hastert. I need to have a better understanding of why 
there are these sharp differences between you and the GAO in 
terms of the value of the unnecessary inventory. They peg the 
number at $41 billion in their GAO report.
    Mr. Emahiser. Basically, part of it is semantics, and part 
of it, in fact, is an evaluation issue. The nearly $12 billion 
of the difference is in valuation, as I mentioned----
    Mr. Hastert. $12 million or $12 billion?
    Mr. Emahiser. $12 billion is the number that we would say 
is potential excess. Under the accounting practices that the 
Department must use, that is then valued at 2\1/2\ to 3 percent 
scrap value, and that is where my $300 million number came from 
earlier. So there is a major difference there of what we would 
say versus the needed and unneeded, which is the terminology we 
do not recognize.
    Mr. Hastert. But if they are saying $41.2 billion, and you 
are saying that you disagree over $12 million----
    Mr. Emahiser. $12 billion.
    Mr. Hastert. Oh, $12 billion.
    Mr. Emahiser. $12 billion. I am sorry.
    Mr. Hastert. OK.
    Mr. Emahiser. The other portion of that has to do, again, 
with the definition of needed versus unneeded. What we 
categorize inventory as potential reutilization is valued at a 
salvage value, as I have mentioned. The other area is that we 
have areas of things like contingency and reutilization, which 
says that we have looked at it, we need to hold that stock, 
bought into the inventory, and we made a conscious decision 
that there will be a need for that inventory over a period of 
time, generally 5 to 6 years.
    The other portion of the inventory that we hold, once it is 
bought, is where we take and see that it has--we looked at cost 
to hold versus cost to procure, and that equates to a 
substantial portion of the $41 billion which we say we still 
need that will be consumed in more than 2 years, but certainly 
within a 5 to 6 year period.
    Mr. Hastert. OK. I have no other questions at this time.
    Mr. Souder [presiding]. I am sorry I missed your opening 
statements. Let me ask a couple of questions. The staff has put 
some of this together. I sat through one of the hearings the 
last session of Congress, one of the hearings on this, and I am 
trying to get up to speed.
    When there is excess inventory, how much roughly is spent, 
what kind of salvage value in excess inventory is it?
    Mr. Emahiser. We would view excess inventory as being held 
at scrap value, which would be 2\1/2\ to 3 percent of its 
acquisition and replacement cost. In the discussion with the 
GAO report, we would say that we have about $12 billion in what 
we would call potential excess materiel, and then because of 
accounting rules, we would evaluate that at about 3 percent, 
which would drive us down to the $300 million.
    Mr. Souder. How long does it usually take to dispose of 
such inventory?
    Mr. Emahiser. Once that is identified, it is relooked at to 
see if possibly there is a claimant that has been missed with 
the Department of Defense, and then it is opened up for 
possible reutilization by other sectors of the Federal 
Government, State governments, police, and only after that has 
been exhausted that it is sold off through the Defense 
Reutilization and Marketing Service.
    So that would take some period of time, but generally I 
would say less than a year. Jeff may have a better idea.
    Mr. Souder. Do you have any further comment?
    Mr. Jones. Yes. Mr. Souder, the times are prescribed in the 
regulations by GSA for screening, and Mr. Emahiser described 
them in the right order. The public is entitled to get 
Government property after it is declared excess and surplus at 
that point, and when that process, the screening process is 
done, which generally takes 90 to 120 days, then the Government 
and the Department of Defense in this case creates a sale for 
those items that do not require demilitarization, and those are 
the particularly sensitive military items.
    Mr. Souder. Are we still purchasing excess inventory?
    Mr. Jones. My opinion is that we are not purchasing excess 
inventory. That is not to say that a mistake does not get made 
every now and then, but in general, I am 100 percent confident 
that no one intentionally purchases excess inventory.
    Mr. Souder. In other words, you are saying that you believe 
the excess inventory that is currently there was 
intentionally--you do not believe that that was intentionally 
purchased, either?
    Mr. Jones. I do not believe that it was intentionally 
procured. That is correct.
    Mr. Souder. Are you saying that--what would be some of the 
key variables, and maybe we have already covered this, that 
would cause these errors, and are we working to tighten that?
    Mr. Jones. When we do what I would call a supply control 
study or a study to decide what needs to be bought, it is a 
point in time, and so things change once we move to contract 
because the contracting time takes, you know, takes a period of 
time.
    So when an item manager runs a supply control study, they 
look at the assets they have on hand, and the assets they have 
on hand not only in their own inventory, but in the inventory 
of the other service; they look at what is due in; they will 
look at their back orders; and then make a conscious decision, 
if it is a consumable, to go ahead and procure. If it is a 
repairable, repairable item, then they will also look at the 
unserviceable inventory that is being held in depot stocks and 
what can be repaired and then only by what cannot be satisfied 
from the repair lines and make the decision to buy.
    They will look at things like what the current force 
structure is. They will look at previous demands going back 
several years. All those kinds of things enter into the 
equation before that buy decision is made.
    Mr. Souder. Do you calculate what the salvage--in other 
words, is part of the decision the balance of the potential 
likelihood that you may have an emergency or need a rise versus 
the salvage value? In other words, the market may go up and 
down on certain products.
    Mr. Jones. I am not sure that I understand your question, 
so let me approach it this way. Once inventory is on hand, then 
the decision is made, even if it appears to be above the order 
point now, we will look at a cost to hold that in inventory 
versus the cost to dispose. Generally, the cost to hold 
inventory is about a third of a percent of the value of the 
item. There is a cost to dispose of an item, particularly if it 
has to be demilled, so we will look at that. So that enters 
into the equation.
    Mr. Souder. Thank you. I may have an additional question. 
Congresswoman Maloney.
    Mrs. Maloney. Thank you very much. In the interest of time, 
I would like to ask the Chair if he would submit my opening 
statement, as read, in the record?
    Mr. Souder. Without objection, so ordered.
    [The prepared statement of Hon. Carolyn B. Maloney 
follows:]
[GRAPHIC] [TIFF OMITTED] T1844.016

    Mrs. Maloney. I would just like to mention that last 
spring, along with several of my colleagues, Congressman 
DeFazio, then Congressman Durbin, and Senator Harkin, we had 
requested a GAO investigation about this problem, and they have 
complied and come forward with really, I think, a very 
excellent and timely report. I would like to compliment them on 
that report, entitled ``Defense Logistics: Much of the 
Inventory Exceeds Current Needs.'' The report really documents, 
I think, a national travesty--$41 billion in unneeded 
inventory, $14.6 billion in inventory that will never be used, 
and over $1 billion for which the Department holds more than 
100 years of supply.
    It also documents that it costs the American taxpayer over 
$90 million a year just to pay for the storage of this 
materiel, and I just feel that this needs to be changed. Mr. 
Chairman, the Pentagon's budget was $243 billion, and the 
Department controls over $1 trillion in assets. We really do 
need to exercise very rigorous oversight of this budget, and I 
am glad that the chairman has called up several hearings, 
several oversight hearings on this issue.
    I would like to say that I would love to work with the 
chairman and the ranking member on legislation that would 
require the Department of Defense to begin testing various new 
best business practices as a step in addressing this problem.
    I have great respect for the American armed services and 
for the Pentagon. We have the best and the bravest men and 
women in the military, and we have the best weapons, and we 
have the best defense in the world. I find it unusual that an 
agency that is so good at so many things has been so slow to 
respond to GAO recommendations that began in 1991, specifically 
recommending, and then again in 1994, that DOD test the 
application of prime vendors for personnel items.
    Also, could you just describe some of the major areas where 
the DOD has been successful in applying these practices and how 
much has DOD saved? I would just like to know why is it taking 
so long. I think the first report was in 1991.
    Earlier this year, they gave a draft report to us that 
showed that there was $36 billion in unneeded inventory. I 
thought that the draft, which was circulated to you, would mean 
that you would sort of start addressing this problem. Then the 
draft came back with a final report, and instead of the 
inventory, excessive inventory going down, it went up. I would 
just like to know what steps you are taking to address this 
problem.
    Granted, you do have to have some inventory, but $41 
billion is quite a lot of money, and we could use that money in 
more constructive ways, both in the military and in the private 
sector and in the fighting forces. So I would just like to know 
why is it taking so long and specifically the response to my 
question. I would also like to ask the chairman if I could 
submit, along with the ranking member, a series of questions in 
writing to be responded to.
    I am on another committee, the Joint Economic Committee, 
and Alan Greenspan is testifying, and they have beeped me and 
asked me to come over for a quorum.
    Mr. Souder. Without objection, so ordered.
    Mrs. Maloney. Thank you.
    Mr. Emahiser. OK. Let me, first of all, we do not agree 
with GAO, as I have said earlier, on the $41 billion dollar 
number, and I have run through that reasoning already.
    In fact, the Army has instituted a number of what we would 
call commercial best practices into how we do our business. I 
mentioned Prime Vendor. Prime Vendor, in fact, has been a fact 
of life now for several years. It just did not start. The idea 
of the Virtual Prime Vendor was kicked off in January 1997, 
with the Air Force and is being embraced by the other services, 
the Army, and Navy. Again, not an effort that can start 
overnight, but it has been embraced now by the Department.
    Direct Vendor Delivery, in fact, has been embedded in the 
Department for a great number of years. I mentioned the Army's 
expertise with using commercial tires for its vehicles. That 
program has been around for over 3 years now.
    So I think that, in fact, the Department has embraced the 
movement to best commercial practices.
    Mrs. Maloney. How much have we saved in the test for best 
commercial practices that you have implemented? How much have 
you saved by moving to these practices? Do you have any numbers 
on that?
    Mr. Emahiser. I do not have any numbers off the top of my 
head. Jeff.
    Mr. Jones. I have numbers, Mrs. Maloney. In the areas that 
we manage in pharmaceuticals, we have saved several hundred 
million in inventory reductions, but let me make sure that we 
are clear on the meaning of the word ``save.'' When we started 
off with Prime Vendor in pharmaceuticals, we had a large 
inventory. We consumed that inventory, and to the extent that 
we were able to consume the inventory, through the use of the 
Prime Vendor, we avoided future expenditures. We did not save 
money in the sense of being able to turn that money into 
something else; we consumed the inventory in place.
    That is a very important thing to keep in mind when we talk 
about these large values of inventory. They do not have much 
value unless you can consume them. They have no value in 
disposal whatever. So we have several hundred million dollars 
there, and I can get exact figures.
    We are implementing the same methods in subsistence, and I 
did not bring the figures with me right here, but, again, 
several hundred million dollars' worth of inventories have been 
reduced at the wholesale level and at the consumer level. In 
addition to that, I think if you go to some of our customers, 
you will hear other things as well, such as they are taking 
people who used to work at the installation managing food and 
storage and using them for other purposes or simply not needing 
them in general.
    So we can document the savings in inventory pretty well for 
the items that we are managing in the Defense Logistics Agency, 
and I believe the services could do the same for those items 
that they are managing.
    Mrs. Maloney. But, still, that is very, very important. 
Granted, it is not dollars that we turn in to the Treasury, but 
it is dollars that we do not have to turn out of the Treasury.
    Mr. Jones. Oh, I agree with you completely.
    Mrs. Maloney. Because several hundred million in inventory 
in pharmaceuticals is quite impressive. I would like to get all 
of this in writing. I think that it is important really to 
document your own success that you have had so far, and I know 
that change is hard, particularly in large bureaucracies.
    I would also like--I see my time is up, but maybe I would 
like to know what are some of your other plans for expanding 
these concepts in other areas for savings.
    Mr. Jones. Mr. Chairman, if you would like, we could 
respond to some of those right now.
    Mr. Souder. Go ahead.
    Mr. Emahiser. I would just like to go back to one of the 
initiatives that has really taken off in the Department, and 
that is the use of purchase cards, credit cards. We now utilize 
purchase cards, credit cards for procuring up to $2,500 per 
item. That saves going through the entire procurement system, 
and, in fact, there has been documented savings, with the Navy 
reducing its budget by $20 million just through the use of 
purchase cards.
    Also, documented by the Army Audit Agency has been a 
savings of $92 per purchase utilizing the purchase card, so 
that, in fact, has major impacts on the overall utilization of 
reducing costs, reducing inventory brought into the system. You 
go down and buy it. It is given to you over the counter, direct 
vendor-delivered to you, and the utilization of that has grown 
from about $800 million per year to $1.4 billion over the last 
year.
    Mrs. Maloney. Thank you, Mr. Chairman; and as I said, I 
have to run to this other meeting, but I would like to submit, 
and maybe the majority would like to join us in a series of 
questions really documenting the successes of the Department in 
writing. Thank you.
    Mr. Souder. Are some of the purchases that are made that 
result in a larger excess inventory? Are they at all related to 
the question of keeping certain of the suppliers in business 
because of the nature of what they make, and if you lose the 
engineering capability or the backgrounds of the lines, you 
will not have the supply source if you have a need?
    Mr. Emahiser. That is a tough story for me to respond to 
from a departmental point of view. I would rather do some 
research in that to provide some kind of an answer for the 
record on that one.
    [The information referred to follows:]

    The DoD does purchase some inventory that will not be used 
right away in order to maintain supplies of uniquely military 
materiel and repair parts. For example, the Defense Supply 
Center Columbus purchased $5.4 million of inventory in FY 1996 
that was designated as diminishing manufacturing source 
inventory (the last manufacturer having alerted the DoD that 
item will no longer be produced after a given date). This 
categorization of stock precludes automatic disposal.
    The DoD currently holds $167.1 million in diminishing 
manufacturing source inventory.

    Mr. Souder. I would appreciate that. The 60/40 rule that 
says that 40 percent, I believe, of maintenance----
    Mr. Emahiser. No. The 60/40 rule has----
    Mr. Souder. That is not related to the previous question; 
it was another question.
    Mr. Emahiser. I understand, but I understand the 60/40 
rule. The 60/40 rule really pertains to depot maintenance, 
which is a supplier of inventory back to the Department of 
repairable items, but the 60/40 rule basically says that no 
more than 40 percent of depot maintenance should be contracted 
out, that is, given to the private sector.
    Mr. Souder. Are there security reasons for the 40 percent? 
In other words, was it felt that that would make the 
Government--what is the reason for capping at 40 percent? Are 
you at 40 percent?
    Mr. Emahiser. That is codified in law.
    Mr. Souder. You do not know the history of that? Is that--
--
    Mr. Emahiser. Well, I think the history was, candidly--
Emahiser's opinion, Emahiser's opinion--let me say it that 
way--was to assure that we maintain the depot base, the repair 
system base in order to assure a supply of items and to have a 
surge capacity available if we went to war.
    Mr. Souder. Are you currently at 40 percent outside?
    Mr. Emahiser. In the depot maintenance arena, I believe 
that we are well below the 40 percent at the DOD level as well 
as the services, but I can get you a better number, if you 
like.
    Mr. Souder. Have you been moving that number up? Are you 
seeking to come closer to the 40 percent of outside which would 
bring you more flexibility?
    Mr. Emahiser. You are really getting outside my area of 
expertise now. We can provide that for the record, if you would 
like.
    [The information referred to follows:]

    For FY 1996, the dollar totals for maintenance performed by 
each Military Department and the public/private breakout were:
    Army--$1.241 billion with 68% public and 32% private
    Navy--$5.345 billion with 65% public and 35% private
    Air Force--$3.956 billion with 71% public and 29% private
        Total--$10.542 billion with 67.6% public and 32.4% private

    Mr. Souder. Do you have any further questions? All right.
    I thank you very much for coming. What I think we are going 
to do is go vote. We will come back for the second panel. So 
with that, we will recess the hearing at this point.
    [Recess.]
    [The information referred to follows:]
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    Mr. Souder. The hearing is back in session. The second 
panel from GAO has already come forward. It is composed of Mr. 
Henry Hinton, the Assistant Comptroller General; Mr. Kenneth 
Knouse--is that correct----
    Mr. Knouse. Yes, sir.
    Mr. Souder [continuing]. An Assistant Director; and Mr. 
Robert Repasky, a senior evaluator. If you will stand and raise 
your right hand for our oath; we do this for all committee 
witnesses.
    [Witnesses sworn.]
    Mr. Souder. Let the record show that the witnesses 
responded in the affirmative.
    Mr. Hinton, will you go ahead and proceed.

   STATEMENTS OF HENRY L. HINTON, JR., ASSISTANT COMPTROLLER 
  GENERAL, GENERAL ACCOUNTING OFFICE; KENNETH R. KNOUSE, JR., 
 ASSISTANT DIRECTOR, GENERAL ACCOUNTING OFFICE; AND ROBERT L. 
      REPASKY, SENIOR EVALUATOR, GENERAL ACCOUNTING OFFICE

    Mr. Hinton. Thank you, Mr. Chairman. With your permission, 
I would like to submit my printed statement for the record.
    Mr. Souder. Without objection, so ordered.
    Mr. Hinton. I am pleased to be here today to discuss 
defense management issues, and as you recognize Mr. Knouse and 
Mr. Repasky, two of my colleagues, and in the back of my 
printed statement are a host of reports that they have been 
heavily involved in in the early 1990's up to the present that 
have been looking into the concept of best practices and its 
applicability to the Department of Defense.
    In 1990, GAO began a special review to look at and report 
on the Federal program areas. Its work is identified as high 
risk because of the vulnerabilities to waste, fraud, and abuse 
and mismanagement. This effort, which was supported by the 
Senate Committee on Governmental Affairs and the House 
Committee on Government Reform and Oversight, brought a much 
needed focus on problems that were costing the Government 
billions of dollars. We identified DOD's secondary inventory 
management as a high risk area at that time because of the high 
levels of unneeded inventory and inadequate systems for 
determining inventory requirements.
    Mr. Chairman, as requested, my testimony today will focus 
on, one, a brief overview of the problems; two, measures taken 
by DOD to improve inventory management; and, three, the actions 
we believe DOD needs to aggressively take to solve the 
longstanding problems that you have heard some discussion 
already.
    Let me briefly describe the type of inventory that we are 
discussing. DOD's secondary inventory, which totals about $70 
billion, is comprised of two types of materiel: repairable 
parts and con-sumable items. As shown in the chart to my left 
and your right, and for those in the audience, on page 27 of my 
printed statement, DOD holds about $50 billion worth of 
repairable parts; $40 billion of that is aircraft parts alone. 
These parts are generally the more expensive and complex items 
that can be repaired when broken and reused, such as landing 
gear on aircraft.
    Consumable items, on the other hand, are generally 
inexpensive, common, and are not reusable, for example, medical 
supplies or nuts and bolts. DOD holds about $20 billion of 
these types of items.
    Inventory management problems have plagued DOD for decades. 
A key indicator of these problems is that a significant portion 
of DOD's inventory is not needed to meet war reserve and 
current operating requirements. As shown in the second chart, 
we believe approximately $34 billion, or about half of DOD's 
inventory, is not needed to support war reserve or current 
operating requirements. There has been a lot of discussion this 
morning on that, and we can engage in a little Q&A, and I would 
like to explain that as we go through the process here today.
    Recently, we issued a report to describe this unneeded 
inventory. We reported that about $14.6 billion of it did not 
have projected demands and, therefore, is likely never to be 
used and calculated that another $11.8 billion could last 2 to 
10 years. Also, $1.1 billion could last at least 100 years.
    Most of the problems that contributed to the accumulation 
of this unneeded inventory still exists, such as outdated and 
inefficient inventory management practices that frequently did 
not meet the customers' needs, inadequate inventory oversight, 
weak financial accountability, and overstated requirements. For 
example, recently, we reported that Navy managers did not have 
adequate visibility over $5.7 billion in operating materials 
and supplies on board ships and at 17 redistributionsites.
    We estimated that because of the lack of oversight in the 
first half of 1995 alone, item managers ordered or purchased in 
excess of operating level needs. As a result, the Navy will 
incur unnecessary costs of about $27 million. That was a 
question you asked this morning, Mr. Chairman, and the answer 
to that is, yes, we are continuing to purchase items that we 
already have stocks of and that are in excess.
    Because these problems and conditions persist in an area 
where DOD spends more than $15 billion a year in new inventory 
purchases, we continue to identify this as a high-risk area. To 
put this $15 billion into perspective, Mr. Chairman, DOD spends 
more annually in buying inventory than NASA's whole budget of 
$13 billion. If you follow the future years' defense plan, if 
we stay on the pace of spending $15 billion over the next 6 
years, what we are talking about spending, from DOD's point of 
view, is about $90 billion to buy inventory. That is why this 
is a very important subject that we are talking about.
    DOD recognizes that it needs to make substantial 
improvements to its logistics system. We continue to see 
pockets of improvement, such as DLA's re-engineering efforts 
where it has made significant strides in adopting best 
management practices for personnel items, which are medical, 
food, and clothing items. But these initiatives impact less 
than 3 percent of DOD's secondary items, or $3.5 billion of its 
$70 billion inventory.
    In this area, DLA, to its credit, started with a strong, 
top-level management endorsement of best practices and 
established Prime Vendor programs that resulted in reduced 
inventory levels and associated operating costs. For medical 
supplies, this has meant inventory and other cost reductions of 
more than $700 million, another question that you raised this 
morning, which in turn has freed up storage facilities for 
other uses. For example, at the Walter Reed Army Medical Center 
here in Washington, DC, DOD converted a medical supply 
warehouse into a national training center for radiology 
students. We have a photograph of that facility to my right.
    DOD has made little overall progress, however, in 
correcting systemic problems that affect over $50 billion of 
DOD's inventory. Unless new and innovative solutions are 
applied to the management of these items, DOD will continue to 
buildup unnecessary inventory, provide slow service to the DOD 
customer, and require the unnecessary expenditure of resources.
    We believe the key to fixing these systemic problems is 
aggressively focusing on changing DOD's management culture and 
adopting new, leading-edge business practices.
    To effectively address these issues, DOD must adopt a 
strategy that includes both short- and long-term actions. In 
the short term, DOD must continue to emphasize the efficient 
operation of its existing logistics systems. In the long term, 
DOD must establish goals, objectives, and milestones for 
changing its culture and adopting new management tools and 
practices.
    A key part to changing its culture should be an aggressive 
approach to adopt best management practices from the private 
sector. From our discussions with more than 50 private sector 
companies, we identified best practices that address the entire 
logistics chain, which if applied in an integrated manner--and 
I am going to put emphasis on the word ``integrated''--could 
help streamline DOD's logistics operation, potentially save 
billions of dollars, and improve support to the military 
customer.
    Let me highlight the four best practices we have recently 
discussed in our reports on the Air Force, the Navy, and our 
soon to be released report on Army's logistics pipelines for 
aviation parts.
    First, third-party logistics services can assume 
warehousing and distribution functions, provide rapid delivery 
of parts, and state-of-the-art information systems that would 
speed the shipment of parts between the depots and field 
locations, another point that you raised about this morning.
    Second, eliminating excess inventory and quickly initiating 
repair actions can reduce the amount of time parts are stored, 
improve the visibility of production backlogs, and reduce the 
need for large inventory to cover operations while parts are 
out of service.
    Third, cellular manufacturing techniques can improve repair 
shop efficiency by bringing all the resources, that is, 
tooling, support equipment, needed to complete repairs to one 
location, thereby minimizing the current time-consuming 
exercise of routing parts to different work shops located 
hundreds of yards apart.
    Fourth, innovative supplier partnerships can increase the 
availability of consumable parts, minimize the time it takes to 
deliver parts to mechanics, and delay the purchase of parts 
until they are needed to complete repairs. Our fourth chart 
illustrates that applying this concept to the traditional DOD 
system for consumable items could reduce or eliminate the need 
for wholesale and much of the retail inventory layers currently 
maintained by DOD.
    Just in this one concept, DOD could significantly reduce 
the need to purchase and store inventory worth hundreds of 
millions, if not billions of dollars. You can see where the 
``X's'' are on the bottom part. They are the levels that fall 
out when you are able to bring some of the best practices 
techniques to DOD's processes.
    In our opinion, DOD has not been aggressive enough in 
pursuing these practices. We strongly believe that if they were 
adopted, the amount of time associated with the purchase, 
storage, repair, and distribution of DOD's inventory would be 
dramatically reduced, lowering its inventory requirements and 
bringing the decision point of what to buy--a very important 
point--bringing the decision point of what to buy, when to buy 
it, and how much to buy closer to the point at the time the 
item is needed. That is very key, and it is part of the 
explanation that I will get into why DOD and we disagree.
    This in turn will enable DOD to make better purchasing 
decisions and would minimize the purchase of unnecessary 
inventory.
    Mr. Chairman, that completes my statement. I and my 
colleagues would be more than happy to respond to anything you 
would like to ask of us.
    [The prepared statement of Mr. Hinton follows:]
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    Mr. Souder. Why don't we start with the first thing that 
you correctly anticipated we were going to ask, which is, could 
you explain how you came up with half of their inventory being 
unneeded----
    Mr. Hinton. Sure.
    Mr. Souder [continuing]. And how you define it differently 
than they do?
    Mr. Hinton. Sure. Matt, could you put that chart back up, 
please, and I can deal with that because I think that this is 
very important.
    I emphasized right at the tail end of my statement what we 
are really stressing here is moving the buy decision closer to 
the period of time that you need inventory, and that is very 
key. Visualize two baskets, if you would, please. One basket is 
needed. That is your operating supplies, your war reserve 
requirements, your safety levels, your administrative lead 
times by which you place an order, and it is the time that the 
part arrives. This is about 2 years' plus of inventory that is 
in the ``needed'' category.
    In the second basket that you have there, what that is are 
other levels that are built into DOD's equation that go out an 
additional 2 years out there, so there is more being bought 
than is really needed at that point.
    Now, when you look at what is in there, and I made mention 
of a few things, there is $14.6 billion where there are no 
projected demands, and there are other parts of that that are 
in the 20-year supply. They are also in the 100-year supply of 
that, and when that does not happen and you do not have that 
demand that hits it, you are left with a lot of inventory. The 
point that we have been making, is that the closer you can 
bring that buy decision to when you would really need the parts 
would remove a lot of the unneeded that we have been having a 
debate with DOD about.
    The reason why it is important now that DOD work hard and 
aggressively to change its business processes is not about the 
$70 billion that we have. This is stuff we have already bought; 
it is there. We have got it. It is looking at the $15 billion 
that we are going to be spending over the next 6 years over the 
future year defense program, and that is significant. Until we 
are able to change that culture, get DOD to move out and test 
some of these best business practices, what we are going to 
find out, we will be back here having another hearing along the 
same lines that GAO is going to be saying there is a lot of 
unneeded inventory out there.
    So that is what we are trying to work with, encourage, and 
recommend to DOD, the need to move forward; and the areas where 
it needs to move forward, and as Mr. Emahiser this morning 
spoke to, was in the personnel area, largely in the medical and 
the pharmaceuticals. We were very instrumental in working with 
DOD to get them off on the right foot with that. We have had 
several reports back then that encouraged them to move forward 
to test that concept, and as I mention in my statement, DOD got 
on board, top down, and moved out, and it worked.
    Where they have not moved forward is into the other parts 
of the inventory, to the tune of about $50 billion, and here is 
what we are talking about: hardware and repairable parts. What 
GAO is saying is, test it. Let's make sure it works. Let's make 
sure it does not involve readiness, any readiness-related 
issues before we go because we do think, from all the best 
practices that we have seen, it has the potential to allow 
better response to the customer, potentially save significant 
dollars, and at the same time improve the efficiency of the 
system.
    Mr. Souder. Is the 2-year a peacetime requirement, or does 
that have a wartime contingent?
    Mr. Hinton. Pardon me?
    Mr. Souder. Are the 2-year figures you are using, a 
peacetime requirement estimate, or does that have wartime----
    Mr. Hinton. Peacetime.
    Mr. Souder [continuing]. A wartime contingency?
    Mr. Hinton. Right, and the basket that has the needed, the 
requirements for war reserves are built into that.
    Mr. Souder. So it is a peacetime war reserve.
    Mr. Hinton. We are not challenging anything around war 
reserves.
    Mr. Souder. Let me--I want to come back. I have got a 
series of questions, but I have got some fundamental, entry-
level questions here. The first is very explosive.
    How much of the problem do you believe, and you are under 
oath in front of the committee, and you can tactfully say it if 
you want to tactfully say it--how much do you believe that this 
is being driven by jobs in Members' districts in Congress, and 
how much of it is actually resistance in the Defense 
Department, and and/or both?
    Mr. Hinton. My answer to that would be both. You know, when 
I showed the chart over there that had the ``X's'' on it, what 
we are talking about there, this affects jobs. Any time you go 
through this process where you are going to change processes, 
you are going to become more efficient, and to become 
efficient, you might have to remove layers that are built into 
the current system. That affects jobs.
    Similarly, as you mention, there is a considerable amount 
of service parochialism involved here that makes change very 
difficult in the Department. It is why we believe that you need 
to move forward, and I think if there is a way that we need to 
move forward might be to require, through legislation or some 
other part, that DOD move forward to test some of these. You 
put forth a plan that they will pick up these best practices, 
they will come up with a strategy for testing them, and they 
would have very good goals and measures to measure the results 
of the test pilots that they would do.
    You could also have a reporting requirement back to the 
Congress and have DOD respond how well that is going, and then 
have us, third, come in as a check, and I think that goes a 
long way to breaking down stovepipes, the service parochialism 
that is out there, and that is what is needed.
    That has been some of the frustrations that I think OSD has 
found in trying to move forward, not only in this area, but the 
same thing applies as it deals with infrastructure, base 
closures, that we, GAO, have been reporting on. That is a very 
difficult issue; it is a painful process.
    Mr. Souder. I have a very unusual, uncomfortable, personal 
background experience with this. When I started as a staffer 
with Congressman Coats and worked in the 4th District in 
basically trying to worry about us not just kind of shutting 
down and turning out the lights after International Harvester 
and others had closed down in the early 1980's. A lot of our 
auto parts manufacturers, who were clearly potential suppliers 
to the military, worked with ECSC out of Columbus in an 
experimental program to try to get more bidders on sole source 
and also for their supplies.
    I remember they had several photographers who took pictures 
of all the parts that they buy, put together this great 
presentation to bring to Fort Wayne, and we held a conference 
where we brought a lot of suppliers in to bid. I remember, 
having come from a business background, my first two questions, 
one which was, ``Well, how much do you usually pay for this 
part?'' They said, ``Well, we cannot say that.''
    They said it depends. I said, ``Well, can you put the last 
three purchases' prices?'' ``Well, that would really be 
misleading because it might not be the same; it is a bid 
price.'' Then I said, ``Well, how many do you buy?'' They said, 
``Well, that depends. It depends on a lot of different 
variables, and there are different-sized purchase orders.''
    Then, they said, ``You do not look very pleased,'' and I 
said, ``Well, we are bringing in 120 businesses, and the first 
question they are going to ask is, how much do you pay, and how 
many are you going to make, that there is no way you are going 
to turn over a part of your factory to be devoted to this type 
of thing based on this kind of erratic flow.''
    Now, my question comes, that is in addition to the 
parochialism and the potential nobody likes to lose any jobs or 
any bases or any depots in their districts. There are some real 
concerns here, one of which is can they get their projections 
better and are they getting better at projecting what they need 
and where; or, in fact, do you, in effect, as a business have 
to have a certain committed supply even if it is being wasted, 
or you are not going to investigate in dealing with the Federal 
Government?
    The corollary to that is, is that we are going to become 
dependent on foreign parts suppliers, that if we have some kind 
of a switchover in one of these foreign nations and all of a 
sudden we were buying our parts there, but our American 
manufacturers decided it is not worth doing business with the 
Federal Government, we do not have anybody supplying.
    How much of those things are in this?
    Mr. Hinton. Well, I think they are really relevant to this 
discussion in terms of how you think about buying things. When 
you go back to the original pie chart and you talk about the 
unneeded, when one predicts out and estimates out over a 2-
year-or-more period as to what you want, things are going to 
change in that intervening period. Demands may not come about 
as you anticipated.
    There could be extreme fluctuations in that; demands just 
do not materialize. Sometimes when they went out, they had a 
quantity of life buys where they bought all the parts that they 
needed and then found out that they were not needed ultimately 
in that intervening period.
    I think the point that we are trying to make here is that 
there are better ways that we have seen in the commercial side, 
the private sector side, of being able to go out and provide a 
means that can get a better grip on what your true requirements 
are through Prime Vendor programs to effect quick delivery and 
bring that customer and the end user, the supplier, closer 
together that can meet the needs in a more timely way.
    Mr. Souder. Clearly, in the more egregious cases, that is--
do either of you have any comments on what has been said here? 
If you want to join in, just----
    Mr. Repasky. I would just echo what was just said, that if 
you shorten the amount of time that you need to place your 
orders and receive those supplies, the chances of you being 
right increase and will reduce the likelihood that you would 
make purchases of items that you do not need.
    I think that is really the bottom line, to shorten that 
process, and that is really what our work has focused on, is 
how do you shorten the repair cycle time, how do you shorten 
the pipeline time, and how do you bring that decision point 
closer to the time that you need the item? I think that is the 
key.
    Mr. Hinton. Mr. Chairman, if I could ask Mr. Repasky, we 
have an example as it relates to the Army, and when you look 
across the Navy and the Air Force, it is akin to the same. But 
it is kind of like a before and after, and if I could have him 
walk that through, I think you could see a little bit of what 
we are trying to push and suggest to DOD as to why this is a 
good idea to move forward. It is in the repairable area that I 
am going to be talking about.
    Mr. Knouse. Mr. Chairman, while they are setting that up, I 
would just like to add that the DOD logistic system is 
predicated on speed. How do you get what the military customer 
needs in as quickly a time as possible? By their own admission, 
DOD will tell you that time is the enemy of logistics. To the 
extent that you can take some of these processes that Mr. 
Repasky is going to talk about and condense them, you are not 
only increasing efficiency, saving money, but you are actually, 
I believe, enhancing readiness, peacetime readiness of the 
equipment that you have out there because you are getting it 
there much, much quicker than relying on the infrastructure 
that is now in place that takes a very long time at times to 
get this materiel to the end user.
    Mr. Repasky. OK. Let me just try to walk through. This is 
basically a before-and-after chart, and I know it is busy, and 
I will try to just hit the high points. This chart shows the 
present Army repair pipeline for aircraft parts. On the right 
side of the chart, from the top to the bottom, it depicts the 
process a part would go through from an operating base into 
storage and into the repair process, back into storage, and 
finally back to the end user at the operating base.
    We did an analysis of 24 different types of parts that the 
Army uses for aviation parts and calculated, through a series 
of different analyses, that it took on average 525 days to go 
through that process for the items that we looked at. Flowing 
from left to right into that depot repair process is the flow 
of the nuts and the bolts and the small items that are needed 
to fix aircraft component parts.
    Basically what that highlights is you have the 
manufacturers that produce the items that sell the materiel to 
the Defense Logistics Agency, who stores them in their depot 
system, and when the military service, in this case, the Army, 
requests those items, the material is shipped into the retail, 
the Army's retail supply system.
    Some key points that we have on this chart, that DLA 
wholesale system just for hardware items, currently we 
estimated they hold about $5.7 billion worth of these small-
piece parts that are needed to satisfy the end user. That 
represents about 2 years' worth of inventory flowing into the 
retail supply system at one particular location that we visited 
for this analysis.
    The Army held about another $46 million worth of the same 
kind of items, and eventually those items are shipped into the 
repair shops, where they are used by the mechanics. So that is 
basically the current system as it exists today and the time 
that is required by the process. The 525 days is one of the key 
points that we are talking about.
    The next chart would show that if you applied the four best 
practices that we have highlighted today, how that would impact 
that process. Again, I will start with the pipeline on the 
right, flowing from the top to bottom. We have applied the 
potential application here of a third-party logistics provider 
to ship the item from the operating base into the repair depot. 
Applying the cellular manufacturing technique at the repair 
depot itself would streamline the repair process, bringing the 
resources that are needed into one location.
    We found, for example, at this one Army depot we visited 
that a component part may travel up to over 2 miles through 
different shops before the repair process is completed, which 
is a very inefficient process compared to what we have seen in 
the private sector.
    So applying the cellular concept would streamline that 
particular piece. Again, a third-party provider could serve the 
function of storing the repaired part and in finally 
distributing them back to the end user. In the private sector, 
the third-party provider service can be as quick as 1 or 2 days 
to move a part from one location to the next.
    So, theoretically, applying those concepts to that repair 
pipeline, the 525 days could be reduced to maybe 35 days, a 
significant reduction in time. Likewise, applying the 
integrated-supplier concept which we have recommended in our 
recent reports, to the con-sumable flow would essentially, as 
we mentioned earlier, reduce or eliminate the need for the 
wholesale system and two of the three layers of the retail 
inventory system that moves that part of those piece parts from 
the manufacturer into the repair center, which minimizes the 
inventory investment DOD must make until the time that it is 
required, which again enables them to make better judgments as 
to what they need, how much they need, and when they need it.
    So this is the ``To-Be'' model, if you will, of how those 
practices could apply to this entire pipeline.
    One other point related to that is that these concepts 
should be applied in an integrated manner, as we mentioned 
earlier. For example, if you increase or improve the piece part 
support but do not improve the reputation of the repairable 
part from the operating base to the repair center or improve 
the flow of the parts into the repair center itself, you will 
have all of the parts that you need, but the repairable items 
will be slow to get to the repair point and then slow to get 
back to the end user.
    So these concepts have to be applied throughout the entire 
supply chain or in an integrated fashion to be most effective.
    Mr. Souder. I have some other questions that I want to move 
to, but let me make one comment. This is to help think it 
through. One is to hold up an ideal system that is real logical 
that the private sector, under proper pressures, would do. 
Another is to say, and I realize you are not to give political 
advice, but you seem to--I heard quite a few things that this 
would be closed and that would be closed and this would be 
closed.
    Any practical suggestions of a transition point or how the 
transportation systems could be used within existing resources 
would probably be helpful if the ideal is ever going to become 
a reality. Partly the budget squeeze is going to force some of 
this.
    Mr. Hinton. Yes, sir, and I think where we have been coming 
from here, we have been suggesting to DOD that they need to 
test some of these and look at--precisely what you are raising 
to me right now, is what are the barriers out there, what are 
the things we need to worry about, what are the costs going to 
be, are there any potential readiness implications of changing 
the way we are doing it? What are the efficiencies, and what 
value can we achieve, savings in the system, by moving forward 
with some of these?
    We are not suggesting that they go right out and just 
change everything. I think it is the point that what they 
proved by themselves, working in the personnel and the 
pharmaceutical area, if it is done right, thought through, 
implemented with a good strategy, it works. What we are trying 
to raise with DOD is you have only dealt with a small part of 
the inventory items, and there is a lot more that we think 
offers a lot of potential.
    Until you go through the drill to lay out that strategy, 
test against it, and demonstrate it and look at the merits of 
it as well as the impediments to it, we are going to be saddled 
with the same system. You think back, in the private sector in 
the 1980's and the early 1990's they recognized a crisis was 
coming when they started thinking about the globalization of 
business and those types of things and how it may affect its 
profitability and also the question of survivability. They 
started re-engineering a lot of their processes, and with DOD, 
that has not occurred yet.
    What has happened over the years is that we have been able 
to have sufficient moneys to keep an inefficient system going, 
which gets us to why we are here today, and unless we see some 
movement, the system is not going to change. I do agree with 
you. I think resources are getting tight, and maybe that crisis 
is looming within the Department and there is reception to the 
suggestions that we have been raising with DOD.
    Mr. Souder. We see it often at the tail end of that, like 
in my district, the ITT Aerospace is there--they do the SINGARS 
radio--and finally all of the services are looking at the same 
kind of radio, but if you have different radios here or there--
I remember when I worked for Sen. Coats, just even things like 
MREs, these meals, when the different services even have 
different meals, and you are customizing for different branches 
and different places they are going, not to mention just piling 
up the meals, is another question.
    But clearly, there need to be changes, and hopefully--let 
me ask you a series of questions related to--you advocate they 
dispose of all the inventory that you classified as unneeded, 
and discuss a little bit how you would propose--right now it is 
handled by the Defense Reutilization and Marketing Service, 
which is--they had management problems. So if you can talk a 
little bit about how much of it would you dispose, who would 
you dispose it through, and why don't we start with those?
    Mr. Hinton. Sure. We are not advocating disposal of all of 
it right now. We think DOD needs to go through and analyze what 
we are saying is unneeded inventory and look at for those items 
that are in that second basket that I was describing to you a 
while ago how much is it costing us to hold these that are 
unneeded, and does the cost, the holding cost, and at what 
point over a period of time does that exceed the price of the 
item? I think they need to go through that analysis and figure 
out which ones do they need to keep and which ones will be the 
low-hanging fruit that you would jettison or dispose of right 
away.
    That analysis has not been done, and we think that is a 
prudent way to go about that, and we are not suggesting in any 
way, Mr. Souder, that they go and dispose of everything. You 
heard Mr. Emahiser this morning saying that 2\1/2\ percent on 
disposal, and we need to think this through, and the Department 
needs to think it through very well, is that while we might 
only get 2\1/2\ percent back, we really spent about $12 billion 
buying that in the beginning, which argues for a reason to 
really think through the efficiency of the current system.
    Mr. Souder. What about who sells it?
    Mr. Hinton. Pardon?
    Mr. Souder. What about who sells it and how they are----
    Mr. Hinton. Well, I think that would go through the general 
system that you just mentioned, through DR--what is it, DRMU, 
Defense Reutilization----
    Mr. Knouse. Yes. Surplus and excess property goes through, 
after the services declare it as excess to their needs, then 
that property goes through the disposal process, which is 
managed by the Defense Reutilization and Marketing Service out 
of Battle Creek, MI.
    Mr. Souder. In their reduced inventory, how much of that is 
due to the downsizing of the military and how much to their 
management practices?
    Mr. Hinton. I think a large part of the reduced inventory 
has been because of downsizing. We are just buying less. The 
initiatives that Secretary Emahiser was talking about this 
morning are relatively new. Not enough time has elapsed that we 
can see the benefits of them, but as he described them, there 
was one in the Army, one in the Navy, one in the Air Force, one 
in the Marine Corps, and the point that we would raise is that 
while they are steps in the right direction, we think there are 
some more fundamental movements that need to take place to 
adopt some of the best practices that I have discussed and also 
have in the statement there.
    Mr. Souder. One of the biggest problems and is helpful with 
what you are doing here, that Members of Congress have, 
particularly pro-defense, conservative Members of Congress, who 
also understand that if we do not manage the defense budget as 
a whole, we are going to lose our readiness component of it, is 
that many of the groups that are critical of expenditures are 
so hostile to the military that we do not know who to believe 
and who is not about what is waste and what is not.
    When we read a report in the media or see some group saying 
such-and-such is waste, we do not know whether they are 
targeting somebody because they are from a certain party, and 
they want to embarrass them, and we do not know whether it is 
actually needed or not needed, and it becomes very hard. 
Because we have less money, the pressure is incredible in the 
defense portion of the budget.
    We do not want to become foreign dependent; we want to be 
flexible to maintain our freedoms and at the same time manage 
the budget. So that has been helpful, too.
    You mentioned about the pharmaceutical compared to the 
other parts. Could you compare and contrast the consumable, 
hardware, and repairable parts, just kind of recapsulate that 
and how they handle those?
    Mr. Repasky. The DOD has responded in different ways to 
each of those commodity groups. I think that, first, in the 
area of consumables they have been most aggressive in the 
medical supplies, and there was some discussion about that 
earlier today.
    As a matter of fact, we estimate that as a result of their 
adoption of best practices, that there has been about a $700 
million savings as a result of those new practices and reduced 
inventories. For clothing and textiles, they have also adopted 
similar, prime vendor programs, and I think Ken can provide 
some more details on that. For hardware items, they have not 
moved out, and hardware is the bulk of the consumable item 
inventory. That represents somewhere in the neighborhood of $6 
billion.
    DLA is one of the primary managers of those inventories for 
DOD, and their key initiative there that we think closely 
resembles what we have seen in the private sector is the 
Virtual Prime Vendor program. As Mr. Emahiser pointed out this 
morning, that initiative was kicked off in January of this 
year. We think there is a lot of promise to that one, but the 
jury is still out. They are still in the initial test phases 
for that program.
    For the $50 billion worth of repairable parts that are 
currently in DOD's inventory, we have not seen an aggressive 
approach to using the best practices that we have outlined in 
our reports. We have issued those reports recently. I would say 
1996 was our first report on the Air Force, February 1996. We 
followed that with a report on the Navy's repairable parts 
pipeline in the summer of 1996, and we are going to issue our 
report on the Navy's process within the next few months.
    We think, though, that there is a significant opportunity 
there because of the long times that we saw in the repairable 
parts pipeline. Time is money; time is inventory, and as I 
outlined on my charts, that we think there is a lot of 
opportunity to reduce those times from hundreds of days to 
maybe months.
    So, in general, that is the overall response by DOD at this 
point.
    Mr. Knouse. The prime vendor project for food has just been 
completed. They did a test in the Southeastern United States. 
That has just been completed. Our initial analysis indicated 
that they reduced their inventories just at a few test 
locations by about $24 million. DOD has believed that since 
that area of the United States was so successful, they are 
going to branch that out nationwide, so they are moving out on 
a nationwide basis, as they have with prime vendor medical. 
They are doing that for subsistence, food.
    The other area is in the clothing area, and the last 
briefing that we got from DLA was very optimistic in terms of 
the prime vendor programs that they are going to adopt in that 
area. Right now, they have a test down at Lackland Air Force 
Base where they are looking at recruit items--socks, underwear, 
things like that--very, very common items that they can provide 
military recruits on a just-in-time basis.
    What excited us was an estimate from DLA that over the next 
3 to 5 years, once they implement those programs, they are 
talking about a billion-dollar reduction in those inventories, 
and we are going to be watching that very, very closely 
obviously, and to the extent that that comes about, that will 
be a credit to DOD in these Prime Vendor programs. So it just 
goes to prove what they can do when they really put their mind 
to it.
    Mr. Souder. That billion dollars starts to add up to real 
money.
    Mr. Knouse. Yes, sir.
    Mr. Souder. Unless there is objection, I would like to have 
your full statement inserted into the record.
    Mr. Knouse. Sure.
    Mr. Souder. Also, if we do not get some questions asked, if 
there is no objection, I will probably send you some written 
questions as well.
    Mr. Knouse. That will be fine.
    Mr. Souder. I am now going to yield the chair back to the 
chairman, Mr. Hastert.
    Mr. Hastert. Thank you, Mr. Souder.
    I have a couple of questions. In the history of the Defense 
Logistics Agency, their job is to purchase everything. Is that 
correct? Basically, everything----
    Mr. Hinton. They largely purchase all the consumables. The 
service purchases things, too. DLA also does all the 
warehousing of everything that DLA purchases as well as the 
services.
    Mr. Hastert. They purchase lethal as well as nonlethal 
commodities. Is that right?
    Mr. Repasky. DLA does store some hazardous materials, if 
that is what you are referring to--not the weapons themselves, 
the missiles, the bombs.
    Mr. Hinton. That is all done by the service.
    Mr. Hastert. Repeat that.
    Mr. Hinton. That is done by the services.
    Mr. Hastert. It is done by the services.
    Mr. Hinton. Right.
    Mr. Hastert. So, the planes and missiles and things like 
that are purchased by Defense Logistics.
    Now, have you looked into the purchasing practices of DLA?
    Mr. Repasky. We have looked at the way DLA acquires those 
consumable items, and my work in particular has focused on 
comparing those purchasing methods and practices with the 
private sector for the similar, same type of items.
    Mr. Hastert. What have you found?
    Mr. Repasky. We have found that there is a significant 
difference between the two.
    Mr. Hastert. In what way?
    Mr. Repasky. First of all, DLA or the Department of Defense 
buys materials many years in advance of when they need them, 
compared to the private sector, which purchases those types of 
materials in many cases in a just-in-time-type environment or 
basis.
    Mr. Hastert. Even things that we would call commodities, 
kind of everyday?
    Mr. Repasky. Exactly. We are talking about, first of all, 
we are talking about medical supplies, the syringes and cotton 
swabs and things like that, all the way through nuts and bolts 
that are needed to repair aircraft component parts, as well as 
food and clothing items.
    Mr. Hastert. How do they purchase? Do they do regular bids 
like anybody else would go out and offer a bid?
    Mr. Repasky. Well, there is a variety of methods that they 
use. I do not have a detailed--I cannot provide you a detailed 
description at this time of that, but there is a variety of 
methods. A lot of it is basically bids and contracting, 
competitive-type contracting procedures.
    Mr. Hastert. Have you looked at that procedure?
    Mr. Repasky. Not in detail. Personally, on the reviews that 
I have conducted, we have not.
    Mr. Hastert. Is that something that you think, just from 
your cursory view, that we ought to look at?
    Mr. Hinton. Contract management in DOD is a high-risk area, 
in our judgment, and it is one that we have not recently looked 
at, Mr. Chairman, but it is one that we worry about a lot 
because some of the oversight resources in DCAA and other 
activities like that are downsizing at a time when dollars are 
going to grow in the procurement accounts. DCAA and other 
agencies that oversee and audit and evaluate those need to 
think about reengineering their own activities to get the 
coverage. We have all been faced with that, as audit and 
evaluation activities, but it is an area I worry about as to 
whether we have got enough coverage.
    Mr. Hastert. One of the things in my limited experience 
that I have had is that they let a contract, canceled the 
contract, let the contract to another company, and then paid 
the first company for all the expenditures they made in a year 
in advance for the products, so they basically have paid for 
everything twice. Not very efficient.
    Mr. Hinton. Right.
    Mr. Hastert. It was a relatively interchangeable piece of 
equipment that they bought. So the taxpayers not only lost once 
on this; they lost twice, and I think that is something that we 
need to continually look at. Not only do we have too much 
sometimes----
    Mr. Hinton. Right.
    Mr. Hastert [continuing]. But we pay double for it before 
we ever get it into the inventory in the first place.
    I want to change scope a little bit here. There is a real 
question about manufacturing specialized products for the 
military, and one of the things that the gentleman from Defense 
Logistics talked about is airplane engines. Obviously, the 
airplane engine that you use on an F-16 or--I am not conversant 
on all the engines and all the planes, but probably are not 
very interchangeable, especially would not have much sale on 
the domestic market. Is that true?
    Mr. Repasky. In some of the work that we have done in the 
past, one of the things that we did look at was aircraft engine 
operations and logistics systems.
    Mr. Hastert. I am using that just as an example, but go 
ahead.
    Mr. Repasky. There are some similarities between DOD and 
commercial hardware--engines, aircraft, whatever--but I would 
not say it is a very large percentage. I think it is pretty 
much military unique, military specifications.
    Mr. Hastert. So, in the manufacturing of these products, 
probably they would run a line, and I am using numbers off the 
top of my head, so I will try not to put any exactitude with 
anything here, but let's say you are making 1,000 planes of 
some description, and with that order was 1,000 replacement 
engines, and maybe in the long term they figured they would use 
1,500 replacement engines.
    For a company to put all their assemblage back in place to 
reproduce those 500 engines maybe 2 years down the road, is it 
usually taken into consideration what is the most efficient 
cost at the time of purchase and then repurchased? How does 
that work?
    Mr. Repasky. I think that the issue that you are talking 
about here is that tooling up for a certain manufacturing 
process is an expensive situation, and you want to maximize the 
production of your units while you have that tooling in place 
to minimize the unit cost of the items.
    So, for example, when you are buying your aircraft, you buy 
as many spare engines as you can right up front to minimize 
that unit cost, or do you delay those purchases until later? It 
is the same dilemma that the airlines have to face when they 
buy the new Boeing Triple-7, for example, and there are some 
issues with initial spares. We have talked to some airlines on 
how they minimize----
    Mr. Hastert. Can I stop you right there, though?
    Mr. Repasky. Sure.
    Mr. Hastert. If you buy a, you know, 777 and you are ABC 
Airlines, you may want to make that purchase now for extra 
equipment, but probably that plane will be in production for a 
period of time. The engines and the hydraulics and the brakes 
and everything that would go on that probably would be 
purchasable 5 years in the future at probably not an extra cost 
to tool up. Is that right? So there would be a difference 
there. Right?
    Mr. Repasky. That is correct.
    Mr. Hastert. So it is not exactly the same decision that 
the private sector would have to make.
    Mr. Repasky. No, and I think that our work really is not 
focusing so much on the acquisition of determining how many 
initial spares that you need directly. The work that we have 
done focuses on how do you improve the efficiency of repairing 
those items once you have them, and if you can reduce the 
amount of time that it takes to repair that engine, then your 
up-front decision of how many engines you have to buy is 
affected. That is really the relationship between best 
practices that we have seen and its application to the 
Department of Defense.
    Mr. Hastert. What I am trying to do here, I am not trying 
to string us out on a lot of esoteric stuff, but what I am 
saying, in some situations there has to be unique decisions 
that have to be made when you purchase X, Y, and Z and how it 
is used. Some of it is not really appropriated just in time. I 
mean, to get a certain turbine for a certain engine delivered, 
it is not going to be delivered just in time if a company has 
to retool----
    Mr. Repasky. Absolutely.
    Mr. Hastert. So we need to sort that out.
    Mr. Repasky. Absolutely.
    Mr. Hastert. In your testimony, of course, in your study I 
hope maybe we have sorted that out. So we really need to look 
at those things that are really kind of special, set-aside 
stuff. I do not know what the number was, but there was only a 
$30 million----
    Mr. Repasky. Basically--let me make one point here, is that 
when we place our recommendations to DOD, we do it in the sense 
that there is not one solution for their problems. We think 
that they really have to test a variety of concepts and apply 
them in a manner where they make the most sense. There is not 
one technique. Like just-in-time does not apply to all aspects 
of DOD logistics operations, including consumable items and 
repairable items.
    We think there are areas where that would be the most 
effective, but it would not apply across the board.
    Mr. Hastert. But there is a real gap between what Defense 
Logistics today came in and said, you know, well it is tens of 
millions of dollars that we have in excess, and you are saying, 
well, maybe it is really tens of billions of dollars that you 
have in excess. Where do we start to find middle ground there?
    Mr. Hinton. Well, as Mr. Souder was there, I was walking 
him through what we had there, and if you could visualize two 
baskets, Mr. Chairman. One is the needed inventory, and what is 
in that needed inventory is what you need for current 
operations, what you need for war reserve materials, what you 
need for safety levels, what you need for administrative lead 
times to place an order until that part comes back.
    That is a fairly large basket of on hand inventory, if you 
will, that you need right now for current operational needs and 
war reserves, at least 2 years, and the safety level on just 
the administrative lead time alone. So over that, you have war 
reserves, and you have your current operation needs, and in our 
view, we are not raising any questions around the war reserves.
    Now, if you go over to the second basket, which is your 
unneeded, that is where we have a difference with DOD, and it 
is how far out that you need to go to buy your inventory, and 
that is where we differ a little bit because what we have been 
trying to push DOD to do is bring their buy decisions a little 
closer to when they need it. What happens for us to 
characterize that they have this unneeded inventory in that 
second basket is that over a period of time what they expected 
to be a lot of demands for that inventory they bought does not 
occur. Some of the weapons systems may become obsolete, and 
they have a whole bunch of parts that are there, and so the 
longer that they look out and buy that, it is a high-risk 
decision that some of those demands may not occur in the 
system.
    Mr. Hastert. Let's talk about obsolete weapons and the 
commodities that you buy to support those things. Let's look at 
a Huey helicopter that is mothballed and it is not there and 
they have engines and blades and all those things and turbines 
that go to support those, when that product--when that 
commodity or piece of equipment is mothballed or set aside, do 
we keep up the inventory for those?
    Mr. Hinton. You will probably have some--you may not be 
buying those parts, but you may retain some of those parts 
until a later date, and they may be in our unneeded basket. You 
are retaining them, but you do not have a likely demand to come 
about it.
    Mr. Hastert. Let's say that those hulls, then, are given 
away or into another country and sold or whatever?
    Mr. Hinton. Then you might be able to sell those parts as 
part of the package.
    Mr. Hastert. Those parts would normally then follow.
    Mr. Hinton. Sure.
    Mr. Hastert. There is a reason to keep those, then.
    Mr. Hinton. To the extent that we are successful in finding 
buyers for some of those old systems, there might be some 
rationale in that.
    Mr. Hastert. If you are a student of history at all, you 
find out that at the beginning of World War II, before we 
really got into the war in the late-1930's and very early 
forties, that we started to gear up for the war, and people 
went down in warehouses that were not too far from this 
building and started to look in them, and there was stuff that 
was literally there from the Civil War.
    There really was not much relevance there, and one of the 
things that we do not want to have happen, and hopefully we 
will never have to gear up for a major encounter of any type, 
but to have that experience as well, not only the cost of the 
equipment that we probably could have rotated out at some 
savings, but also just the cost of storage.
    Mr. Hinton. In the unneeded basket that we have been 
talking about it costs about $100 million to warehouse that 
unneeded inventory.
    Mr. Hastert. What price do you put at the unneeded 
inventory? Is that your $69 billion?
    Mr. Hinton. Well, that is the total, and we would split 
that; that $35, $37 billion is unneeded in our analysis. Within 
that unneeded inventory that we have there is about $15 billion 
that DOD has no projected demands on that inventory. There is 
about a billion of it that has a 100-year supply.
    Mr. Hastert. That is the purchase price. Right?
    Mr. Hinton. Yes.
    Mr. Hastert. If you cycled that out, do you have any idea--
--
    Mr. Hinton. Well, the number that Mr. Emahiser had, 2\1/2\ 
percent, this morning, those that would go to disposal. On 
those 2\1/2\ percent his number was about $300 million that 
they had was targeted for disposal. What it cost us to buy that 
$300 million was $12 billion.
    Mr. Hastert. How integrated are the various supply and 
information systems within the DOD inventory management?
    Mr. Hinton. That is an area that GAO has been reporting on. 
Information management is also a high-risk area across the 
government. It is a key to the efficient running of any 
inventory operation, as well as a whole lot of the processes in 
Government, but in DOD it is not well integrated, particularly 
in the material management.
    DOD was going through the processes of coming up with an 
integrated system. Once they identified the cost for that 
system, they changed strategy, and we are going with individual 
systems against various parts of the materiel management 
process right now, but we have not gone through--DOD has not 
gone through the drill of determining whether or not their 
plans are going to be the cost-effective solutions for what 
they ultimately want to achieve. We have a report on that.
    I would be happy to make that a part of the record, and it 
is an area that is very key to having good information to make 
the decisions that we were talking about when Mr. Souder was 
here. What is at risk here, Mr. Chairman, is $15 billion. That 
is what DOD spends annually to buy inventory. So if we are 
talking over the life of the future-year defense plan, which 
covers 6 years, that comes to the tune of about $90 billion. To 
put the $15 billion in context, that is more than NASA's 
budget, which is $13 billion.
    Mr. Hastert. Let me ask one more question, and I would like 
to pass the time over to the gentleman from Arizona, but, you 
know, I have been around this Congress 10 years. Some people 
say maybe that is 10 years too long, but I remember having a 
discussion 10 years ago in this committee that, boy, we are not 
being very efficient on the inventory, and it was an issue when 
we had a lot more inventory as well as we saw the early slide 
of, those charts this morning. Some people said, at that time 
saying that we had defense inventory problems for 20 years. 
Well, now, it is 30 years. Why has change been so difficult, in 
your opinion?
    Mr. Hinton. I think there is a lot of service parochialism 
in the Department that makes it very difficult to change over 
there. I think change itself is very difficult.
    One of the things that I think we have had that businesses 
in the private sector have not had, we have had a lot of money 
to keep an inefficient system running. It is not a question of 
we have got incapable people working in the system; what we 
have is an inefficient system. Over the years we continued to 
pay to run that inefficient system, and what we have been 
suggesting through our work, Mr. Chairman, is the need to 
change.
    DOD has got to come forward, and that is our recommendation 
that deals with the high-risk report that we have issued, to 
think of a strategy for changing the culture over in the 
Department. A key part of changing that culture is adopting 
some of these best management practices that we have seen in 
the private sector, and it has got to be done from the top 
down. That is the way you overcome the stovepipes that are 
within the individual system--services.
    Mr. Hastert. Thank you very much. Mr. Shadegg, do you have 
any questions for this panel?
    Mr. Shadegg. Mr. Chairman, I do not. Thank you.
    Mr. Hastert. Thank you. Thank you very much, gentlemen. I 
appreciate your testimony, and I would be interested in 
discussing some of these things with you further, obviously.
    Mr. Hinton. Sure. I would be happy to, Mr. Chairman. Thank 
you very much.
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    Mr. Hastert. I ask now the third panel if they would please 
come forward. It is composed of Dr. Jacques Gansler, vice 
chairman of the Defense Science Board; and Retired Admiral 
Luther Schriefer of the Business Executives for National 
Security, who is executive director of their Tail-to-Tooth 
Commission. Gentlemen, if you would please rise and take the 
oath, as required by the committee.
    [Witnesses sworn.]
    Mr. Hastert. Let the record show that the witnesses 
responded in the affirmative, and Dr. Gansler, please proceed.

 STATEMENTS OF JACQUES GANSLER, VICE CHAIRMAN, DEFENSE SCIENCE 
    BOARD; AND ADMIRAL LUTHER F. SCHRIEFER (USN, RETIRED), 
 EXECUTIVE DIRECTOR, BUSINESS EXECUTIVES FOR NATIONAL SECURITY

    Mr. Gansler. Mr. Chairman, members of the committee, at 
your request, I am here to report on the Defense Science 
Board's 1996 summer study. The title of it was ``Achieving an 
Innovative Support Structure for the 21st Century Military 
Superiority.'' We subtitled it ``Higher Performance at Lower 
Cost.'' It was dated November 1996, and I served as co-chairman 
of the study.
    Before commenting on the study itself, I think it is 
appropriate to briefly note the role of the Defense Science 
Board. This board was established in 1956, actually in response 
to the Sputnik at that time, to provide an objective and an 
independent advice on technology and management issues to the 
Secretary of Defense, the Deputy Secretary, Under Secretary, 
and also to the chairman of the Joint Chiefs and the vice 
chairman. Currently, it is composed of 28 representatives from 
academia, industry, and research institutions. We meet three 
times a year for 2 days each.
    It achieves its impact, though, through the various task 
forces that are put together from a combination of board 
members and outside experts that we bring in, and we look at 
specific problems of concern to the various senior DOD 
officials that it serves.
    It has to be emphasized that the role of the DSB is simply 
an advisory one, and our recommendations and positions do not 
necessarily represent those of the Department of Defense. 
Rather, the board is perceived as a way for the secretary and 
his senior personnel to receive outside counsel and advice in 
areas that are critical to the future evolution of America's 
national security posture. I currently serve as vice chairman 
of that board.
    Now, let me address the specifics of the 1996 summer study. 
As I said, that was on the innovative DOD support structure for 
the future. Our requested task was to address two critical 
issues. First, with the recognition that the Nation had 
essentially put off weapons modernization for the past decade 
and with a clear recognition that it is unlikely there will be 
a large increase in the defense budget in the coming years.
    Thus, how is it possible to generate the tens of billions 
of additional dollars annually required for modernizing the 
forces? That is an action that is required to both replace the 
aging equipment and to update it to match the requirements of 
advanced technology; in other words, in order to meet the 
demands of the revolution in military affairs.
    The second question we were asked: Since it will be 
necessary to generate these modernization dollars by a shift 
from within the overall level of current expenditures, 
particularly a shift from the support areas, will it be 
possible to maintain or even improve overall combat 
effectiveness while simultaneously significantly reducing the 
current levels of DOD's support costs and personnel?
    To address this set of issues, a group of senior people, 28 
of us, outside advisors, of whom 11 were DSB members, were 
assembled. They were assisted by an outstanding group of 
Government advisers who provided the interface with the DOD.
    We began our analysis by looking at the current 
approximately $250 billion of annual defense expenditures, and 
our objective was trying to make a significant shift, tens of 
billions of dollars per year, from the over 55 percent of the 
dollars that are spent in the support area, and we wanted to 
shift these into the required combat and modernization areas.
    So we focused on the approximately $140 billion a year that 
are spent in the areas typically referred to as support and 
infrastructure. These run the full gamut from medical and 
housing to school house training and base operations. They also 
consume a very large share of both the civilian and military 
2\1/2\ million people that make up the active-duty and civilian 
work force.
    I might note that only about 14 percent of the dollars are 
directly expended on combat operations, and only about 14 
percent of the total personnel are actually in combat 
positions.
    Now, since our objective was to increase the percentage of 
the dollars available for modernization and combat, we focused 
on finding savings in the support area. We took each of the 
various support areas and analyzed whether there could be 
performance improvements and/or cost reductions in each of 
them, and we did this through applying modern information 
technology and management principles, along with maximizing the 
use of competitive forces from the private sector.
    Our conclusions, as described in detail in the report, are 
that there are dramatic performance improvements that are 
potentially made if you, in fact, make the simultaneous changes 
that we described here. By the end of, say, a 5-year period a 
shift of tens of billions of dollars per year can be made from 
the support area into the combat and modernization area.
    Now, since your focus here today is on the DOD's logistic 
system, which is the largest of its overall support areas, let 
me briefly summarize our findings in that area. In 1996, the 
DOD expenditures for the overall logistics support were about 
$60 billion a year. Some of this was for direct battlefield 
support, but the vast majority of it was associated with the 
infrastructure, primarily that located within the continental 
United States.
    Importantly, over one-half million, active-duty military 
personnel are involved in the logistics area. That is over 30 
percent of the active-duty military, and approximately 300,000 
of the DOD civilians are involved in this area. Now, 
recognizing the critical importance of this area to DOD's 
future, and that is from a performance as well as a budget 
perspective, we found that there have, in fact, been 
significant initiatives taken in the DOD to address the 
logistics infrastructure area. In my prepared remarks, I listed 
those initiatives, and you heard those from the DOD today.
    Now, these actions are all very commendable, and they have 
to be aggressively pursued. However, we found that there is 
still very significant room for improvement. For example, we 
found that the response times of the DOD logistics systems, in 
terms of distribution, repair, and procurement, are still 
dramatically higher than those achieved by world-class 
commercial organizations on similar, or in some cases 
identical, equipment.
    In fact, we found these world-class benchmarks are measured 
in hours or, at most, in days, while the DOD performance tends 
to be measured more in weeks or months. For example, while 
Caterpillar delivers parts anywhere in the world within 1 to 4 
days, or, in fact, if it is not within 4 days, they pay for it, 
the DOD, with these identical parts, took 40 to 60 days to be 
distributed during the Gulf War.
    Essentially, the difference is that the commercial world 
has been moving to a totally re-engineered logistics system, 
one that relies on total asset visibility and rapid 
transportation. For the DOD to move from its historic what has 
been called just-in-case inventory system and supply system to 
achieve comparable high performance at dramatically lower 
costs, it will be necessary to totally reengineer the current 
system--some refer to that as a World War II system or, at 
best, a cold war logistics system--moving to one that focuses 
on a concept of on-demand, rapid, intermodal delivery right 
from the factory to the foxhole.
    The changes in the DOD logistics system we envision are not 
small, incremental changes, but they are what the commercial 
firms have been forced to do to become competitive. These firms 
fully applied modern information technology to keep track of 
the availability of all inventory on a worldwide basis, 
including that in transit, and they take full advantage of 
rapid, worldwide transportation.
    They also continuously improve the reliability of their 
parts and systems so as to minimize their down time and thus 
maximize their readiness, while simultaneously reducing the 
inventory and the repair costs.
    Thus, the specific issue being addressed by this committee, 
namely, defense inventory management and repair parts, cannot 
be effectively addressed in isolation. It has to be seen simply 
as a part of a dramatically transformed and streamlined, 
overall DOD logistics system, one utilizing far fewer people, 
far fewer parts, and far fewer facilities, yet greatly 
enhancing the logistics performance.
    This is the essence of our study findings. Clearly, the 
potential exists for dramatic improvements in DOD's support 
performance and a significant shift of resources from support 
to combat and modernization. However, the challenge is 
achieving the implementation of these changes that are required 
in order to realize these potentials.
    I personally believe that the Secretary, the Deputy 
Secretary of Defense, as well as the chairman and vice chairman 
of the Joint Chiefs of Staff, and each of the service chiefs 
are now committed to achieving these changes. I also believe 
that the initial impact of these changes will be reflected in 
the final results of the QDR process.
    However, it has to be recognized that these will be 
extremely difficult changes to bring about, as they were in 
American commercial industry. Thus, achieving these changes 
will require the full cooperation of America's military and 
political leaders for its realization.
    I believe you on this committee and the other Members of 
Congress can play a significant part in removing the barriers 
that currently exist for the required transformations that must 
take place within the DOD over the next few years. I think only 
in this way will America be able to modernize its forces in 
order to be fully prepared for military operations in the early 
21st century. Thank you.
    [The prepared statement of Mr. Gansler follows:]
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    Mr. Souder [presiding]. Thank you very much for your 
thoughtful testimony. Admiral Schriefer.
    Admiral Schriefer. Mr. Chairman and members of the 
subcommittee, first of all, I want to thank you for inviting us 
today. Second, I would like to ensure that our written 
testimony we provided gets entered into the record.
    I would like to talk a little bit about Business Executives 
for National Security [BENS] to make sure everybody understands 
who and what we are and why we are involved in this. Now, BENS 
is a national, nonpartisan organization of business and 
professional leaders that are dedicated to the idea that 
national security is everyone's business.
    BENS members apply our experience and commitment to help 
our Nation's policymakers build a strong and effective, 
affordable defense and find practical ways to use and encourage 
that all these business practices become a reality, and that is 
really the crux of what our organization is about. We work with 
Congress. We work with the Pentagon and the White House to 
ensure that the changes we recommended are put into practice, 
and that is really why I am here today.
    Before joining BENS, I had recently retired from 37 years 
of active duty in the Navy, and in that position I have really 
become familiar with the topic we are addressing this morning: 
improving defense inventory management. I have seen it from 
several perspectives, both in the Navy as a commander and 
observer of what we do, and also observing the best in the 
private sector of their inventory management practices. I can 
say that from my vantage point, American industry has much to 
offer and to teach and apply to the inventory practices of the 
Department of Defense.
    I would like to talk about some of these methods today. As 
I said earlier, I want to not only thank you, but I want to 
commend you for addressing this, because I cannot think of 
anything that is more critical than the way we go about our 
business in the Department of Defense. That is the imbalance of 
the force structure-to-structure ratio, the problem of tooth-
to-tail.
    Too much of our limited defense dollars go to support 
areas, the tail, like inventory management. In fact, support 
and infrastructure now consume nearly 70 percent of the defense 
dollars. This type of excessive overhead is inexcusable when 
many war-fighting needs, the tail, go unmet.
    In fact, BENS considers this problem so acute that we are 
standing up a Tail-to-Tooth Commission, and that word order is 
intentionally inverted so that we highlight the dangerous 
reversal in the resources we devote to the combat end of the 
national defense. When our commission's work is done, we can 
reverse that name, having restored the military resources to 
the ratio the United States needs to defend our interests and 
the ideals into the 21st century.
    Your hearings, directed toward that same goal, will 
ultimately free the resources that can be directed at other, 
more critical defense needs.
    As we heard this morning, the Pentagon has long suffered 
from deficiencies in its inventory practices. I took the 
liberty of tracing the history of the problem and found that 
GAO has studied this for some 30 years. These type of supply 
deficiencies were costly annoyances during the cold war period. 
In today's era of rapid, come-as-you-are warfare, inventory 
problems could prove deadly.
    To their credit, the military services do recognize this 
danger. Since Desert Storm, military experts have cited two 
capabilities as crucial to superior battlefield performance: 
intelligence collection on enemy plans and activities, and the 
ability to stand up logistics trains stretching 7,000 miles 
back to the warehouse and depots in the United States.
    Management of our logistics inventory was a key to success 
in Desert Storm. In fact, since World War II, no other 
industrial nation has matched our ability to deploy and support 
military forces on a worldwide scale, but today our prowess has 
become our problem. At huge cost of national treasure--and we 
have seen that today--we have maintained stocks of supplies and 
equipment just in case they were needed. However, the end of 
the cold war and the squeeze on resources allocated to national 
defense has made just in case an unaffordable strategy.
    Now, we have seen and witnessed the many past excesses of 
DOD inventory and to the incremental management improvements 
that have been made since the early 1900's. Now, we have also 
had some successes. For example, let me just mention one. The 
Air Force now uses the private sector to move materiel from 
depots to bases worldwide. In 1992, the Air Force Materiel 
Command operated its own air transportation system, called 
LOGAIR, to move high-value repair parts around the United 
States and overseas. It was costing $135 million a year and 
required nearly 200 full-time civil servants to run that 
program.
    To get a benchmark, the Air Force went to Fed Ex to see how 
they ran their program. In the process, they asked one of the 
managers of the Fed Ex warehouse if he could move engines. He 
looked around and said, ``Well, we are moving Mercedes 
automobiles, so I think we can move engines.'' Today, the Air 
Force saves nearly $50 million in that process.
    The point which underlies this example is that inventory is 
a part of a complex problem, as well as the entire system. 
Piecemeal, step-by-step change will have long-term impact. Real 
reform requires creation of an entirely new system. As we just 
heard Dr. Gansler say, it needs to be re-engineered. It is a 
revolution, not evolution, and it must occur.
    That was the lesson that our American industry learned in 
the 1980's. As recently as 10 to 15 years ago, many large 
corporations maintained inventory systems which resembled what 
the Pentagon does today. They were largely vertically oriented. 
They put key parts in warehouses, supplies and other items that 
had to be shipped around the world. These corporate structures 
are now something of the past. The reason simply is that 
American business simply had no choice.
    Faced with that serious challenge from foreign suppliers 
and using sophisticated inventory systems and lean production 
teams, our U.S. firms were forced to change. They were, in 
fact, very successful.
    Supply chain management is not just the latest management 
fad. According to the Department of Commerce, U.S. companies 
have cut inventories 9 percent since 1980. That has freed up 
$82 billion. The savings are the other bonus. Not only do you 
get more efficient management, but you save money as well.
    If supply chain management sounds like it is just in time, 
I want to insist that it does not. I have not mentioned just in 
time, because it may not make sense in many critical, combat-
related cases. It makes sense in some industrial sectors, but 
in most cases customers remain uncertain about their future 
needs.
    When a company's projections of future demand are too high, 
inventory grows; when too low, sales opportunities are lost, 
and may be a rare exception when used in the military, but for 
example, what Boeing is now doing with their new versions of 
the 737 could equally be applied to the Defense Department. An 
expanded spares distribution network and a reliable, critical 
parts delivery system can reduce the number of spares an 
airline has to keep on hand. Improved data analysis allows 
parts to be shipped closer to the dates when they will be 
needed for repairs.
    Boeing has successfully tested this program with one 
airline. They predict the plan could reduce an airline's 
initial spares investment by up to 60 percent. That, in fact, 
could be applied to the Department of Defense. We need to look 
at several areas.
    Lean thinking. Lean thinking means that management should 
spend its time looking at processes rather than at 
organizations and functions.
    Asset availability. All firms must maintain a minimum level 
of inventory, but even this minimum level can be more 
effectively managed. Advanced software and parts management 
systems, pioneered by the aftermarket, retail parts industry, 
can help.
    Inventory management, as we have heard today, is not an 
isolated event. It is part of the life cycle of a product, or 
in the Pentagon's case, an entire weapons system. You cannot 
suboptimize inventory management and hope to achieve an overall 
solution in the life cycle problem. The entire process has to 
be reformed.
    The right amount of inventory varies by situation. 
Customers and soldiers in the battlefield do not always know in 
advance what they want or will need. What is important is how 
you manage that inventory. Inventory management to achieve 
corporate goals has been pioneered by the private industry. The 
most important lesson that the U.S. private sector can share 
with the Defense Department is that there is no need to 
benchmark a better way of managing inventory when you simply 
can hire a quality provider to perform a service for you. In 
short, benchmark not to emulate but to outsource.
    Mr. Souder. Admiral, for time reasons, we are going to need 
you to summarize in the next minute or so.
    Admiral Schriefer. OK. I will summarize with the 
recommendations. The first one is that we have to focus on 
advances in inventory management software. Advances in 
inventory software have been revolutionary. Software is the 
tool that allows the entire supply chain to become visible and 
responsive to the inventory manager.
    No. 2: Buy off the shelf. Buying commercial makes sense 
because it reduces contract costs and overhead.
    No. 3: Plan for life cycle costs. For new systems, consider 
long-term contractor support and outsourcing maintenance as a 
first option.
    Finally, centralized inventory management: A caution here, 
however, and I emphasize that centralized management is not an 
excuse for a large management headquarters, which is one of the 
biggest problems we have today. I thank you for the opportunity 
to present this.
    [The prepared statement of Mr. McInerney follows:]
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    Mr. Souder. I want to thank you, Admiral, and you, Dr. 
Gansler. I appreciate your testimony. You all have had to wait 
a little bit longer today and be here with us longer than you, 
I think, had originally anticipated. Because of this vote and 
because we have already lost our members on the minority side 
and because I am going to have to run to make the vote myself, 
what we are going to do is conclude the hearing at this time 
without any questioning, but ask you--advise you that we will 
submit written questions which we would very much appreciate 
your answering; and, Admiral, your full statement--each of your 
full statements will be made a part of the record.
    Thank you very much, and with that, I will conclude. This 
hearing is adjourned.
    [Whereupon, at 12:15 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
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