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



 
  REFORMING INVENTORY MANAGMENT THROUGH INNOVATIVE BUSINESS PRACTICES
=======================================================================


                                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

                               __________

                             JULY 24, 1997

                               __________

                           Serial No. 105-78

                               __________

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              ELIJAH E. CUMMINGS, Maryland
JOE SCARBOROUGH, Florida             DENNIS J. KUCINICH, Ohio
JOHN B. SHADEGG, Arizona             ROD R. BLAGOJEVICH, Illinois
STEVEN C. LaTOURETTE, Ohio           DANNY K. DAVIS, Illinois
MARSHALL ``MARK'' SANFORD, South     JOHN F. TIERNEY, Massachusetts
    Carolina                         JIM TURNER, Texas
JOHN E. SUNUNU, New Hampshire        THOMAS H. ALLEN, Maine
PETE SESSIONS, Texas                 HAROLD E. FORD, Jr., Tennessee
MICHAEL PAPPAS, New Jersey                       ------
VINCE SNOWBARGER, Kansas             BERNARD SANDERS, Vermont 
BOB BARR, Georgia                        (Independent)
ROB PORTMAN, Ohio
                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
         William Moschella, Deputy Counsel and Parliamentarian
                       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
              Andrew Richardson, Professional Staff Member
                          Amy Davenport, Clerk
          Mark Stephenson, Minority Professional Staff Member














                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 24, 1997....................................     1
Statement of:
    Emahiser, James B., Assistant Deputy Under Secretary of 
      Defense for Materiel and Distribution Management; Edward D. 
      Martin, Acting Assistant Secretary of Defense for Health 
      Affairs; and Jeffrey A. Jones, Executive Director for 
      Logistics Management, Defense Logistics Agency.............    59
    Warren, David R., Director, Defense Management Issues, 
      General Accounting Office, accompanied by Kenneth R. 
      Knouse, Jr., Assistant Director; Robert L. Repasky, senior 
      evaluator; and Matthew Lea, senior evaluator...............    20
Letters, statements, etc., submitted for the record by:
    Burton, Hon. Dan, a Representative in Congress from the State 
      of Indiana, prepared statement of..........................     9
    Emahiser, James B., Assistant Deputy Under Secretary of 
      Defense for Materiel and Distribution Management, prepared 
      statement of...............................................    62
    Hastert, Hon. J. Dennis, a Representative in Congress from 
      the State of Illinois, prepared statement of...............     3
    Jones, Jeffrey A., Executive Director for Logistics 
      Management, Defense Logistics Agency, Navy Times article...    87
    Maloney, Hon. Carolyn B., a Representative in Congress from 
      the State of New York, prepared statement of...............    17
    Martin, Edward D., Acting Assistant Secretary of Defense for 
      Health Affairs, prepared statement of......................    81
    Warren, David R., Director, Defense Management Issues, 
      General Accounting Office, prepared statement of...........    23















  REFORMING INVENTORY MANAGEMENT THROUGH INNOVATIVE BUSINESS PRACTICES

                              ----------                              


                        THURSDAY, JULY 24, 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 12:10 p.m., in 
room 2154, Rayburn House Office Building, Hon. J. Dennis 
Hastert (chairman of the subcommittee) presiding.
    Present: Representatives Hastert, Souder, Mica, Barrett, 
and Maloney.
    Ex officio present: Representative Burton.
    Also present: Representative Sessions.
    Staff present: Robert Charles, staff director; Andrew 
Richardson, professional staff member; Amy Davenport, clerk; 
Mark Stephenson, minority professional staff member; and Ellen 
Rayner, minority chief clerk.
    Mr. Hastert. Good afternoon. The Subcommittee on National 
Security, International Affairs, and Criminal Justice will come 
to order.
    Today the subcommittee is holding its second hearing on 
defense inventory management. While seldom openly discussed, 
this is an issue of tremendous importance to the Nation, and 
one on which we will begin to focus more vigorously as a 
subcommittee.
    Our first hearing on defense inventory management served as 
a survey course, providing an overview of existing problems and 
options. The scope of our hearing today will be more narrow. We 
shall examine how the Department of Defense has used innovative 
best business practices, including virtual prime vendor and 
direct vendor delivery, to improve inventory management. We 
will also examine how the department can buildupon its 
successes and expand the number of items for which virtual 
prime vendor and direct vendor delivery are used.
    Joining us today are representatives from the General 
Accounting Office and the Department of Defense to discuss 
current and future reforms.
    As you know, the Defense Department has historically 
emphasized ``just in case'' practices, which necessarily 
involve the overbuying and stockpiling of excess inventory. 
This approach has offered availability for supply and repair, 
but only at the cost of efficiency and savings. Today, modern 
inventory management practices offer both availability and 
maximum efficiency. In fact, the American business community 
has pioneered in sophisticated methods of inventory management 
which allow both timely delivery and valuable cost savings.
    It is time that these methods were more widely adopted by 
the Federal Government. Methods like ``just in time'' delivery, 
supplier parts, and prime vendor contracts could easily be 
applied to the Defense Department. Obviously, where military 
readiness is at issue, we side with the need for total 
preparation, but there are countless opportunities today for 
increased cost savings.
    The department has been slow to adopt the cutting edge 
business practices, but they have achieved at least one notable 
success. This is in the area of virtual prime vendor and direct 
vendor delivery for medical and pharmaceutical supplies. Under 
steady pressure by Congress and GAO, the department has 
replaced a slow, costly system of managing medical supplies 
with one that is more like that used by private hospitals. 
Instead of numerous warehouses, the department now places 
orders electronically and receives medical supplies on an as-
needed basis from commercial vendors.
    Adopting these practices has saved the department over $700 
million since 1991. The GAO has suggested similar techniques 
for other categories of defense inventory items, including 
commercially available industrial hardware. The estimated value 
of potential savings to America's taxpayers by improved 
inventory management by the Defense Department is in the 
billions of dollars. Our message today is, let's do it.
    One last point: The embryonic program at Warner Robbins Air 
Logistics Center is a step in the right direction, but the 
department must continue to apply new practices, particularly 
to acquisition of industrial items. Remarkably, the department 
has embraced this idea for only this facility, and only since 
January. If broadly applied, Americans could save billions, and 
we, as a Nation, would have a more efficient and highly ready 
military.
    In conclusion, I want to emphasize that we all understand 
the need to reduce infrastructure so our Defense Department can 
profitably devote greater resources to modernization. We also 
want maximum readiness. The department's budget has been cut 
for 13 consecutive years. But, by contrast, the department's 
wide inventory management improvements could bring major 
rewards home to the average taxpayer. Today, we will together 
begin that effort.
    [The prepared statement of Hon. J. Dennis Hastert follows:]



    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Hastert. With that, I would like to yield to the 
chairman of the full committee, Mr. Burton.
    Mr. Burton. Thank you very much, Chairman Hastert.
    I want to thank you for holding this important hearing on 
Department of Defense inventory management. This area has been 
identified by the General Accounting Office as 1 of its 25 
high-risk areas in the Federal Government because of its 
vulnerability to waste, fraud, abuse, and mismanagement, and it 
has been on that list for several years.
    As the principal oversight committee in the House of 
Representatives, it is our responsibility to oversee the 
efficiency and effectiveness of all aspects of Federal 
Government operations, including the Department of Defense. 
Congressman Hastert's subcommittee has been vigilant and 
aggressive in pursuing Department of Defense oversight, 
especially defense inventory management.
    Unfortunately, the Department of Defense has not 
effectively and efficiently solved many of the long-term 
inventory management problems, and therefore it is necessary 
for Congress to hold stronger oversight and scrutiny of the 
department's practices in inventory management, and we intend 
to do that.
    Today, the department currently holds an estimated $69 
billion worth of inventory. Recognizing that a ``one size fits 
all'' solution will not work for inventory management and that 
the subcommittee cannot tackle the entire issue of inventory 
management in one hearing, today the subcommittee will be 
focusing solely on the consumable items within the inventory.
    These include items such as medical supplies, food, 
clothing, screws, lumber, and building supplies. This portion 
of the inventory is valued at $18.7 billion. This hearing, 
according to Representative Hastert, will focus on how the 
Department of Defense is managing the inventory of items within 
this category, with particular emphasis on the $7.2 billion 
worth of industrial hardware items, such as bolts, valves, and 
fasteners held by the department.
    Over the last several years, the department has 
successfully applied best business practices to medical, food, 
and clothing items. Today, we will be given more details about 
their latest efforts to apply these practices to hardware 
items.
    The subcommittee also wants to learn what the potential 
savings could be if the department more aggressively adopted 
modern business practices over the next few years, a goal that 
is shared by Chairman Hastert and myself. While I am encouraged 
by the reforms the department has made in this area, I am, 
frankly, concerned that the department is not moving fast 
enough, and I think the American taxpayer feels the same way.
    At a time when we are contemplating additional cuts in our 
combat forces, it is vital that the department's infrastructure 
be as lean and as mean as possible. There is the potential to 
save billions of dollars over the next few years in inventory 
management, which could be reinvested in higher priority 
programs within the Defense Department or returned to the 
taxpayer. This is an issue that the committee will be working 
on for the duration of the 105th Congress.
    Mr. Chairman, once again, I want to thank you for your 
leadership on this issue, and I look forward to working with 
you in the future.
    I yield back.
    [The prepared statement of Hon. Dan Burton follows:]




    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Hastert. Thank you, Mr. Chairman. I certainly 
appreciate your leadership in this area and many areas in the 
full committee.
    At this time, I would like to recognize the Member from New 
York, Mrs. Maloney.
    Mrs. Maloney. Thank you very much, Chairman Hastert.
    I am very pleased that you are holding this hearing today 
on reforming defense inventory management through innovative 
best business practices. I applaud your efforts to keep this 
issue in the public spotlight, because I believe that we have a 
real opportunity here to eliminate substantial waste at the 
Department of Defense and save taxpayers billions of dollars.
    Very importantly, as both sides of the aisle work very hard 
to balance the budget, and we have suffered cutbacks in all 
areas of government, it is important that the limited dollars 
that we have are spent on keeping our armed services the best 
equipped and the best prepared in the world, and certainly not 
on unneeded inventory.
    Earlier this year, the General Accounting Office responded 
to a request from Congressman DeFazio, then Congressman Durbin, 
and Senator Harkin and myself to investigate the amount of 
unneeded inventory at the Department of Defense. The GAO 
reported to us that DOD has $41 billion in unneeded inventory, 
including $14.6 billion in inventory that will never be used, 
according to the GAO, and $1 billion in inventory that will 
last 100 years or more.
    I must say that since I have been on this committee, I have 
read the GAO reports that they have been issuing on this issue, 
and every time I read about the problem, I think, well, the 
next GAO report will show that the inventory is becoming less, 
that the great military Department of Defense that we have will 
address the problem that they are pointing out to them.
    I must tell you I am astonished that every time I read a 
GAO report, the number gets bigger; it grows. The inventory 
grows, and I don't understand that, with the expertise that you 
have in the department, that a problem like this cannot be 
addressed.
    For more than a decade, GAO has documented mismanagement at 
the department, yet the Department of Defense has made little 
progress. In fact, the inventory continues to grow. The 
Department of Defense continues to use outmoded technology and 
inventory practices which waste money, and delays the timely 
repair of weapon systems and their components.
    For example, just this year, the Navy reported that it 
stopped repairing more than 12,000 broken aircraft components, 
valued at $500 million, simply because parts were not 
available. At the same time, the military services continued to 
order parts for which they already have 20 more years' worth of 
supplies on the shelf. By using best business practices, a 
modern corporation would not only make sure that it needed the 
part before ordering more, but it would also receive parts as 
soon as they needed them.
    To bring DOD into the 1990's, I have introduced 
legislation, H.R. 1850, which Mr. Barrett, the ranking member 
of this committee, has cosponsored, that would require the 
Secretary of Defense to begin testing various best business 
practices to improve defense inventory management.
    I also drafted a version of this bill as an amendment to 
H.R. 119, the House Defense Authorization bill. Unfortunately, 
the Rules Committee did not accept my amendment. At the same 
time, I sent a copy to the Senate and urged them to accept my 
legislation as part of the Senate Defense Department 
Authorization bill. I am pleased to inform the subcommittee 
that a version of my legislation passed the Senate on July 11.
    I applaud the Senate's actions and urge the House to adopt 
Senate language in conference that will implement best business 
practices at the Department of Defense. And I appeal, in a 
bipartisan way, to the chairman and other distinguished members 
of the panel to aid in keeping this language in the conference 
committee report.
    I designed my language to promote the use of best business 
practices, like cellular manufacturing techniques, which 
involve bringing all the resources needed to complete repairs 
to one location, the elimination of excess spare parts 
inventory, and the rapid initiative of repair actions, like the 
use of private entities for logistics services such as 
warehousing.
    I urge the Department of Defense to implement these 
techniques. Once implemented, I am confident that the 
department will discover that these techniques can improve the 
support to the military customer and enhance readiness, as well 
as save inventory and related management costs, and therefore 
allow us to spend more of our dollars on the defense of our 
country and on the support of our military men and women, and 
the inventory that they need, but not unneeded inventory.
    I yield back the balance of my time. Thank you.
    [The prepared statement of Hon. Carolyn B. Maloney 
follows:]



    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Mr. Hastert. The gentlewoman's time has expired.
    I would also like to note that Mr. Sessions, a member of 
the full committee, will be joining us today. Mr. Sessions is a 
member of the Results Caucus, and he will be addressing this 
issue throughout the 105th Congress.
    I yield to the gentleman from Texas for an opening 
statement.
    Mr. Sessions. Thank you, Mr. Chairman.
    I appreciate your allowing me to serve with you today. As 
chairman of the Results Caucus, I am here to not only 
participate but to gather and gain information and insight into 
the testimony that is going to take place today.
    The Results Caucus is a caucus that was appointed by 
Majority Leader Dick Armey, a gentleman who has a distinguished 
career in looking not only at our military but also the 
efficiency of government. We are concerned about any government 
agency that remains on the high-risk series, as a result of GAO 
and any audits they perform. So my function here really, as 
chairman of the Results Caucus, is to gather information into 
what is being discussed today.
    From a perspective of purely trying to look at good 
management--I have heard said many times today, and heard many 
times today--the efficiency gained from reform in this area of 
the defense inventory management, I believe, can result in more 
money for the Department of Defense to support its ultimate 
target and mission statement, and that is of not only the 
defense of our country but also combat readiness.
    I take a perspective that I believe that the best 
disinfectant is the light of day, and that oversight by this 
committee and the Results Caucus will be critical to the 
success of not only the military but any other area we get 
into. The Results Caucus and the work that we do should be 
considered positive, not only by the taxpayers of this country, 
but also those agencies. I hope that the Defense Department 
views our interaction with them as positive also.
    Mr. Chairman, thank you.
    Mr. Hastert. I welcome the gentleman from Texas' comments 
and just want to say that we look forward to working with him. 
I know that both the chairman of the full committee and myself 
think this is an important issue.
    Just let me say for the record, our goal is not necessarily 
to cut defense spending. Our goal is to make sure that the 
dollars that are spent are spent to support the men and women 
who wear the uniforms and protect this country, that they have 
the wherewithal to do their jobs, and that we are in the most 
efficient support posture possible, to make sure that the 
dollars are spent for the things that are most important.
    At this time, I would like to introduce our first panel. 
Mr. David Warren is the Director of Defense Management Issues 
at the General Accounting Office. He is joined by Mr. Kenneth 
Knouse, an Assistant Director at GAO, and Mr. Robert Repasky, a 
senior evaluator at GAO, and Mr. Matthew Lea, also a senior 
evaluator at GAO.
    I thank you, gentlemen, all for coming. In accordance with 
House rules, we will swear you in, so please stand and raise 
your right hands.
    [Witnesses sworn.]
    Mr. Hastert. Let the record show that the witnesses 
answered in the affirmative.
    Before you begin, Mr. Warren, I would like to extend my 
thanks to the GAO for your recent and good work with the 
subcommittee on this issue. I especially want to thank Mr. 
Repasky and Mr. Lea, both of whom worked out of your Dayton 
office, for the work that they have done, including travel with 
the subcommittee staff and investigative trips to military 
installations nationwide.
    Mr. Warren, please proceed.

  STATEMENT OF DAVID R. WARREN, DIRECTOR, DEFENSE MANAGEMENT 
 ISSUES, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY KENNETH R. 
  KNOUSE, JR., ASSISTANT DIRECTOR, ROBERT L. REPASKY, SENIOR 
          EVALUATOR, AND MATTHEW LEA, SENIOR EVALUATOR

    Mr. Warren. Thank you, Mr. Chairman. We appreciate that.
    I would like to just briefly summarize my remarks, if I 
could, and have my full statement entered into the record, 
please.
    Mr. Hastert. Without objection, the full statement will be 
entered into the record.
    Mr. Warren. I would also, as an opening remark, mention 
that, as a result of the last hearing, Mr. Emahiser, who will 
be on the second panel and has major responsibilities in this 
area, he and I got together and thought it would be 
constructive to talk about the areas of, in essence, mutual 
disagreement that we had on certain issues. We have agreed to 
do that.
    We have also agreed to put together a team of folks to look 
at those items, so we can constructively start working toward 
solutions. I just wanted to mention that as a positive result 
of the work that has already come out of this particular set of 
oversight hearings.
    Mr. Chairman, members of the subcommittee, Mr. Burton, we 
are pleased to be here today to discuss DOD's use of private 
sector business practices to improve inventory management 
processes. As you requested, we will look at consumable items. 
They represent about $18.7 billion.
    Our testimony addresses three points: First, DOD, in fact, 
has made some progress in reducing inventory cost and improving 
services to customers.
    Second, we still think significant opportunities exist to 
reduce those costs further, and we think they lie, as you have 
said, in the area of prime vendor and best commercial 
practices.
    Third, we do, in fact, think that legislation that has been 
introduced in this Congress represents a positive step forward 
and is consistent with many of the recommendations that GAO has 
put out over the past several years with regard to ways to 
address these problems.
    Let me give you a few more details on each of those areas. 
Regarding DOD's progress, about 2 percent of the consumable 
items that DOD manages are through the prime vendor program. 
Simply defined, a prime vendor is a commercial activity that 
buys, stores, and then provides items to a military customer 
upon request.
    To its credit, DOD has achieved significant cost and 
service improvements through the medical supplies program, as 
mentioned in the opening statements. We estimate that savings 
in those areas are on the order of magnitude of $700 million 
over a 5-year period. This program is also helping to get DOD 
out the storage, distribution, and inventory holding business, 
which we think is important, as well, and I think the 
department would agree.
    Another important item with regard to that program is that 
it puts DOD in a position of not having or minimizing the 
amount of excess inventory that they have, because they are 
making a purchasing decision much closer to the point in time 
that the inventory can be used. So things that would intervene 
where the period is longer, natural changes in requirements, 
things of that nature, the likelihood of that happening is 
reduced.
    The first figure that we have here to my left provides an 
illustration of what was mentioned in the opening remarks 
regarding the success of this program. The key point to look 
at, the bars represent the total amount of inventory that was 
held starting in 1991, about $600 million, and the amount of 
inventory that we have today in the medical area, and that's 
about $200 million. That's a significant reduction.
    Now, some of that, obviously, was occasioned by the force 
reduction. Other portions of it, clearly, we believe are 
attributable to the medical prime vendor. That program started 
in earnest in 1993. Prior to that, we had made recommendations 
to adopt the program. The department was in agreement with that 
and started some initiatives to buy down the excess inventory 
they had, in anticipation of beginning the medical prime 
vendor.
    To me, this is a true success story for the department. The 
dotted line shows that as the prime vendor program is 
implemented, you see a trend of the inventory being held moving 
down. From an overall context, this is the approach the private 
sector has been implementing, principally during the 1980's and 
very aggressively during the 1990's.
    In addition to reducing inventory costs, this purchasing 
approach also improves service to the military customer. For 
example, the use of this practice has reduced the time needed 
to supply an item from an average of 110 days to 8 days. In 
short, this means you have helped to improve readiness.
    DOD is also making similar progress in the food prime 
vendor program. They also have a program underway in the 
clothing area; however, that has not progressed far enough for 
us to make a full assessment, but the early indications are 
that the trends are similar to those that you see in the 
medical area. They moved out very aggressively in the food 
area. They have a ways to go in the clothing area.
    Let me turn to some of the things where we see there are 
opportunities for further improvement. An area where DOD has 
made little progress in adopting best practices is hardware 
supplies. This includes such things as bearing valves, bolts, 
things of that nature. The reason that we believe it is 
significant is that it represents 97 percent of the items that 
DLA manages and represents a substantial financial investment.
    For example, DLA annually purchases $2.6 billion of these 
types of items and holds these items valued at about $7 
billion. However, our work has shown, in many cases, customer 
needs can still not be met. For example, at one repair depot 
where we did some extensive work on the repair process, we 
found that mechanics ordering parts received the full order 
only 25 percent of the time. Obviously, that's not the type of 
supply responsiveness that we are hoping to see.
    To improve hardware inventory management, DLA has 
implemented a commercial direct vendor delivery program in 
about 17 percent of the sales in the hardware items. Also, it 
has started a limited program in the prime vendor area, and 
that represents about 2 percent of those sales.
    Our second illustration, to your far right, the comparison 
I wanted to make here, you have a very much less aggressive 
program in the prime vendor going on in the hardware area. You 
note there, for the amount of inventory being held, that there 
has been very little change since 1992.
    What we would hope and will talk a little bit about here as 
we go on, and I am sure we will discuss, is that we believe 
that there is an opportunity to get a similar trend in the 
hardware area. In other words, as prime vendor use goes up, we 
hope to see inventory cost go down and supply responsiveness 
improve.
    Last, I would like to make a few comments about the 
legislation. We think it is important to note that these 
represent, we think, important opportunities to improve not 
only inventory management but the use of best commercial 
practices in that process. As I said, they are consistent with 
many of the recommendations that we have made over the last 
several years.
    For example, the House Defense Authorization Act of 1989 
calls for reductions in the overhead of inventory control 
points. We believe such reductions are certainly needed. A 
recent study that was done by LMI and that we evaluated showed 
that savings could be on the order of magnitude of $3 billion 
over, I believe, a 5-year period, if consolidation could be 
achieved.
    Also, we support several requirements in the Senate version 
of the 1998 Authorization Act. Particularly, we are encouraged 
by those provisions that relate to the application of best 
practices at depot-level repair activities and the expansion of 
the use of concepts such as prime vendor within the Defense 
Logistics Agency.
    We think, by doing these things, particularly in the 
hardware items, that you have high potential for improving DOD 
inventory management and, obviously, reducing costs without 
impacting on the war fighting, and we would hope perhaps 
improve that service and level of capability.
    Mr. Chairman, that concludes my summary. We would be happy 
to respond to questions.
    [The prepared statement of Mr. Warren follows:]




    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Hastert. I thank the gentleman.
    Let me ask you a question. You talk about the great 
advances in health care inventory. One of the things that I've 
been doing around this Congress for the last couple years is 
health care. We've found that the increasing cost in health 
care, that was basically 15 percent a year, both on the private 
side and the public side, has been reduced down to almost 2 or 
3 percent, in some cases, in the private sector, and down 
around 5 to 10 percent even in the public sector, except in the 
cases of some issues in Medicare, where it was almost still at 
12 percent.
    One of the ways that you squeeze down the price, of course, 
is to put caps on costs for procedures, but also in the 
inventory. Most hospitals that you walk in today, when a 
patient checks in, there is a computerized situation where the 
substance that goes at bedside is punched in. So the health 
care industry, because of managed care and other things, has 
been revolutionary in their management of hospital equipment 
and supplies.
    So let me ask you a question. In your opinion, is the 
military's ability to control this a result of the trend in the 
industry, or is it real innovation inside DOD?
    Mr. Warren. Specifically as it relates to?
    Mr. Hastert. Health care.
    Mr. Warren. Inventory management?
    Mr. Hastert. Yes.
    Mr. Warren. I guess, if I'm understanding correctly, I 
would have to say it's a combination. In other words, the 
actions that the department has taken are very consistent with 
the innovative practices that were being implemented in the 
private sector.
    What they did was to take a look at what was happening 
there. They instituted pilot programs. They have a rather long 
schedule, or a longer schedule, for the implementation. They 
saw early on that that was working very well, and they said, 
``Hey, this is going to work for us. Let's expand that out and 
get the full benefit.'' I believe they are up to 200 hospitals 
now.
    So I think it would be a combination. In other words, the 
innovation--I think the practice came from the private sector, 
but the department was willing to accept that practice, embrace 
it, move out, and get the savings that were available, and 
improve services.
    Mr. Hastert. So the technology was basically there in the 
private sector, and it was the willingness of DOD to accept it 
and go forward with that.
    Mr. Warren. Yes, sir. What we've seen in this area, the 
logistics inventory area, improvement is heavily dependent on 
information technology advances that, again, principally have 
been made during the 1980's and now are going even further 
during the 1990's. That's what they were able to latch on, 
along with business concepts and philosophies.
    Mr. Hastert. Well, also in the private sector, when you say 
that this hasn't been followed or hasn't been the savings in 
the hardware and inventory levels, in that area, those types of 
things, valves and fasteners and all that stuff.
    Mr. Warren. Yes, sir.
    Mr. Hastert. Our private sector has gone to just-in-time 
philosophy or just-in-time procedures that were adapted from 
the Japanese, who adapted from American know-how philosophy. 
But, anyway, it's come full circle.
    Is that tougher because the private sector is not willing 
to forward that? Is it because of the unique properties of 
those things that we have to have; it's one of a kind? What's 
the nature?
    Mr. Warren. Our general assessment is that we do not think 
it would be tougher. In other words, we think it is feasible. 
However, as in the past, our recommendation has been to let's 
pilot this to make sure, and just as you mentioned, that we're 
not going to do anything here that's going to harm readiness.
    One of the things in our studies, we can only do a 
hypothetical, in essence, assessment of feasibility, so we 
think we need those pilots to make sure they are directly 
transferable. The pilots have been the key to assure that that 
transfer feasibility is there and that readiness is not harmed. 
That's been the vehicle.
    What we have encouraged the department--and, again, as they 
did in the medical area--is to establish a pilot schedule that 
you feel is reasonable, but that if you see the results are 
working very well, move forward as quickly as possible to 
expand that.
    Mr. Hastert. Let me ask you a question: How long should it 
take the DOD to expand the practices highlighted in your 
testimony, especially to cover the majority of the consumable 
inventory items?
    Mr. Warren. I cannot give a precise answer, but I can give 
some information around that.
    Mr. Hastert. General.
    Mr. Warren. It took 20 to 40 months, in the pharmaceutical 
and medical area, to accomplish this. So you're talking 2 to 3 
years plus. We have had information from private sector 
companies that they are able to do this in 1 year; however, I 
think it's important to point out that many of those companies 
are not as large as the Department of Defense. There may be 
special problems.
    Also, the Senate bill recommends that this be done in about 
a 3-year timeframe. So based on that information, I would say 
it's not unreasonable to look at a 3-year pilot program. All we 
would ask is that there be a process where you can check as the 
program goes along.
    If it looks like you've got all the information to expand 
in an aggressive manner, go ahead and do that. If you feel you 
need the entire cycle to assure yourself that you're going to 
be able, in fact, to meet all your requirements, and again, 
particularly toward readiness, then that would seem reasonable 
to me.
    Mr. Hastert. Mr. Warren, to be clear on the numbers, the 
GAO asserts that there's $7.2 billion worth of hardware items 
in DLA's distribution depots and warehouses. Is it feasible for 
the department to try to employ virtual prime vendor and direct 
vendor delivery for all these items?
    Mr. Warren. Yes, I certainly think it's feasible to test. I 
think our indications are that there ought to be opportunities 
to go across the entire spectrum. Yes.
    Mr. Hastert. Your statement discusses DOD's progress in 
adopting best practices. What have been the keys to DOD's 
successes, and in what areas does DOD need to make more 
progress?
    Mr. Warren. Clearly--and it's similar to what happens in 
the private sector--you need top-level management commitment. 
In other words, the senior leadership, for any major change in 
an organization, whether it's Department of Defense or the 
private sector, the senior leaders have to be committed and 
say, ``We're going to stick with this and do it.''
    Then another key to success is that you need to have 
success stories that you can relate to your middle manager, 
your rank-and-file people, who are ultimately going to have to 
embrace this, to convince them that, in fact, these things will 
work. I mean, those two are critical to making that happen.
    Mr. Hastert. Well, one of the things this subcommittee is 
intending to do is to get in the field and actually take its 
members to walk through the warehouses and the bone yards and 
places that we want to look and see actually what's happening, 
and look at the successes, as well.
    What actions, other than that, either legislatively or 
regulatory, can this subcommittee take to encourage DOD, in 
your opinion, to become more aggressive in the adoption and 
implementation of the best practices you point out in your 
testimony?
    Mr. Warren. I think, No. 1, holding oversight hearings of 
this nature is critical, not only to hear, obviously, the 
testimony of the General Accounting Office, but also to talk 
through with the department what they see as the true 
impediments or obstacles, or things that are going to take them 
a little bit longer. Then that would help to provide an agenda 
of things that perhaps can be taken care of to help facilitate.
    Second, I do believe the legislation that has been proposed 
on the Senate side is important, in terms of providing the 
department the authority, in the depot area, for example, to go 
in and do pilot programs to look at innovative ways in which to 
improve the economy and efficiency of their operations.
    I think it's those types of things and, as well, setting 
milestones for DLA to lay out a plan to fully implement these 
programs. I think those types of things are critical. The 
department needs to be given the legislative authority and 
sometimes direction to get them going toward the full 
implementation.
    And again, I would say testing of these, and I can't 
emphasize that enough. There may be some spots, because of the 
nature of the Department of Defense, the unique nature of the 
Department of Defense, contingency requirements and rapid 
response requirements, where some of this may not just fit, and 
we ought to know what that set of things is before we say ``one 
size fits all.''
    Mr. Hastert. I appreciate that, because that's something, 
as you go through this, I'm thinking to myself. You know, 
there's a lot of things that come off the shelf of a hardware 
store or other places, there are other things that are 
certainly unique needs. So what we're talking about here is not 
the special equipment that can only fit in a military widget of 
some type.
    Mr. Warren. I think, clearly, those items are the ones that 
best lend themselves to this practice, and particularly 
because, with the prime vendor, where you have a very hot bed 
of competition, they can work to drive down the cost, which 
then is passed on to the military.
    In the military-unique items, you have, typically, a less 
competitive situation. So my thought would be that you would 
likely not get significant reductions in cost. You still may 
have some opportunity to reduce warehouse space, things of that 
nature. But, again, those are the things that should be looked 
at in a pretty rigorous way as they go through the testing of 
this.
    Mr. Hastert. There's a lot of, quote, unquote, things, we 
can just say, without being descriptive, that some of them are 
outmoded, some of them are parts that the equipment they were 
intended for isn't necessarily in prime use today, or it's 
somewhat discarded or less used, some parts that people say we 
have a 100-year inventory.
    How, in your opinion, is the best way to start to work that 
inventory down or dispose of it, or is there a way to do that?
    Mr. Warren. Yes, I think there is.
    It would be a pretty straightforward management analysis of 
taking a look at those items; in other words, understanding 
what they are, understanding what requirements they are 
associated with, from a weapon system standpoint, and 
determining, first, the likelihood that those items might be 
needed at some point in time, then doing an analysis of what 
it's costing you to hold those pieces of equipment, and move 
from there to, I think, a prudent decision about whether we 
should keep these items, in view of the fact that we may need 
them and we don't want to run out and purchase them again, or 
sit down with a good management judgment and say, it really 
does look like the right thing for us to do is to dispose of 
those items.
    Mr. Hastert. Is this activity in progress now or beginning?
    Mr. Warren. The department has entered into a process 
similar, I believe, to what I've described, and that's part of 
the reason the overall inventory, in fact, has come down, say 
over the last 5 years. And that's part of the inventory 
reduction effort.
    I think it would be inappropriate to say the department has 
not been mindful of this. They have been working toward that 
issue. Could we go a little bit faster? I would say, maybe; 
perhaps we can.
    Mr. Hastert. One of the bright spots that you and your 
staff have seen firsthand is the implementation of the 
practices at Warner Robbins Air Logistics Center. Can you 
describe both the positive and the negative aspects of the 
program as it's currently being implemented? And what 
additional changes, from your perspective, are needed to 
improve the system further, or is it too early to make any 
recommendations at all?
    Mr. Warren. I think it's a little bit early for us to make 
recommendations, but I think we can make some general 
observations about what we've seen. No. 1, I would clearly say 
it's very important that that program, in and of itself, that 
it's underway, because that's the type of thing that's needed.
    I'd like to ask Mr. Repasky to expand a little bit on that, 
because he was actually down there recently and visited, and 
has some firsthand knowledge on discussions with the people 
working the program.
    Mr. Repasky. First of all, the overall observations of the 
pilot program at the Waner-Robbins Air Logistics Center are, 
No. 1, the depot commander is very aggressive and very much a 
supporter of best practices and using best practices to improve 
logistics operations.
    In fact, he made some statements basically along the lines 
that he wanted to lead the Air Force in adopting these best 
practices for that organization. So, in that sense, it's very 
similar to the top-level support we've seen in the private 
sector.
    Overall, the initiatives that he has underway there are 
limited, and they are limited in the sense that it represents 
only a small portion of the hardware sales to that 
organization. Mr. Warren mentioned earlier that it represents 
about 2 percent of DLA sales of hardware items.
    In addition, the initiatives that they have underway do not 
really address the entire logistics supply chain for those 
items. In particular, they don't look to reduce the retail 
supply system as much as it does the wholesale supply system, 
or the need to store hardware inventory at the wholesale level.
    The depot commander also mentioned that he would like to 
take that prime vendor program further down into the 
organization and expand it. He highlighted during our visit 
that there were some requirements or potential requirements 
under OMB Circular A-76 that would require cost comparison 
analysis of that operation.
    His main concern there was that it would take approximately 
2 years to complete that analysis. He would prefer to have the 
initiatives or the improvements under way before then. He was a 
little bit frustrated in that sense.
    I think, as far as additional changes, as Mr. Warren 
mentioned, it's too early to really give a complete assessment 
of that program, but we did talk, I think, extensively with the 
depot commander about the need to expand the prime vendor 
services to their fullest extent, to maximize the savings that 
could be accomplished by having an integrated supplier concept 
in place there. I think, in general, he agreed with us on that 
point, but again recognized that there would be some time 
involved in the cost comparison, if that issue came up.
    Second, I think that it's also important that Warner 
Robbins be held as an example to the Department of Defense, or 
for the Department of Defense, as a success story, if these 
initiatives prove to pan out the way we think they would. Along 
those lines, we suggested to the commander that a track of the 
cost savings be prepared, basically to baseline the system as 
it today and compare it to the cost savings or the more 
efficient process under a prime vendor or an integrated 
supplier program.
    So those were two areas that we discussed with the depot 
commander related to ways that the initiative could be 
expanded.
    Mr. Hastert. Thank you.
    I would now like to turn, for questioning, to the chairman 
of the full committee, Mr. Burton.
    Mr. Burton. Thank you, Mr. Chairman. I'll just ask a couple 
of questions.
    Chairman Hastert and I have both been very interested in 
the war against drugs in Colombia and the support for the 
people in the police force down there who are fighting so 
diligently. With regard to our support efforts, I wonder about 
one of the problems that has occurred, that appears to be a 
procurement problem and a management problem.
    We requested that mini guns be sent down to the Colombian 
police so they could put them on the helicopters that we 
supplied. When the guns were delivered, they delivered the 
barrels, but they didn't deliver the mechanism that makes the 
gun fire.
    You said earlier in your testimony, as I recall, that about 
25 percent of the deliveries, there is a shipment malfunction 
of some kind. What I wanted to know is, in the case I just 
alluded to, was that caused by the mismanagement of the 
supplies that the military has? If so, how do we correct that? 
Because in a time where we might be in a conflict, this is 
something that would be intolerable.
    Mr. Warren. The answer is that I think I would actually 
have to look at that individual situation in the same way that 
we looked at the activities of the repair depot, and I do not 
have any direct knowledge on that. It's possible, but I would 
have to go in and see the circumstances.
    There are a variety of things that could have happened. In 
other words, the item could have very well been, in fact, in 
the inventory system. There could have been just simply a 
paperwork foul-up and a misunderstanding about what was 
actually to be shipped. It could have been, in fact, the item 
had not been purchased. There would be a myriad of things, and 
I would have to look at that one to give you a good answer.
    Mr. Burton. Well, is the problem that you alluded to 
earlier endemic to the entire system?
    Mr. Warren. Yes, I would say that is a systemic problem as 
it relates to the repair depots. In other words, many of the 
items that are needed to fully perform the repair function at 
the major depots in the department, our work is finding that 
oftentimes that full complement of items is not there when 
requested to accomplish the repair.
    Mr. Burton. OK. One other question, Mr. Chairman. One of 
the problems that we've talked about for years in the Congress 
is the procurement process. We have the different branches of 
the service ordering supplies independent of one another that 
could have been ordered collectively and maybe saved the 
taxpayer a lot of money.
    Does that leach over into the management problem at depots 
you're talking about?
    Mr. Warren. Not so much, because these items that we're 
talking about today, the consumable items, actually, in fact, 
are centrally procured through DLA, what they call inventory 
control points. So that is actually the system that's occurring 
today for these consumable items.
    Mr. Burton. OK. Thank you very much, Mr. Chairman.
    Mr. Hastert. Thank you, Mr. Chairman.
    The gentleman from Florida, Mr. Mica.
    Mr. Mica. Thank you, Mr. Chairman. I've got a couple 
questions for, I believe, Mr. Warren.
    Is there any portion of the $7.2 billion worth of hardware 
that is excess to the current and future requirements, and how 
soon will that be disposed of?
    Mr. Warren. My understanding is about $1.5 billion of that 
amount is currently excess, or is excess to needs, and the 
department is in the process of moving that through the 
disposal process.
    That process is defined through law, through the Property 
Act. Those items have to be made available first to the 
military services that might be able to use them, then to other 
users in the Federal Government, then to State and local 
communities, and finally, if there is not a need there, then 
they would go into the sales program and either be sold, 
depending on whether or not there are military technology 
implications, as is, or if, in fact, that's the case, then they 
would be destroyed in certain ways and sold as scrap.
    Mr. Mica. Can you please discuss the impact that successful 
implementation of prime vendor for hardware items may have on 
repair times in our maintenance depots?
    Mr. Warren. In general, the answer is that we think what 
this is going to result in is much quicker repair times. The 
availability of items is going to be more prevalent. And the 
overall result or the biggest effect is, obviously, improved 
readiness. In other words, equipment that's needed for the 
troops is going to be available on a much quicker cycle than we 
experience now.
    Mr. Mica. Let me ask you about the application of the best 
practices approach that you advocate. How will it help DOD 
sustain its operations in peacetime and meet its readiness 
requirements in the event of a contingency?
    Mr. Warren. Well, consistent with what we've seen in the 
medical area, and again, assuming that the pilots would be 
successful, we think this is going to be a win-win situation. 
In other words, the department will ultimately spend less 
dollars for the inventory that they need to do their job. It 
will be available in a more timely manner than it is today. 
Again, when you put those factors together, that should equal 
better readiness.
    Mr. Mica. Well, I was just going to ask you about 
readiness. How do you think this will impact readiness because 
of, again, a different approach here?
    Mr. Warren. Our indications are that, again, if it works 
properly, it probably should be a readiness enhancer. But as I 
mentioned earlier, I think that's why the pilots are important. 
There very well could be some set of items where this concept, 
for whatever reason, could be detrimental to readiness; in 
other words, it would be less effective. Again, that's why we 
support taking a look at that.
    But, in general, we believe that that will be the case. I 
do not believe, and the next panel can speak better to this 
than I can, that in the medical area, for example, that has 
been an issue of concern. It seems to me everybody is pretty 
satisfied that the readiness needs are being met.
    Mr. Mica. From what I've been able to gather, your 
testimony and comments seem to indicate that the current model 
DOD uses to manage hardware items, compared to the private 
sector, is based on logistics systems, processes, and 
capabilities that really date back some years to the 1950's.
    Given the amount of work GAO has done in this area, what 
should the so-called ``new'' model look like, in your opinion?
    Mr. Warren. OK. If we could put up one more chart here that 
helps to describe that. In general, it would look like a system 
that relies much more heavily, obviously, on the private sector 
and reduces significantly existing components of the logistics 
supply system that exists today, from the standpoint of 
warehousing.
    Yes, the chart would indicate, basically, you would be able 
to make reductions in wholesale depots, military warehouses, 
and in storage location at bases or other facilities. In 
essence, the prime vendor would become the holder of your 
inventory.
    As I understand from dealing and talking with private 
sector and the Council on Logistics Management, that is the 
approach that many companies are going to. They refer to this 
as third-party logistics or outsourcing logistics functions. 
So, kind of a familiar phrase today, what you would have is a 
streamlined system that would depend heavily on technology, 
information data exchange between the end user and the prime 
vendor to accomplish the inventory function in a timely manner.
    Mr. Mica. Let me ask you another question on a more 
sensitive issue, and that's relating to defense jobs, 
employment. At Walter Reed, you noted that 50 percent of the 
positions in materiel management were eliminated. Such 
reductions, applied department-wide, would result in the 
elimination of thousands of jobs.
    Do you have an estimate as to how many jobs would be at 
stake, and can you discuss the challenge of getting workers to 
implement changes that could also lead to elimination of their 
jobs?
    Mr. Warren. We do not have a precise estimate on the number 
of jobs that would be affected, but I think it is fair to say 
that they could be substantial. There are about 30,000 
personnel working in this area, just in the Defense Logistics 
Agency. What portion of that might ultimately be affected, 
again, I can't give you a good estimate, but it could be tens 
of thousands or more, if you go to a totally streamlined 
fashion.
    Typically, again, what private industry has done is to 
substitute technology for manpower. As a result, many of the 
streamlining savings that have occurred during the 1980's and 
again during the 1990's have been a result of using that 
technology to replace personnel that were formerly performing 
some of these functions.
    So, clearly, there is the potential for a personnel impact, 
and I think it's fair to say that it could be high. The 
department may have a better estimate on that, or perhaps even 
a different view.
    Mr. Mica. Do you expect some of these positions to be 
absorbed by private sector activity, or are they going to be 
permanently eliminated positions?
    Mr. Warren. The work I'm most familiar with in that regard 
is in the depots, where some of the depot work has been 
privatized in place, a commercial contractor has taken over the 
work. Typically, what we've seen is, a portion of the work 
force is, in fact, retained. However, typically, along with 
that is some reduction.
    So while there would be an opportunity for some transfer, I 
don't think it would be appropriate to assume that you're going 
to have a one-for-one transfer. Again, the reason for that is 
the enabler for achieving these logistics reduction costs is 
the substitution of technology for manpower in performing these 
logistics functions.
    Mr. Mica. Now, in closing, I wanted to ask you: DLA, as 
primary manager of DOD's consumable items, acts as custodian of 
all these military ship and vehicle parts. What is the total 
value of the inventory that they purchase and control?
    Mr. Warren. The total value of inventory that they control 
is $11.1 billion.
    Mr. Mica. You have 30,000 people in materiel management 
operations in 1996.
    Mr. Warren. Yes, sir.
    Mr. Mica. And then this report says the materiel management 
costs, excluding the management of fuels, was reported at $8.3 
billion. Of that amount, $5.5 billion was spent to purchase 
con-sumable items, and $2.8 billion was spent to manage and 
distribute inventory.
    Is that almost--I mean, it's not a one-to-one; it's a 0.8 
to 1 ratio. Is that what we're looking at?
    Mr. Warren. In terms of personnel to purchases?
    Mr. Mica. It costs us $8.3 billion for materiel management 
costs, to purchase and to oversee an inventory of $11.1 
billion, or is there more?
    Mr. Repasky. Let me just clarify that a little bit. The 
$8.3 billion, as you mentioned earlier, is comprised--$5.5 
billion of that were obligations to buy new materiel. The 
supply management costs and depot operations costs amounted to 
the $2.8 billion. And that's to manage consumable items.
    Mr. Mica [presiding]. What's the total figure of the 
consumable items?
    Mr. Repasky. The total figure for consumable items, DOD-
wide, is $18.6 billion.
    Mr. Mica. What I'm trying to get just a handle on is how 
much it's costing us to manage acquisition and this whole 
activity, compared to, you know, the management cost.
    Mr. Repasky. I understand. The details that I can provide 
today relate primarily to DLA's costs. And that, again, is the 
$8.3 billion, including the $5.5 billion to buy new materiel. 
Again, DLA stores and distributes all of DOD's inventory, 
including the reparable parts.
    Mr. Mica. That's part of the cost in here?
    Mr. Repasky. And that total inventory is the $68.4 billion.
    Mr. Mica. It still seems awfully high overhead cost. If you 
were in the private sector, you would be out of business.
    Mr. Warren. If I could mention, as I mentioned earlier in 
the statement, part of that is high overhead cost at the 
inventory control points where the purchasing function actually 
occurs. Again, in an LMI study, and we went in and took a look 
at that, and we think it's a pretty solid number, talked about 
the opportunity for $3 billion in savings through consolidation 
of that.
    So I think that's very consistent with your point, Mr. 
Mica.
    Mr. Mica. The other thing, in closing, I chair Civil 
Service and have dealt with downsizing. I must say that DOD has 
taken its licks and picked itself up and moved forward without 
a lot of whining and coming to Congress, like some of these 
agencies. Also, you have had to bear the brunt of downsizing. 
About 80 percent of any downsizing in government is actually in 
DOD, in the last 4 years.
    If we're going to eliminate these positions, the other 
thing I am asked is, do we have in place adequate protections, 
soft landing transition? DOD has been pretty good at this, but 
this is something that we are preparing for or anticipating and 
can handle?
    Mr. Warren. Again, I'm most familiar with the depot 
situation where, as you say, there have been a number of 
reductions. From the work that we did, we believe that the 
department does, in fact, have one of the best programs to try 
to address what is a very difficult problem, in terms of 
people's separation.
    They have a priority placement program. They have an 
excellent program for assisting personnel that want to move 
from one location to another when an activity is closing, and 
have done several other things to avoid the number of persons 
that they have to RIF. So from where I sit and the work that 
I've seen, I would give the department high marks on that. But 
I would also share your concern that it's still not easy.
    Mr. Mica. I thank you.
    I will yield to the gentleman from Texas.
    Mr. Sessions, you are recognized.
    Mr. Sessions. Thank you, Mr. Chairman.
    Mr. Warren, if I could, I'd like to take just a few 
minutes. You and I have met before, and I have somewhat of an 
idea of what we're talking about. We have always dealt with and 
all the reports deal with numbers and the things that are out 
there.
    Can you take just a minute with me, knowing, as you know 
about me, I'm process oriented, and I'm not asking for you to 
do a flow chart or a food chain type of a flow chart, but I'm 
interested in knowing how decisions are made. From the world 
that I came from, we had decisionmakers, we had logistics, we 
have the customer. We have all these people that are involved 
in this, kind of like this schematic you've got.
    What I'm interested in knowing is, how is the decision 
made, for instance--and you can pick any item that you choose, 
whether it's raincoats, whether it's jet fuel, whatever it is, 
whether logistics is the person that does the ordering, or is 
it the person who's responsible for inventory, where they all 
of a sudden look, and they have a little marker there that 
says, when we get to here, we order Z number more.
    Kind of go through it with me, if you can, in several 
different areas, that let me understand who is the responsible 
party for ordering these items that we're talking about, and 
how that process works.
    Mr. Warren. In a general sense, the process works the same 
for all the items. The department sets up acquisition 
objectives. Those objectives, in general, are based on demands 
and requirements that they have for inventory. An item manager 
is the responsible person for making the buy decision, but that 
demand information is coming in to him or her from the user. So 
it is, in fact, an integrated--it's kind of a partnership.
    Mr. Sessions. Probably, what I call for my business, a 
forecaster, inventory forecaster?
    Mr. Warren. Yes, they are forecasting what the demands are. 
Their job is to make sure that, when the phone rings, they can 
provide that item, in a very simplistic way.
    They built into that process--and Mr. Emahiser can give you 
more detail on this--but there are safety levels. There's an 
economic order quantity quotient. Necessary war reserves are in 
there. I think, typically, a 30-day supply of war reserves. If 
a surge has to occur, we've got those in. You have lead times 
built into the computation.
    So there's a whole series of factors that are built in, 
that reflect all of those things that need to go into 
consideration about how far in advance of the need for an item 
do I actually, as an item manager or a forecaster, go out and 
purchase that.
    Mr. Sessions. Now, what you have described would seem and 
appear to be normal and regular, to me. Is it that these 
inventories that we have may never be used, as we've heard from 
testimony that has been given here today, is that because there 
was a change in equipment, because of update in technology, or 
what would precipitate us having, not only buying, but keeping 
around these types of items? So that's a two-part question.
    Mr. Warren. OK. Let me go to the second part of the 
logistics process. We just talked about how items are bought. 
Part of what we've been discussing and in our reports is that 
the logistics system, once you've purchased an item, looks a 
lot different in the military system than it does in the 
private sector system.
    The military system--and, again, it was built largely in 
the 1950's and 1960's--was built on a multilayered system, to 
avoid shortages of items, very well intended, and had multiple 
layers of warehousing, prime warehouses, main warehouses at 
bases, then shop stocks, and then some level of items at the 
user. And that was the way a lot of companies operated during 
the 1960's, during the 1970's, and into the 1980's.
    The change that has occurred, and it's principally on this 
chart to your far right, is that, in the private sector, many 
of those types of things have gone away because technology now 
allows the inventory manager to have total visibility over the 
items and be more responsive to buys. So the concept of having 
to layer items in order to assure that they are available--
again, it was a good concept, and that was what was needed--is 
the piece of the process that's becoming outdated through 
technology.
    But you also raised, are some of these items a result of 
the downsizing of the force? Clearly, that is the case. We've 
had a substantial reduction in military force, from about 2.1 
million military members, in around 1991, down to 1.4 million, 
I think, will be by the year 2000. And then there have been 
corresponding force reductions with that. The inventory 
managers were buying in good faith up until the point that 
decision was made, so some of that, obviously, is a result of 
those circumstances.
    What we're advocating and would like to see tested is, 
let's try to get that buy decision closer to the point in time 
we're really going to use the item, so that some of these 
unforeseen things that are going to happen--I can't tell you 
what the next one will be, but they are going to happen--will 
have less impact on the amount of inventory that we actually 
end up holding after that event.
    Mr. Sessions. I do understand that difference, and thank 
you. In other words, we've got to make sure the system works. 
I'm just trying to make sure, also, that the decisionmaker in 
this process is aware of, has information at his fingertips, 
his or her fingertips, that tells them, before they think they 
are going to order something, the reason why they are ordering 
it, what's available, and then what those timeframes would be.
    Mr. Warren. Yes, clearly, that system is in place. We do 
have some questions about how well it operates. We think it 
could be tweaked and run a little better. There's no question 
about that. But, clearly, there's a very elaborate system for 
doing that.
    One area where we think there would be--and, again, I think 
the department would agree with this--is a concept called 
``total asset visibility.'' The department has been working on 
that very diligently here over the last several years.
    Those item managers or forecasters are in a case of 
sometimes not being able to have total visibility of all the 
items that, in essence, DOD owns, that they are responsible 
for. Our work has shown, from time to time, that then that 
causes unnecessary buys. But, again, the department is working 
toward getting a total asset visibility system in that fully 
meets their needs.
    Mr. Sessions. Last, let me say this, Mr. Warren. It's 
probably really to anybody that's from DOD that's in the room. 
You've expressed to me, not only confidence but appreciation, 
at least what you've said to me in my office, privately to me, 
that you feel like the Department of Defense is very 
professional and that they deal with you on an up-front basis, 
not only sharing of information, but availability of the things 
that they have.
    So I would like to publicly thank you and the Department of 
Defense, because I feel like what you're doing is an attempt to 
get closer to making sure the readiness of our men and women is 
there. And I want to pat you on the back and congratulate you 
also, because you're part of that participatory team, and the 
other men and women who work with you.
    Mr. Chairman, thank you.
    Mr. Mica. Thank you.
    I thank the gentleman from Texas, who indeed has been a 
leader on bird-dogging some of these issues and making certain 
that the interests of the taxpayer and also the best interests 
of the Congress are served in overseeing, again, this area for 
some of the leadership. I thank the gentleman from Texas again 
in his pursuit.
    We all get off on different activities, but your role is 
very important, Mr. Sessions. We thank you.
    I have just a couple of final questions, either for Mr. 
Warren or anyone else. Do you see any problems with inner 
service or interagency conflicts within DOD that could be 
obstacles to reforming defense inventory management?
    Mr. Warren.
    Mr. Warren. The general answer is yes, and hopefully they 
can be solved.
    Mr. Mica. Can you tell me, just real briefly, what they 
are?
    Mr. Warren. Well, it's just by the nature of the 
organization of the department. Army, Navy, Air Force, each of 
them own certain processes in the logistics system. They manage 
some of their own inventory. DLA manages a portion of that 
inventory.
    Mr. Mica. Jurisdictional disputes?
    Mr. Warren. Absolutely. If you think about it in terms of 
the way the private sector talks about it, they talk about 
supply chain management, and they talk about managing an item 
from the time that it comes into the door till the time it goes 
out the door. And they are trying to think of that as an 
integrated, seamless process.
    The department is attempting to move in that direction.
    Mr. Mica. So the nature of the beast, the disjointed 
structure, et cetera, is a problem.
    Mr. Warren. It requires a high premium on cooperation.
    Mr. Mica. Any other interagency conflicts or problems? The 
other question that I would ask, are there any legislative 
impediments, anything that we need to do legislatively to move 
this process forward? Or do you have the tools and authority 
and legislative flexibility to move?
    Mr. Warren. Again, I think, particularly in the Senate 
bill--the department--and they would be better positioned than 
me--they need the opportunity where they have an innovative 
practice that they want to attempt to do, they need to be given 
the authority to do that in such a way that they can make a 
good faith analysis of that.
    Mr. Mica. And they don't have that?
    Mr. Warren. In some cases, that's not there. Partnering 
comes to mind, and that's included in the Senate bill. I think 
part of the discussion will have to be, well, what do we mean 
by ``partnerships'' between public sector depots and private 
sector entities? What does that mean, and how do we, in fact, 
operationalize that?
    That would be the only area I'm aware of.
    Mr. Mica. OK. Did anyone else want to comment?
    Mr. Knouse. Mr. Mica, as the department goes through 
implementing some of these legislative proposals, in terms of 
accountability and oversight, there may be a need, if the 
committee so deems it appropriate, for our organization to act 
in maybe an evaluative mode to see just exactly how well those 
proposals are being achieved and whether there are any 
additional impediments that we're not aware of that are 
surfacing as they try to implement these best business 
practices.
    Mr. Mica. This question may have been touched on before 
about excess inventory being purchased. It's about $1.3 
billion, according to this report; is that correct?
    Mr. Warren. $1.6 billion was the estimate that we provided 
to the committee at the end of the last hearing.
    Mr. Mica. $1.6 billion?
    Mr. Warren. Yes, sir.
    Mr. Mica. Do we have sufficient actions being taken to 
reduce the amount of excess inventory, in your opinion?
    Mr. Warren. We provided that information to the department. 
The answer to that, I firmly believe, is really in what we've 
been talking about this morning. The true key to reducing 
excess inventory to kind of its most reasonable level is to 
implement best practices that allow people to succeed in what 
they are doing. That's the key.
    Mr. Mica. The other question was disposing, and that's $1.1 
billion of excess consumable materiel, in 1996. And you feel we 
have adequate plans and there will be an attempt to bring that 
figure down, too, Mr. Warren?
    Mr. Warren. Yes, I believe those plans are there. Over 
time, there have always been, because of the volume of materiel 
that's moving through the disposal process, there have been 
concerns here and there. But the department has put in a fairly 
aggressive program to move the disposal process along.
    Their concern, and it's very legitimate, is that they do 
not want to be sending things out the door that, 2 weeks later, 
all of a sudden, they have to buy. Obviously, that's not a good 
situation for the taxpayer; it's not a good situation for the 
department.
    Mr. Mica. It says $1.1 billion in consumable materiel. Is 
that based on the cost of purchase or depreciated?
    Mr. Warren. $1.1 billion is in the acquisition cost.
    Mr. Mica. Acquisition cost?
    Mr. Warren. That's what it cost to buy those items.
    Mr. Mica. It's not coming in at $2.2 billion, then, and 
going out at $1.1 billion. Right.
    Finally, many of the defense inventory problems that have 
been discussed here today have been with us for at least three 
decades. Why has change been so difficult, Mr. Warren?
    Mr. Warren. I guess, first of all, change is difficult for 
any institution. I think, first of all, the department had in 
place, during the 1960's and 1970's, a system that worked 
pretty well for them. They felt it was responsive; they felt it 
looked pretty close to what was being done in other places.
    As time moved on, I really believe that cultural resistance 
to change--in other words, the system was working OK, we were 
being funded sufficiently to operate it, and it's kind of--you 
ask the question: Why change?
    You could take it back, the same thing, to the U.S. private 
sector. It was really not until the 1980's, when we felt we got 
into a very noncompetitive situation in a world market, that we 
had to decide, boy, we've got to do something different, and 
then that spurred change.
    DOD now is at that point where they are getting that 
incentive to say, ``We need to look carefully at how we're 
going to change. Our budgets are being severely squeezed. We 
need money for modernization. We think this is an area to do 
it.'' So you've kind of had this action-forcing event that was 
not there previously.
    Mr. Mica. I want to thank all of our panelists for their 
participation today, and also for their examination of this 
issue for the General Accounting Office. It's important that we 
move forward with trying to reform our inventory management 
through innovative best practices, and you can help us make it 
happen.
    We may have additional questions to submit to you in 
writing. At this time, we will thank you again for your 
participation and good work.
    We will excuse this panel, and I will call our second 
panel.
    Thank you, gentlemen.
    Mr. Warren. Thank you.
    Mr. Mica. Our second panel consists of representatives of 
the Department of Defense. Dr. Edward Martin is the Acting 
Assistant Secretary of Defense for Health Affairs; James 
Emahiser, Assistant Deputy Under Secretary of Defense for 
Materiel and Distribution Management; and Mr. Jeff Jones, 
Executive Director for Logistics Management, the Defense 
Logistics Agency.
    Mr. Emahiser and Mr. Jones have testified before this 
subcommittee last March, and I appreciate your coming to update 
our subcommittee today.
    In accordance with our House rules and, as you know, this 
is an investigation and oversight subcommittee, gentlemen, if 
you will stand, I will swear you in.
    [Witnesses sworn.]
    Mr. Mica. Thank you.
    As you know, we welcome your condensed opening oral 
statements, and lengthy statements will be made part of the 
record. I will recognize each of you for 5 minutes.
    You are welcome. To our panel, again, several of you have 
been here before. I will recognize first Dr. Edward Martin, 
Acting Assistant Secretary of Defense for Health Affairs.
    Welcome, and you are recognized, sir.
    Mr. Martin. Mr. Chairman, if it would be all right, I would 
like, actually, Mr. Emahiser to be the lead witness, and then I 
will followup.
    Mr. Mica. All right. That's fine. Then I will, in fact, 
recognize James B. Emahiser, Assistant Deputy Under Secretary 
of Defense for Materiel and Distribution Management.
    You are recognized, sir, for 5 minutes.

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

    Mr. Emahiser. Thank you, 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 use of innovative business 
practices to reform our inventory management and the program 
and the initiatives we have underway to increase efficiency 
while maintaining support to the war fighters' needs.
    I would like to enter into the record my written statement 
responding to the issues raised in your letter of invitation 
and make a brief oral statement.
    Mr. Mica. Without objection, your entire statement will be 
made a part of the record.
    Mr. Emahiser. You have already introduced the gentlemen who 
are with me here today. The Department of Defense is 
implementing a series of wide-ranging initiatives to adopt best 
business practices. As I testified in March 1997, our 
inventories have, in fact, decreased from $107 billion in 1989 
to currently $67 billion, with a target of $48 billion in the 
year 2003; overall, a reduction of 55 percent.
    The initiatives that we have are enabling us to move toward 
buying many commercially available items at the local bases, 
using the Internet and the government purchase card to obtain 
delivery directly from a vendor to a user in a few days, rather 
than maintaining multiple levels in inventory of such items 
within the department.
    A key indicator of our success in this area is the rapid 
expansion of DOD usage of the government purchase card, the GSA 
International Merchants Purchase Authorization Card [IMPAC] 
card. I testified in March that DOD use of the card increased 
by nearly 80 percent from fiscal year 1995 to fiscal year 1996, 
from just under $800 million to more than $1.4 billion. I can 
now report to you that DOD use of the purchase card is 
projected to exceed $2.3 billion in fiscal year 1997, an 
increase of more than 60 percent.
    The purchase card and Internet ordering are two key 
elements of the menu of innovative practices the department is 
using, along with prime vendor, virtual prime vendor, and 
direct vendor delivery. The goal of this menu of practices is 
to improve services while lowering costs.
    Customers of the Defense Logistics Agency can already use 
on-line Internet ordering to obtain commodities as varied as 
clothing and textile items, maintenance and repair items such 
as electrical, plumbing, and refrigeration supplies, through a 
hardware prime vendor in the Southeastern United States.
    The success of these various initiatives can be seen in the 
bottom line numbers for the portion of DLA sales provided 
directly from a vendor to a customer without going through a 
DOD warehouse. That portion was 24.5 percent in fiscal year 
1992. It increased to 33.2 percent in fiscal year 1996.
    In the medical prime vendor program, 98 percent of the 
orders are delivered by prime vendors within 24 hours, as 
opposed to the 30 days it used to take from government stocks. 
The response time and fill rate of this program enabled DLA and 
the military hospitals to drastically reduce their inventories, 
resulting in significant savings in their cost of operations.
    Walter Reed Medical Center reduced its medical on-hand 
inventories by 83 percent and closed six warehouses in this 
process. They also reported over $7 million recurring annual 
savings by converting to prime vendor. We anticipate further 
increases as we use lessons learned from this successful 
application of innovative practices in the medical and food 
commodities to the more complex area of hardware items.
    The Department of Defense is proud both of the progress we 
have made in adopting innovative business practices to improve 
our inventory management processes and committed to further 
improvements. We are confident that management improvements and 
ambitious deployment of technological advances will continue to 
enable us to expand our use of innovative business practices.
    I would also like to confirm what Mr. Warren said earlier, 
that he and I have agreed that our folks will try and work the 
inventory issues together, and we should be meeting over the 
next several weeks.
    We appreciate the interest of the subcommittee in defense 
inventory management 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. I will be glad to answer any 
questions that you may have.
    Thank you.
    [The prepared statement of Mr. Emahiser follows:]



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    Mr. Mica. Thank you, Mr. Emahiser.
    Dr. Martin.
    Mr. Martin. Thank you, Mr. Chairman.
    I would like to submit my written statement for the record.
    Mr. Mica. Without objection, so ordered.
    Mr. Martin. Thank you, sir.
    My comments, I think, are from the perspective of running 
that integrated business, Mr. Sessions, you were alluding to. I 
mean, we've basically got a $15 billion health care delivery 
system. We take care of about 7 million people, 150,000 
employees, 130 hospitals.
    So when we look at what these questions you're asking have 
done for us, from the business point of view, there have been 
any number of changes, in addition to the efficiencies that 
have been well articulated in the written testimony submitted. 
It fundamentally changes how we are able to do business within 
our facilities.
    When you have one warehouse instead of seven, and when you 
are able to free up staff, and you have 95 percent of your 
orders there within 48 hours, the way your system runs is 
dramatically impacted, particularly in regard to the providers. 
This has been an extremely popular effort on the part of us in 
the Defense health program, with DLA and DPSC.
    A couple questions that came up before that I'd just sort 
of like to proffer my thoughts on: First of all, the difficulty 
within DOD or any department--I spent the bulk of my career in 
Health and Human Services--doing things that are different or 
making changes is well known, both to this committee and 
particularly to Mr. Mica.
    The fact of the matter is, we would not have been able to 
do this, the success story that is, in fact, part of the 
testimony, if it had not been for DLA and DPSC. Without their 
help, pushing through a fairly complicated bureaucracy with 
many, many rules, we simply could not have done something that 
I think we jointly believe is one of the great success stories 
in this area.
    The second which needs to really be pointed out, and I 
think we touched on it in a couple of questions, is that it 
takes the business area manager's commitment to make it happen, 
and not just DLA and DPSC. The example was given, which is a 
good example, of the depot commander or the base commander, 
when they really want to do these kinds of things, or a 
hospital commander, like they did at Walter Reed, it's much, 
much easier for DLA and DPSC to make it work.
    The flip side would have been, if we had this example at 
Walter Reed, and the commander at Walter Reed didn't want to 
make it work and wanted to continue the old business practices, 
little that prime vendor could have done could have made it 
work. I think that's important to put into perspective since 
you've got a lot of business areas that are going to need to 
take the leadership, like I believe my predecessor did in 
health.
    A very important point in the differences between health 
and some of the other business areas, we were very lucky to 
have universal product numbers in pharmaceuticals, of course, 
because of the regulation by the Food and Drug Administration, 
and also for many of the other areas like food, where that's 
also regulated by Agriculture and FDA. So we already started 
out with an enormous advantage, as did the private sector.
    In the area of medical-surgical where our statistics are 
less, we have actually been in the position of being the 
industry leader trying to get medical-surgical universal 
product numbers used by the industry so we can implement prime 
vendor. Without that consistent approach to identification, it 
becomes very difficult in those kinds of markets.
    The fact is, the industry has been very receptive, and we 
are moving aggressively with the private sector and industry. 
In fact, many of the real savings of our efforts now in med-
surg will be in places like Medicare, Medicaid, and in the 
private sector. Because, indeed, they have problems with the 
ability to use prime vendor effectively.
    The last thing I think I would like to point out was made a 
couple times during the testimony. In order to effectively 
implement these programs, you fundamentally have to redo your 
current automation. I think it is very clear, in the hospital 
industry, automation was changed most of the hospitals to the 
AIS systems in the mid- and late 1980's.
    The government, unfortunately, takes a little longer to get 
changes made, but we had advantages in that we would rapidly be 
able to develop the automation and to get products that helped 
us move this aggressively forward. Without an automated 
infrastructure, this particular approach simply does not work, 
especially in regard to the electronic commerce part.
    So the success that we feel that we have had I think has 
been more to us been amply repaid in the impact, positively, on 
our business. Again, the point that I don't think that we could 
have done it without DLA and DPSC assistance, because it's not 
an easy job at all.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Martin follows:]


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    Mr. Mica. Thank you.
    Mr. Jones, you are recognized.
    Mr. Jones. Thank you, Mr. Chairman.
    If there is no objection, I would like to enter into the 
record an article from the Navy Times which came out this week, 
called ``Believe It or Not, Food in the Navy is Getting 
Better.''
    Mr. Mica. Without objection, we will make that part of the 
record.
    Mr. Jones. Thank you, Mr. Chairman.
    The reason is, we've been able to expand our prime vendor 
experience and what we've learned in the process of doing it to 
the point now where we're able to put commercial items directly 
from vendors onto ships. We have awarded a contract to do that 
for the Norfolk, VA, area and we're going to do that in other 
places, as well.
    We have talked a lot about specific techniques today. I 
want to add to the list of things we are doing, so the 
committee isn't left with the impression that we are sitting on 
our hands.
    No one is more impatient to implement best commercial 
practices than we are at DLA. I say that because the devil is 
in the details in implementing these programs. As hard as we 
try to push a program, as Dr. Martin said, you have to have a 
customer that's ready to move with you. When customers have not 
seen evidence of success in areas that have been traditionally 
hard to penetrate, such as aircraft spares, their confidence 
isn't there with you. So you have to work as a partner over a 
fairly long period of time.
    I would also agree with Dave Warren's assessment that 
pilots are very important, pilot programs, to build confidence 
in areas where there hasn't been demonstrated success in the 
past.
    I want to point out that while GAO does say that only 2 
percent of our items are covered, it is a third of our sales. 
The reason that we bring up the difference is that the maturity 
of the industry, the ability of the industry to participate in 
something like a prime vendor type arrangement, is key to being 
able to do it. The last thing the Department of Defense wants 
to do, or the Defense Logistics Agency, is impose another new, 
unique defense business practice on the industry.
    So in the case of medical-surgical, the industry wasn't 
exactly where pharmaceuticals have been, for the reasons Dr. 
Martin mentioned. The universal product numbering system wasn't 
there. Other things weren't there. So we had a more difficult 
time, but we are making progress and we will get there.
    We have, in fact, awarded contracts now, as Mr. Emahiser 
said, for facility maintenance and repair type items: civil 
engineering supplies, 8,000 stock numbers are being supported 
by prime vendors at southeastern bases in the United States. 
The comptroller of the Department of Defense has directed that 
we roll that program out as quickly as possible, and we are in 
the process of working out a schedule, once again, with our 
customers, for doing that.
    That takes us out of the business of stock-store-issue of 
all items that are used in the process of maintaining 
facilities. So we will be completely out of that business 
within a couple of years.
    But we had some false starts, because first we looked at 
individual commodities. We looked at plumbing, we looked at 
electrical, and then we found that there was no industry 
practice there to meet us. Finally, the industry had matured. 
We found that there was an industry practice that dealt with 
the entire range of items that we were looking at, and that's 
the industry that we went to.
    The procurement process is very difficult. I have to 
caution the committee on one point, that although we are, as I 
said, impatient to roll out these practices, we have to be very 
mindful that, as we do, we observe all of the rules and the 
regulations which uniquely apply to the government. We cannot 
and will not walk away from small business. We cannot and will 
not walk away from disadvantaged businesses. On top of that, we 
have to make sure that what we do in pricing is what the 
committees in the Congress would expect us to do, and 
rightfully so.
    I would point out very briefly that the commercial practice 
in aviation sparing and in automobile sparing, and in a lot of 
other commodity areas that have been discussed today, is 
basically to provide a full-service product at a price which 
the market will bear. That's the American way. That's 
competition, and that's exactly what the industry is about, and 
there's nothing wrong with that. But when it comes to the 
Defense Department, when we buy spares, all the market will 
bear is not good enough.
    So I would remind the committee that, as we progress down 
this path of looking at prime vendor and other types of direct 
vendor delivery processes, we have to be very cautious, because 
the oversight functions that are rightfully performed here will 
catch up with us if we aren't as careful as we need to be. So 
we can't move quite as fast as we would like to for a number of 
those reasons.
    I will say one last thing, that it has been a pleasure 
working in this environment. The GAO, I think, has made a 
substantial contribution to a change in our relationship. 
Dialog is much more productive, and I want to thank the 
gentleman on my right for exerting leadership in that area. We 
look forward to continuing to work with the committee on this 
and other related subjects.
    That concludes my oral remarks.
    [The Navy Times article referred to follows:]



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    Mr. Mica. Thank you, Mr. Jones.
    I yield now to the gentleman from Texas for questions.
    Mr. Sessions. Thank you.
    My questions would be for any of the three of you that 
wish. Just a couple observations. I heard the words, ``The 
devil is in the details,'' and I heard the words that you're 
dealing with a bureaucracy with many, many, many rules. Let me 
tell you, I have not walked a mile in your sandals.
    I know this is difficult, but please tell me, have any 
group of you, meaning even individually, been out to a depot in 
the last 2 years? And if you could, please tell me where you've 
been and what your observations were. A depot, as opposed to a 
military operation--Walter Reed wouldn't count--but a depot.
    Mr. Emahiser. Let me go ahead and respond first.
    Mr. Sessions. Please.
    Mr. Emahiser. I've been to Jacksonville and to Warner 
Robbins.
    Mr. Sessions. What were your observations when you were 
there?
    Mr. Emahiser. The observations were that, first of all, the 
folks were extremely energetic and extremely proud of the 
products that they were producing at those depots, were proud 
to be employees of the services responsible for the depot, and 
thought they were doing a quality job, producing a quality 
product.
    Mr. Sessions. Did they provide any feedback to you, or are 
there any observations that you made that--and I don't know 
which depot--I don't know what Jacksonville handles. I don't 
know what they did, but was there any feedback. You were there 
to look and hear people, and you've heard they were proud of 
the job, felt like they were part of the mission, were pleased 
to be there.
    Mr. Emahiser. I would just follow that on by saying that at 
Warner Robbins they were excited about the virtual prime 
vendor, that is the thing that was going to be put in to help 
support the propellers and hubs and rotors, and that kind of 
thing.
    They recognize that they are under the watchful eye of not 
only the department but of the Congress, in all honesty, to 
assure that they are producing quality products. They recognize 
they've got to have a handle on costs, particularly at those 
two depots, they are very cognizant of that. And that permeates 
from the commander on down for both those installations.
    Mr. Sessions. Are these depots run by the military with the 
assistance of civilian employees, or what was the nature?
    Mr. Emahiser. Those both are military depots. They are not 
run by contractors. They are both military depots with, I would 
say, 95 percent, 98 percent being DOD civilian employees. There 
are some contractors there that may be on board that do provide 
some support, but they are primarily DOD civilians.
    Mr. Sessions. Mr. Jones, could you please discuss with me, 
have you been to any depots at all?
    Mr. Jones. Yes, Mr. Sessions, I have, although, in my 
current capacity, most of the depots that I visit are 
distribution facilities that are co-located with maintenance 
facilities. That's my primary responsibility now. I have been 
to Warner Robbins, Kelly Air Force Base, McClellan, Sacramento, 
numbers of places. Of course, our primary distribution depots 
are in San Joaquin, CA, and Susquehanna, PA.
    So I have seen quite a bit of change in all of those 
locations and an eagerness on the part of our customers for us 
to bring new solutions to them; again, a combination of some 
frustration in how long it takes, and some caution that they 
want to see demonstrated results before they jump in all the 
way with this.
    Mr. Sessions. Can you tell me, in this case or in any case 
that you choose, in your testimony, who is a customer? Who are 
they expressing this concern to, and how do you find out about 
it?
    Mr. Jones. Yes, I would be pleased. In the case of Warner 
Robbins, we have a number of channels. No. 1, we work directly 
with the commander, in some cases. A gentleman who used to work 
for me in uniform is now one of the change advocates down 
there. We have a direct line.
    We have an interchange of people, basically, that know 
what's going on, who are also facing new pressures from their 
commander at Wright Patterson to reduce costs, control and 
manage costs. They know what we have tried to do and want us to 
partner with them, and we're just itching to do it. So it's a 
communication that works that way.
    We also have customer representatives on the ground, 
permanent employees of the Defense Logistics Agency who are 
there, field a lot of the direct input, attend the commanders' 
staff meetings, so we have a third direct channel that way.
    Mr. Sessions. Would you describe, in your capacity as the 
executive director for logistics management, the people who are 
in your organization? Can you describe how they are appraised? 
In other words, what part of their performance evaluation would 
deal with effective use of resources, these sorts of things? Is 
that included within their appraisals?
    Mr. Jones. Yes, it is, Mr. Sessions. By law, it's in mine, 
and it's also in theirs. There are, as a matter of fact, 
several elements that they are rated on. We are also moving 
toward giving higher marks to those that spend more time 
solving customer problems. We have both an emphasis on solving 
customer problems and accountability, which is a requirement of 
FNFEA.
    Mr. Sessions. Would you say that this is--and I know we've 
heard it's just a matter of time till we get to zero, it may be 
the year 2050, but at some point we're working that number 
down--would you say that you are well on the road or that there 
are a good number of bureaucratic rules that are getting in the 
way of you performing it better?
    Mr. Jones. Well, if you mean inventory being zero.
    Mr. Sessions. I do mean inventory and proper management. 
I'm not trying to get to zero; I'm trying to get to where you 
feel better about what that level is, proper management.
    Mr. Jones. I think we're within a very short time. The main 
problem that we have is something that will never go away, and 
I think the GAO would agree with this, is that there is a 
pattern of demand in a lot of our materiel which is highly 
irregular.
    It's not like manufacturing. Inspect and replace causes 
demand to fluctuate wildly. When you have equipment that's 50 
years old, there are problems in trying to maintain low 
balances and anticipate and forecast correctly. Those will 
always be with us as long as we're in the environment we are.
    If you talk about the vast bulk of our items, our dollar 
sales, I'm comfortable that within 3 to 4 years we'll have a 
much better handle on having the right stuff at the right place 
at the right time.
    Mr. Sessions. Really, what I'm in reference to is 
management. Are you making good judgments about what is there, 
that's on an appraisal; you feel like you're cutting through 
rules and regulations, and that your management structure and 
decisionmaking is good?
    Mr. Jones. Yes.
    Mr. Sessions. I hear you say you feel good about it.
    Mr. Jones. Absolutely. We've overhauled the whole agency, 
reorganized it, reshaped it from the bottom up, changed the 
incentive process, changed the management structure. We've done 
an awful lot in the last 3 years to change the culture. I'm not 
going to say it's done. It's never done. We have to change it 
every day.
    Mr. Sessions. Good. Well, hopefully as a promise, not as a 
threat, I'd like to join any of you someday out at a depot and 
go learn more about it, and see those kinds of things that you 
walk through. So if either one of you three, as you have those 
opportunities that are coming up this year or early next year, 
I would welcome that opportunity when you do that same 
evaluation yourself.
    Mr. Emahiser. Sir, we would be glad to do that for you.
    Mr. Sessions. Good. Thank you.
    Mr. Mica. I yield to the ranking member, Mr. Barrett.
    Did you have any questions?
    Mr. Barrett. Thank you, Mr. Chairman. No, I unfortunately 
have been in other hearings all day. I may submit some written 
questions to the panel, but at this time I have no questions.
    Mr. Mica. I thank the gentleman.
    Mr. Emahiser, in your testimony, you say that in 1996 DLA 
sold about $3 billion worth of hardware. What is your estimate 
of the total value of hardware inventory? Do you agree with the 
GAO that DLA has a $7.2 billion inventory of hardware items in 
its distribution warehouses and depots? Is that correct?
    Mr. Emahiser. Yes, sir.
    Mr. Mica. It is?
    Mr. Jones. With one exception, Mr. Chairman, that's the way 
GAO is computing the value of inventory we have declared to be 
potential excess. They value it at full acquisition cost, and 
the government's own Federal Accounting Standards Advisory 
Board rule says that we have to value that at recovery cost, 
which is essentially scrap value. That takes about $1.1 billion 
to $1.2 billion off of that total. So we're closer to $6 
billion in assets.
    Mr. Emahiser. That's an ongoing discussion that we've had 
with the GAO, how to, in fact, value that inventory once it 
appears that it's going to be excess.
    Mr. Mica. The GAO, again, asserts this $7.2 billion worth 
of hardware items in DLA's distribution depots and warehouses 
that you have agreed to. Is it feasible for the department to 
try to employ virtual prime vendor and direct vendor delivery 
for all of these items?
    Mr. Jones. Let me break that answer, if I can, Mr. 
Chairman, into two parts. One, the first answer is no, not all 
items. But the more important answer to the question is, we're 
going to try. We have plans in place now to try avionics 
components. As I said, we have a potential breakthrough in 
bench stock prime vendor that's in a very sensitive procurement 
stage now. I can't really talk about it, but that's a huge 
potential change in our business practices if we're able to get 
that to work.
    We are working in the hardware areas intensively, but the 
way we're doing it is, we're looking at how the industry does 
business. I have to say again that if the industry does 
business one way, and Defense tries to direct them another way, 
we're not going to make it work. We have to go find what's 
working and capitalize on that. That's why we did so well with 
pharmaceuticals, and that's kind of a pacing factor in some 
cases.
    Mr. Martin. Mr. Chairman.
    Mr. Mica. Yes, Dr. Martin.
    Mr. Martin. Just let me add, because this is important, 
there are, given the industry practices, some important 
exceptions. Even in medical, where our organizational 
philosophy is to reach toward 100 percent, there are clearly 
hundreds of items that, no matter what happens, we will not be 
able to use prime vendor for.
    Second, we have to always be concerned--and I think Mr. 
Warren touched on this very, very clearly--for surg 
requirements. To the extent that our prime vendors can't meet 
our surg requirements, all of a sudden we need very large 
numbers of things when we deploy, we have to work a different 
arrangement than prime vendor.
    Prime vendor works very well for those consumables where 
there is a through-put within our facilities that's very 
predictable. It does not work very well when the item is not an 
industrial standard andor we have unique needs that are 
substantially different than the industry. I can think of one 
immunization right now where we constitute 95 percent of the 
requirement for the industry. Those kinds of things are very, 
very difficult to fit into the prime vendor system, and 
sometimes they are fairly sizable in number.
    I think that is consistent with what Mr. Warren alluded to 
in regard to the process of going through and figuring out 
which are those things. We want all, of course, in medical, but 
we are very cognizant of the fact that there would be another 
oversight hearing if, all of a sudden, we needed 150,000 of 
something and we didn't have it and couldn't get it, and we 
went to war and we only had 40,000. So we have to worry about 
that in those cases, particularly with surg.
    Mr. Mica. Mr. Emahiser, you had indicated in your testimony 
that one of the problems in obtaining inventory and maintaining 
inventory is some of the materiel, et cetera, is, I think you 
said, 40, 50 years old, that you're storing parts and acquiring 
materials for. How much of a problem is this with outdated 
military equipment? Is this a small part, or is this major? I 
don't know if you could give me a percentage or some estimate. 
Are we dealing with this as the major problem or just one of 
the problems?
    Mr. Emahiser. There's no doubt that the age of our 
inventory, that is the age when we procured equipment, whether 
it be tanks, personnel carriers, helicopters, or airplanes, is 
a problem, because as the age of the inventory grows, we still 
have to maintain parts. Conversely, as we do technology 
insertion to upgrade that equipment, we find that we have parts 
on the shelf that are no longer applicable to that equipment.
    That, in fact, causes us some problems. I believe the 
example that GAO used in the 100 years of supply is, in fact, 
an item like that, that was caught up in a technology upgrade, 
and therefore there was not basically a requirement for that 
after that was done.
    I can't give you a number. It has an impact. Rather than to 
quantify that off the top of my head, I just would prefer not 
to do that.
    Mr. Mica. Well, the department has implemented prime vendor 
practices at Warner Robbins Air Logistics Center. Did you say 
you visited there?
    Mr. Emahiser. Yes.
    Mr. Mica. If this pilot program proves successful, will it 
be implemented nationwide or on a broader scale?
    Mr. Emahiser. Well, when we see that the pilot program 
proves out, and the program really has just started, it 
certainly provides a basis for further implementation, not only 
in the aviation commodities like at Warner Robbins, but in 
other commodities to support the depot maintenance program. Mr. 
Jones alluded to the avionics expansion that was being looked 
at now. That certainly would be a case that could be made for 
that.
    Mr. Mica. Where do you anticipate that these practices 
would be implemented in the future?
    Mr. Emahiser. I could see where programs like this could be 
issued across the entire depot community; again, either under a 
pilot or on a case-by-case basis. Certainly, Corpus Christi 
Army Depot, where we're doing helicopters, is a prime case 
where something like that could be put into place. Anniston 
Army Depot, where primarily we do tanks and heavy combat 
vehicles, would be another place that we could take a look.
    So I think that the time would be ripe, as this case down 
at Warner Robbins proves out, to expand that.
    Mr. Mica. Does the department have any estimate, based on 
the experience with medical supplies of how much money could be 
saved by adopting prime vendor for all hardware items currently 
held by the department? Is there any indication from that 
experience?
    Mr. Emahiser. Sir, I don't know of any number that's been 
projected out.
    Mr. Mica. Mr. Emahiser, it's my understanding that you made 
this point in the subcommittee, in our hearing in March, that 
the department could not aggressively adopt these practices 
without conducing thorough testing first to ensure that 
changing practices would not affect readiness. What effect do 
you think the prime vendor practices, like those employed--the 
example we've used here is Warner Robbins--is having on 
readiness, and can you make such a determination or evaluation 
yet?
    Mr. Emahiser. Based on the limited test that's going on at 
Warner Robbins, I would say that it's had a positive impact on 
readiness, and it's had a positive impact on throughput for the 
depot for those items. I think my comments, which I don't 
really remember from the last time, in that area would have 
been caution in that there may be some commodities or some 
areas that it just would not fit. Again, the idea would be not 
to create a new business entity, but rather be able to follow 
on what industry would currently be doing, to make sure that 
that fits.
    Mr. Mica. So, so far, also, you are not able to provide the 
subcommittee with any estimate of saving from implementation of 
the virtual prime vendor at Warner Robbins? You're still in 
that position?
    Mr. Emahiser. I couldn't provide those now. We could go 
back and look and provide that for the record, if it's 
available.
    Mr. Jones. Mr. Chairman, if I could just add one thing.
    Mr. Mica. Yes, Mr. Jones.
    Mr. Jones. Thank you. The virtual prime vendor at Warner 
Robbins is different from prime vendor that we practice in 
other commodities. The virtual prime vendor is essentially an 
integrator, providing a service, and has access to our 
contracts for parts or his own parts chain and parts supply.
    What we are attempting to do there is to demonstrate the 
capability to provide an integrated logistics support service 
for a particular weapon system. There are 1,400 weapon systems 
that we manage parts for in DLA. I don't think that the method 
we're going to use is going to be to go system by system. What 
we're probably going to do is to go commodity by commodity, and 
in certain cases where the customer wants us to take on a 
particular problem involving an air frame or something like 
that, we will then look for an integrated service.
    So one of the reasons it's hard to answer your question is, 
we're not sure what service our customers will want us to 
provide. When they do, then we can make the estimates on the 
point cases for the materials that will be involved in those 
cases.
    Mr. Mica. Real quickly, it's my understanding that at 
Walter Reed the prime vendor for medical supplies procedure has 
resulted in the reduction of about 50 percent of the materiel 
management personnel, somewhere in the 70's to 30's. Is that 
correct?
    Mr. Martin. It's about a 50 percent reduction from the mid-
70's to about half of that.
    Mr. Mica. It's my understanding that this prime vendor for 
medical supplies has been extended to over 200 DOD medical 
facilities. Are there similar results in reductions of 
personnel anticipated or underway?
    Mr. Martin. I think it's fair to say that within the health 
care delivery system that the results at Walter Reed are being 
seen pretty consistently throughout. And it's not only the 
savings in the personnel, particularly for us, which was 
warehousing and managing the inventory, that is a large 
responsibility that has changed, but also, it's freed up a 
great deal of space.
    I mean, when you visit the Brooks Army Hospital, the new 
hospital in San Antonio, for example, there is a vast amount of 
space that we used to have to dedicate, within the hospital, 
for storage, that this new approach has essentially freed up 
for other uses, which has been also a big factor in its 
popularity at the hospital level. Again, there was the point I 
made before, this is very popular with our hospital commanders 
and doctors and administrators, because it makes life a lot 
easier in the hospitals.
    Mr. Mica. Well, gentlemen, we're getting into the meat of 
some of the issues I wanted to discuss with you, and look at, 
again, savings and how we can best pursue practices that, 
again, will aid us. We're all up against a budget crunch. We're 
trying to do more with less and also transition folks who may 
lose positions as a result of our actions.
    I won't be able to get into all of those questions. We have 
a vote and a series of votes coming up. However, I am going to 
submit to you additional questions, and I'd like a response. 
I'm going to leave the record open for 2 additional weeks. They 
will be submitting them to you, and if you could respond to the 
subcommittee.
    We appreciate your cooperation in this endeavor and our 
oversight obligations. I would like to thank each of you for 
being with us. The record will remain open, as I said, for 2 
weeks.
    There being no further business to come before the 
subcommittee this afternoon, this meeting is adjourned. Thank 
you.
    [Whereupon, at 2:15 p.m., the subcommittee was adjourned.]

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