Defense Inventory: Several Actions Are Needed to Further DLA's	 
Efforts to Mitigate Shortages of Critical Parts (01-AUG-03,	 
GAO-03-709).							 
                                                                 
DOD's management, funding, and reporting of spending for spare	 
parts programs have been a focus of GAO high risk reports for	 
over a decade. They noted that spare parts shortages adversely	 
affect military operations and readiness. Despite funding of	 
about $1.9 billion over fiscal years 1999-2002 to increase	 
availability of spare parts, managing to mitigate shortages still
challenges the Defense Logistics Agency (DLA). GAO examined if	 
(1) DLA's strategic planning addresses mitigating critical spare 
parts shortages that affect readiness, (2) strategic initiatives 
will likely mitigate these shortages, (3) a DOD-directed	 
initiative has improved availability of critical aviation parts, 
and (4) DLA can identify the impact of added investment on parts 
availability.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-709 					        
    ACCNO:   A07825						        
  TITLE:     Defense Inventory: Several Actions Are Needed to Further 
DLA's Efforts to Mitigate Shortages of Critical Parts		 
     DATE:   08/01/2003 
  SUBJECT:   Combat readiness					 
	     Spare parts					 
	     Strategic planning 				 
	     Military inventories				 
	     Inventory control systems				 

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GAO-03-709

                                       A

Letter

August 1, 2003 The Honorable Jerry Lewis Chairman Subcommittee on Defense
Committee on Appropriations House of Representatives Dear Mr. Chairman:
The Defense Logistics Agency (DLA) manages about 4.6 million consumable
items, including weapon systems spare parts, with sales of over $20
billion in fiscal year 2002. In the Department of Defense*s (DOD) February
2003 budget submission to the Congress, DLA reported achieving an
aggregate weapon system supply availability rate of 85 percent. DLA began
to strategically address ways to mitigate spare parts shortages and
improve its logistics infrastructure and operations as early as 1988.
However, managing to mitigate critical spare parts shortages is a
continuing challenge for DLA and defense managers, even though over $1. 9
billion was devoted to increasing the availability of spare parts in the
fiscal years 1999- 2002 period. Concerns remain about DOD*s continuing
shortages of critical spare parts for aircraft, ships, vehicles, and
weapons systems and their resulting detrimental effect on military
readiness. Also, since 1990, we have repeatedly reported that DOD*s
inventory management systems and procedures were ineffective and wasteful,
putting DOD at high risk for unnecessary spending that, through good
stewardship, could be directed to higher priorities such as modernization
or readiness. In our January 2003 High Risk Series report, 1 we wrote that
DOD was experiencing equipment readiness problems because of a lack

of key spare parts; and we recommended that DOD act to address these
shortages. While recognizing that spare parts shortages will never be
eliminated, it is reasonable to expect DOD and DLA to place a high
priority on mitigating, or reducing, the shortages that adversely impact
readiness. Such priority would be inherent in the overall stewardship of
funds and accountability for making spare parts investment decisions that
provide a

1 U. S. General Accounting Office, Major Management Challenges and Program
Risks: Department of Defense, GAO- 03- 98 (Washington, D. C., Jan. 2003).

good readiness return. As recently as August 2002, DOD recognized the need
to overcome critical spare parts shortages and recommended changes to
improve the readiness of weapon systems. 2

This report is one in a series of reports 3 that responds to your request
that we identify ways to improve the availability of spare parts. As
agreed, this report focuses on DLA*s strategic efforts to transform the
way it conducts its logistics business operations, including spare parts.
More specifically, this report focuses on whether (1) DLA*s strategic
planning addresses mitigating critical spare parts shortages that
adversely affect readiness, 4 (2) DLA*s strategic logistics initiatives
will likely help mitigate spare

parts shortages that affect readiness, (3) a separate DOD- directed
aviation initiative has improved the availability of critical aviation
parts, and (4) DLA can identify the impact of increased investments on the
availability of critical spare parts.

To accomplish these objectives, we analyzed DLA plans, initiatives, and
performance metrics applicable to the management and oversight of DLA*s
Strategic Management System. We interviewed officials, as well as obtained
and analyzed information on inventory management practices and critical
spare part shortages, at DLA headquarters, Fort Belvoir, Virginia, and the
inventory control point for aviation in Richmond, Virginia. Our criteria
for evaluating DLA*s strategy and initiatives included the Government
Performance and Results Act (GPRA) of 1993, 5 previous GAO reports, and
appropriate DOD reports and guidance. Our scope and methodology are
discussed in further detail in appendix I.

2 Office of the Secretary of Defense, Inventory Management Study
(Washington, D. C.: Aug. 2002). 3 U. S. General Accounting Office, Defense
Inventory: The Army Needs a Plan to Overcome Critical Spare Parts
Shortages, GAO- 03- 705 (Washington, D. C.: June 27, 2003);

Defense Inventory: Air Force Plans and Initiatives to Mitigate Spare Parts
Shortages Need Better Implementation, GAO- 03- 706 (Washington, D. C.:
June 27, 2003); Defense Inventory: The Department Needs a Focused Effort
to Overcome Critical Spare Parts Shortages, GAO- 03- 707 (Washington, D.
C.: June 27, 2003); Defense Inventory: Navy Logistics Strategy and
Initiatives Need to Address Spare Parts Shortages, GAO- 03- 708
(Washington, D. C.: June 27, 2003).

4 For this report, we used *critical spare parts* to mean those parts that
directly affect the readiness of weapon systems. For example, DLA
periodically identifies parts, such as complete engines and engine
components for various aircraft, as *top degraders* of weapon

system readiness. 5 Pub. L. No. 103- 62, Aug. 3, 1993.

Results in Brief DLA*s strategic logistics planning specifically addresses
mitigating critical spare parts shortages that adversely affect readiness
through a major

component of its Strategic Management System* the business plan. The
business plan does so by focusing initiatives on some of the primary
causes of critical shortages and increasing investment in the safety level
of parts* the number of parts in the inventory that triggers reordering.
The Strategic Management System incorporates four components: (1) a
strategic plan that contains DLA*s corporate goals, objectives, and
strategies; (2) a balanced scorecard that provides a basis for assessing
how well the strategic plan is working; (3) a business plan containing 97
initiatives in varying stages of implementation that specify the actions
needed to achieve the strategic plan*s goals, strategies, and objectives;
and (4) a review and

analysis process that assesses performance. The 2002- 2007 strategic
management system is an improvement over previous efforts because it
contains performance metrics and management feedback mechanisms for

measuring performance progress consistent with key attributes of strategic
planning included in GPRA. The system is also designed to incorporate
future changes as necessary to reflect and improve business operations.

If fully implemented as planned by 2009, 24 of the 97 initiatives
contained in DLA*s business plan could either directly or indirectly
contribute to mitigating spare parts shortages and improve supply support
readiness. A group of 18 initiatives is aimed at mitigating critical spare
parts shortages by improving the availability of specific parts that the
services have identified as critical to readiness. For example, a few
initiatives in this group are designed to obtain sources of supply for
critical, hard- to- find

parts or to identify and contract with key material suppliers for
lowdemand, long- lead- time parts. Others in the group focus on addressing
some of the recurring causes of spare parts shortages. A second group of
six initiatives seeks to modernize DLA*s entire logistics management
system to improve business processes and systems and better support its
customers. While these initiatives show potential, until they are fully
implemented the extent to which they will contribute to mitigating spare
parts shortages is not certain.

A separate initiative not included in DLA*s business plan* a $500- million
aviation investment initiative* has steadily improved the supply
availability of DLA- managed critical aviation spare parts. Nonetheless,
shortages exist, in part because the aggregate supply availability measure
DLA used to assess its effectiveness does not reveal the lower supply
availability rates of many critical spare parts. Furthermore, DLA*s
progress in buying these critical spare parts was impeded by a DOD
regulation that has since been revised (May 23, 2003) to allow a waiver
for such purchases. The availability of critical aviation parts increased
over the first 3 fiscal years (2000- 2002) of the 4- year initiative that
is aimed at achieving DLA*s aggregate, or total average, supply
availability goal of 85 percent.

This means that the parts, on average, will be available to meet customer
demand 85 percent of the time. Using this aggregate goal, however, does
not reveal the actual availability of many critical aviation spare parts
because many parts are at or over 85 percent, while others continue to be
far less available. For example, by fiscal year 2002, of the about 10, 300
critical parts that were selected for aviation investment, almost 4, 900,
or 48 percent, met or exceeded the DLA goal of 85 percent. 6 The remaining
5, 400 parts were available less than 85 percent of the time. Of these,
over 2,900* such as engine mount fittings for the B- 52 bomber, shoulder
bolts for the F- 14 Tomcat, and landing gear axles for the UH- 60A

helicopter* were available less than 35 percent of the time. Furthermore,
the availability of 3,342 of these critical parts was below the 85-
percent aggregate goal because a DOD regulation, recently revised,
constrained how many DLA could buy based on the lead time required to
acquire the part. A subsequent investment initiative, planned for fiscal
year 2004, is designed to increase availability of aviation, as well as
land and maritime, critical spare parts and may improve supply readiness.
This initiative has an 80- percent minimum availability goal for each of
the critical DLA- managed parts but is dependent on funding as well as a
waiver of

the lead- time requirement as allowed in the revised DOD regulation. 6 It
may take up to 2 years before an increase in supply availability of a
specific spare part is evident because current demands and backorders are
filled first before safety levels are increased.

DLA can estimate how additional investments in critical spare parts can
improve supply availability to the military services. For example, based
on a DLA November 2002 estimate, a one- time cost of $748 million would
achieve a minimum 85- percent availability for each of DLA*s 219,071
aviation, land, and maritime most critical items. The cost to achieve a
90- percent minimum availability for each of these items would be about
$1. 3 billion and the cost to achieve a 95- percent minimum would be about
$2. 2 billion. However, while selectively buying more critical spare parts
will likely increase supply availability, doing so will not necessarily
increase the overall readiness posture of the forces because supply is
only one of several factors 7 that contribute to the overall readiness
posture of operating units. Therefore, an operating unit having sufficient
spare parts could still have readiness deficiencies due to factors such as
maintenance or training needs.

We are making several recommendations to help ensure that DLA*s service
customers have an adequate supply of critical spare parts that affect the
readiness of weapon systems. These involve (1) DLA*s submission of needed
waivers as allowed in the recently revised DOD regulation that limits the
safety level investment in critical spare parts, (2) a change in DLA*s
current aggregate supply availability goal to a minimum 85- percent goal,
and (3) prioritizing funding to achieve the 85- percent goal. DOD
concurred with the report and the intent of our recommendations but did
not agree with all actions we prescribed. The department*s comments and
our evaluation of them are on page 25 of this report.

7 Factors impacting readiness posture include supply, maintenance,
equipment, training, and personnel.

Background DLA is a DOD Combat Support Agency under the supervision,
direction, authority, and control of the Under Secretary of Defense for
Acquisition, Technology, and Logistics. DLA*s mission is *To provide best
value logistics support to America*s Armed Forces, in peace and war*
around the clock, around the world.* In carrying out its mission, DLA
manages an $80.5 billion inventory comprised of about 4.6 million
consumable items

including commodities such as energy, food, clothing, and medical
supplies. DLA also buys and distributes hardware and electronics items
used in the maintenance and repair of equipment and weapons systems. DLA
sales and services amounted to over $20 billion in fiscal year 2002.

Customers, mainly the military services, determine their requirements for
material and supplies and submit requisitions to any of four DLA supply
centers. 8 The centers then consolidate the requirements and procure the
supplies for their customers. DLA provides its customers with requested
supplies in one of two ways. Some items are delivered directly to
customers from commercial vendors while other items are stored and
distributed through worldwide distribution depots owned and managed by
both DLA and the military services. DLA refers to this ordering and
delivery process as materiel management or supply- chain management. 9
Figure 1 depicts this process.

8 DLA*s four supply centers are (1) Defense Supply Center, Columbus, Ohio,
which is responsible for land, maritime, and missile support; (2) Defense
Energy Support Center, Fort Belvoir, Va., the lead center for
comprehensive energy solutions, such as contract support and the
management of petroleum- based fuels; (3) Defense Supply Center, Richmond,
Va., which is responsible for air, aviation, and space support; and (4)
Defense

Supply Center, Philadelphia, Pa., the lead center for troop support items,
such as food, clothing, and medical supplies.

9 The materiel management or supply chain management process incorporates
five major DLA business functions. These functions include distributing
materiel ordered from its inventory; purchasing fuels for DOD and the U.
S. government; storing strategic materiel;

marketing surplus DOD materiel for reuse, reutilization, or disposal; and
providing numerous information services, such as item cataloging, for DOD
and the United States and selected foreign governments.

Figure 1: DLA*s Supply- Chain Management Process

Requisitions Orders

Agency supply centers Agency distribution depots

Materiel delivered Customers

Orders Manufacturers/ vendors Orders

Vendors Source: GAO's analysis of DLA's process.

GPRA requires establishment of a strategic plan for program activities by
each agency that includes, among other things, a mission statement
covering major functions and operations, outcome- related goals and
objectives, and a description of how those goals and objectives are to be
achieved.

DLA has been guided by formal strategic plans since 1988. The 1988 plan
did not identify strategic measures or performance targets for achieving
strategic goals and objectives. Subsequent strategic plans incorporated
GPRA attributes but still lacked strategic measures.

DLA approved the current 6- year 2002- 2007 Strategic Plan* on February
19, 2002, updating DLA*s 2000 Strategic Plan. The DLA Strategic Management
System formalizes, aligns, and integrates planning and performance
measurement processes. The system incorporates four components: a
strategic plan with goals and objectives; a balanced scorecard, 10 with
strategies and performance measures; a

business plan containing initiatives; and a review and analysis process
that assesses performance. The balanced scorecard and business plan
reflect decisions on the initiatives in which DLA will invest, and these
investments and performance target levels form the basis for DLA*s budget
request. The strategies, performance measures, and objectives address
mitigating critical spare parts shortages. Performance measures provide
DLA management a means of assessing progress and making adjustments as
necessary to achieve its goals and strategies. The system*s review and
analysis process involves examining progress against objectives and
targets to make necessary adjustments to plans and objectives to meet
customer requirements. In developing and revising the Strategic Management
System, DLA*s procedures require it to incorporate higher- level plans
such as, the National Military Strategy, the Quadrennial Defense Review,
and Defense Planning Guidance. According to a DLA planning official, DLA*s
first corporate assessment of the 2002- 2007 Strategic Plan is scheduled
for 2003. Appendix III graphically displays the DLA Strategic Management
System.

DLA*s Strategic DLA*s Strategic Management System*s business plan
specifically addresses

Management System mitigating critical spare parts shortages that adversely
affect readiness.

The strategic logistics planning process, currently being implemented, is
Addresses Mitigating

DLA*s framework for logistics transformation, strategic measurement, and
Critical Spare Parts

performance management. Three of its components* a strategic plan, a
Shortages That

balanced scorecard, and a business plan* incorporate GPRA attributes,
address spare parts shortages, and act to improve overall logistics
systems

Adversely Affect and business processes, all of which could improve
overall supply support

Readiness to DOD customers.

10 The balanced scorecard, introduced by Professor Robert Kaplan and Dr.
David Norton in 1992, is a component of the Strategic Management System
that links strategic goals, strategies, objectives, and measures to an
organization*s strategic plan.

DLA*s 2002- 2007 Strategic The DLA strategic plan covers a 6- year period
that includes the year

Plan of publication* 2002* and 5 additional years consistent with GPRA

guidelines. It focuses on long- term outcomes and contains DLA*s corporate
mission, vision, and values statements and the agency*s 4 strategic goals,
13 strategic strategies, and 39 strategic objectives. The goals that
address customer service, customer outcomes, or management of DLA
resources for customer value address spare parts shortages directly or
indirectly through improved service to the military service customers.
Table 1 identifies DLA*s four strategic goals and the respective number of
strategies, objectives, and initiatives to be measured for achieving the
plan*s strategic goals and strategies. Table 2 illustrates the
relationships between the Customer Goal (strategic goal 1) and
representative strategic strategies, objectives, and action plan
initiatives, relative to spare parts and

customer service.

Tabl e 1: DLA*s 2002- 2007 Strategic Goals and the Number of Strategies,
Objectives, and Initiatives Number of Number of Number of DLA strategic
goal strategies objectives initiatives

Goal 1* Provide responsive, best value supplies and services consistently
to our customers. 3 8 8

Goal 2* Structure internal processes to deliver customer outcomes
effectively and efficiently. 4 18 37

Goal 3* Ensure our workforce is enabled and empowered to deliver and
sustain logistics excellence. 3 5 36 Goal 4* Manage DLA resources for best
customer value. 3 8 16

Tot al 13 39 97

Source: GAO analysis of DLA data.

Table 2: Representative Strategies, Objectives, and Action Plan
Initiatives of DLA's 2002- 2007 Strategic Plan Customer Goal (strategic
goal 1)

DLA strategic goal Strategic strategies Strategic objectives Strategic
action plan initiatives

Goal 1* Provide Focus, manage, and measure Improve customer satisfaction
to 90% by Refine customer satisfaction responsive, best value

logistics support by customer the end of fiscal year 2007. survey.
supplies and services

segment based on customer Implement customer Relationship consistently to
requirements.

Management. customers.

Service Level Agreements with major customer segments.

Supply availability, for weapons systems Improved supply availability. and
overall, shall be equal to or greater than 85% for each military service
for each fiscal year.

Implement measurement of Customer Customer Wait Time as the DOD Wait Time
as the DOD logistics timeliness

Logistics Timeliness Measure. metric by the end of fiscal year 2007.

Reduce hardware backorders to 250,000 Backorder Reduction. by the end of
fiscal year 2007. Negotiate and honor

Improve responsiveness by all modes of Establishment of practical
performance agreements customer contact so that 85% of customer
responsiveness standards for with customer segments.

contacts meet standards by fiscal year each mode of customer contact 2007.

with DLA and actions to improve responsiveness for each mode.

Cost- effectively increase hardware combat support capability through
utilizing Strategic Materiel Sourcing techniques and partnering with
industry by forging 17 long- term strategic supplier alliances by fiscal
year 2004.

Source: GAO summary of DLA data.

The Balanced Scorecard The balanced scorecard component of DLA*s strategic
system identifies and links DLA*s strategic goals and strategies to
transform DLA operations,

including customer service, over the next 2 to 5 years. It also provides
metrics to measure strategic plan progress including *lead* and *lag*
indicators. For example, a lead performance indicator for a Goal 1
strategy** Negotiate and honor performance agreements with customer
segments** measures the percent of customer agreements negotiated. A lag
performance indicator for that same strategy measures the percent of
negotiated agreements fulfilled.

DLA*s balanced scorecard component *cascades* to each of its Defense
Supply Centers located in Richmond, Virginia; Columbus, Ohio; and

Philadelphia, Pennsylvania. The centers* balanced scorecards identify the
*how and to what extent* their strategies support DLA*s corporate balanced
scorecard. The centers* scorecards are expected to reflect DLA*s overall
vision of *Right Item, Right Time, Right Place, Right Price, Every Time*
Best Value Solutions for America*s Warfighters* and, in this way, provide
a consistent vision to DLA customers, stakeholders, and

employees. The Business Plan DLA*s business plan is a 2- year, agency-
wide operating plan that (1) tracks

DLA*s 97 initiatives in varying stages of implementation and (2)
highlights the investments and actions necessary to achieve strategies and
business objectives in the near- term. DLA considers 43 of these
initiatives as strategic because they are required to achieve DLA*s vision
and strategy.

Another 45 initiatives DLA considers critical to maintain or improve DLA
operations and guarantee both effectiveness and efficiency. Also, DLA
considers nine initiatives mandatory because they are directed by higher
authority and may also be strategic or critical. The 97 initiatives, at
the time of our review, were in varying stages of implementation.

DLA*s business plan, issued in May 2002, is the newest component of the
Strategic Management System. Its initiatives are described in action
plans, which cite who is responsible for the action; the amount of
investment required; how the action supports strategic plan goals,
strategies, and objectives; and the major events and time frames to
achieve the action. Of the 97 DLA initiatives contained in DLA*s Strategic
Management System, DLA identified 18 that are aimed specifically at
mitigating spare parts shortages and 6 that are aimed at improving DLA*s
internal logistics operating systems and processes that may improve
logistics support to customers and thus help reduce critical readiness-
degrading spare part

shortages affecting the military forces. The remaining 73 initiatives
relate to DLA*s financial, human capital, and information technology areas
that could improve DLA*s ability to better serve its customers but do not
specifically relate to acquiring spare parts to fill shortages. Thus, they
are not addressed in this report.

Some Strategic DLA has a number of initiatives that, if fully implemented,
could either

Initiatives Could directly or indirectly contribute to mitigating critical
spare parts

shortages and may improve supply support readiness. Twenty- four of Help
Mitigate Spare

the 97 initiatives contained in its Strategic Management System, and Parts
Shortages

1 separate ongoing DOD- directed initiative, according to DLA, are aimed
at and Improve

achieving these results. Such improvements are likely, in part, because
some of the 24 initiatives address recurring causes for the shortages.
Supply Readiness

If Fully Implemented, DLA If fully implemented as planned by the end of
2009, 18 initiatives in DLA*s

Initiatives Could Directly Strategic Management System could directly help
mitigate spare parts

Reduce Critical Shortages shortages and may improve supply support
readiness. These initiatives

and Improve Supply focus heavily on (1) obtaining strategic sourcing,
which involves alliances

Support Readiness and long- term agreements with suppliers of critical
parts; (2) partnerships

and agreements with customers; (3) an improved supply availability to
customers; (4) a reduction of backorders; and (5) the development of a
national inventory system. Several of these initiatives also address some
recurring causes of shortages. For example, one initiative is aimed at
reducing spare parts shortages by identifying manufacturers that produce
parts, such as cast and forged parts and microcircuits, that are no longer
produced by the original equipment manufacturers, yet are still critical
components of weapon systems. Another initiative will likely mitigate
spare parts shortages because it is designed to guarantee DLA sources of
low- demand, high- dollar items by forming long- term contracts with their
manufacturers. Another initiative is designed to develop agreements
between suppliers and DLA to arrange long- term contracts for sole- source
items.

Some of the initiatives more specifically address recurring causes for
critical spare parts shortages. For example, a Defense Supply Center
Richmond official identified two predominant causes for a number of
critical spare parts shortages* unexpected service demand and sole

source manufacturers not producing quantities DLA needed to fill customer
orders. The customer relationship management initiative is designed to
address unexpected service demands by using collaborative demand planning
between DLA and the services to determine how much

of a particular part is needed during wartime as opposed to peacetime.
According to DOD, this initiative addresses the readiness- based sparing
concept 11 by using service level agreements to provide tailored support
levels for weapon systems parts. Several supplier relationship initiatives
are aimed at addressing problems with sole source manufacturers not
producing quantities DLA needs to fill customer orders.

Table 3 briefly describes the 18 initiatives DLA Logistics Operations
officials identified in the Strategic Management System*s business plan
component that are currently aimed at mitigating spare parts shortages.

It also provides an estimated completion date for the ongoing initiatives.
Appendix IV describes the initiatives in more detail.

11 The readiness- based sparing concept tailors different support level
goals by item with a link between the item*s availability and desired
readiness levels, according to DOD.

Table 3: DLA Initiatives Specifically Aimed at Improving Spare Parts
Shortages Initiative Description Estimated completion date

Strategic Materiel Sourcing Procure items needed for readiness by applying
commercial best Fiscal year 2005 practices to several initiatives that
fall under the initiative*s *umbrella* including Strategic Supplier
Alliances, Strategic

Materiel Sourcing/ Rapid Manufacturing initiative, Supplier Relationship
Management, Corporate Contracts, and Prime Vendor Contracts.

Strategic Supplier Alliances Develops agreements between suppliers and DLA
to arrange Fiscal year 2005 long- term contracts for sole- source items
using best commercial practices.

Strategic Materiel Sourcing/ Rapid Guarantee DLA sources of low- demand,
high- dollar items by Ongoing business practice a Manufacturing Initiative
forming long- term contracts with their manufacturers stipulating

that DLA will also purchase other low- priced, higher- demand items from
those same manufacturers.

Supplier Relationship Management Facilitates communication between DLA and
its suppliers with Fiscal year 2005 the end goal of receiving the desired
quantity of a particular item when it is needed.

Corporate Contracts Long- term contracts with a single source that
provides multiple Ongoing business practice a items, which reduces spot
buying activity and business transaction costs.

Prime Vendor Contracts Long- term contracting that allows military
customers to Ongoing business practice a requisition market ready or
commercial products directly from a commercial distributor as the items
are needed.

Manufacturing on Demand Identifies manufacturers for parts that are no
longer produced by Ongoing business practice a the original source, yet
are still critical components of weapon systems. Includes Casting and
Forging, the Generalized Emulation of Microcircuits, Warstoppers, and the
Strategic

Material Sourcing/ Rapid Manufacturing initiative. Casting and Forging
Obtains cast and forged spare parts that are difficult to find and

Ongoing business practice a often are no longer produced by the original
manufacturer. Generalized Emulation of Identifies sources of replacement
microcircuits that are critical

Ongoing business practice a Microcircuits components of older weapons
systems still used by the services. Warstoppers Identifies (1) critical,
mission- essential items with long production

Ongoing business practice a lead- times that are low- demand items during
peacetime but experience high demand during periods of war and (2) vendors
that will be able to meet the wartime surge and sustain wartime
requirements for those items.

Organic Manufacturing Production process of items that must be produced by
Ongoing business practice a government owned and operated facilities
because the private sector no longer produces the parts.

Improved Supply Availability Increases supply availability in accordance
with DLA*s goal of Assessed and reported in improving supply availability,
specifically, maintaining aggregate

monthly reviews 85 percent, or greater, supply availability for weapon
systems for each of the military services for each fiscal year.

(Continued From Previous Page)

Initiative Description Estimated completion date

Backorder Reduction Reduce backorders to increase supply availability and
customer Assessed and reported in support. monthly reviews

Customer Relationship Management Incorporates customer input into DLA*s
business practices to Initial Operational Capability improve customer
service and anticipate customer needs. fiscal year 2005; Full

Operational Capability fiscal year 2009 Service Level Agreements
Establishes a set of common expectations between DLA and

Fiscal year 2004 customers and encourages collaboration between them to
improve customer satisfaction.

National Inventory Management Combines the consumable inventories of the
services, with DLA*s

Fiscal year 2009 Strategy inventory, resulting in a single national
inventory that will improve

supply performance by eliminating redundancy and improving asset
visibility.

Inventory Accuracy Improvement Improve inventory record accuracy by using
independent Fiscal year 2007 contractors to perform sample inventories of
DLA items. DLA Product Conformance, Aviation Conducts monthly quality
assurance testing to baseline aviation Assessed and reported in

products to identify necessary improvements to meet monthly reviews
performance goals for critical items. Source: DLA (data), GAO
(presentation).

a A business practice that DLA has implemented to fulfill specific goals
and to better meet customers* needs. Such practices have performance
targets and measures that are assessed periodically.

Several DLA Initiatives DLA also identified six Strategic Management
System initiatives that

Focus on Improving could decrease shortages and increase supply
availability by developing

Logistics Systems or adjusting systems and business processes to improve
its logistics

and Processes That operations and better serve its customers. However,
some of these

initiatives are not expected to be fully implemented until 2007. These
Indirectly Reduce Spare

initiatives include Business Systems Modernization, Distribution Parts
Shortages

Planning and Management System, Strategic Distribution, Logistics Response
Time Reduction, Direct Vendor Delivery Processing Time, and Improving
Overall Purchase Request Processing Time. Business System Modernization
faces a number of challenges before being fully implemented. In June 2001,
we reported some information technology concerns with the initiative,
which increased program risk that DOD agreed to address. 12 Table 4
identifies the system and process initiatives and provides a brief
description of intended results. It also provides an

12 U. S. General Accounting Office, Information Technology: DLA Should
Strengthen Business Systems Modernization Architecture and Investment
Activities, GAO- 01- 631 (Washington, D. C.: June 29, 2001).

estimated completion date for the ongoing initiatives. Appendix V
describes each initiative in greater detail.

Table 4: DLA System and Process Initiatives Initiative Description
Estimated completion date

Business Systems Modernization Transformation of how DLA conducts its
logistics operations Fiscal year 2006 including the replacement of legacy
systems with new software, reengineering by fielding best practices,
improving customer service through collaboration with customers and
suppliers, and providing best value solutions.

Distribution Planning and Improves DLA business processes by enhancing
existing

Fiscal year 2007 Management System systems with new commercial best
practices that include

reengineered logistics processes and industry- based integrated supply
chain solutions. Electronic logistics data will provide realtime
information about orders, including asset visibility of requisitioned
spare parts, as they are in transit to the customer.

Strategic Distribution Identifies international locations that can be used
as strategic Fiscal year 2007 distribution points. Logistics Response Time
Reduction Improves supply chain performance by reducing the number of

Assessed and reported in days that its customers must wait for medical,
pharmaceutical, monthly reviews clothing, and textile items, as well as
repair parts.

Direct Vendor Delivery Processing Improves the average processing time to
13 days for planned Assessed and reported in Time direct vendor delivery
from the inventory control point/ vendor. monthly reviews Improve Overall
Purchase Request

Improve purchase request processing time by reducing inventory Assessed
and reported in Processing Time control point processing time. monthly
reviews Source: DLA (data), GAO (presentation).

A Separate A separate DOD- directed, $500 million aviation investment
initiative*

DOD- Directed Aviation although not included in DLA*s business plan* has
significantly improved

the availability of many critical aviation spare parts and most likely
supply Investment Initiative

readiness. During its first 3 fiscal years, 2000- 2002, the initiative,
called the Has Significantly

Aviation Investment Strategy, significantly improved critical aviation
parts. Increased Availability

Shortages, however, will continue, in part, because the 85- percent
aggregate goal does not reveal that while 47 percent of the critical
aviation of Some Critical

spare parts were raised to this level, many* 5,414 (53 percent) as of the
Aviation Parts, but

end of fiscal year 2002* are below the goal. Of that number, 2, 904 parts,
or over half, were available less than 35 percent of the time. In
addition, Others Remain in Short

DLA officials informed us that DLA*s progress in buying these critical
Supply

spare parts was impeded by a DOD regulation that has since been revised on
May 23, 2003, to allow a waiver for such purchases.

DOD transferred $500 million from the services* operations and maintenance
funds to support the initiative. The low availability of critical aviation
parts had occurred because of (1) steady declines in inventory levels
during the 1990s and (2) inventory models that optimized total stock
availability, while constrained by total cost, and did not favor investing
in low- demand, high- cost parts regardless of readiness impact. These
conditions prompted the Office of the Secretary of Defense in 1999 to
direct DLA*s investment of $500 million, through the initiative, in safety
level inventories of selected aviation critical parts to achieve the
aggregate 85- percent goal. Our analysis of over 10,000, out of a total of
over 15,000, critical aviation parts before and after investment indicates
that their availability significantly improved over the fiscal years 2000-
2002 period. Also, additional improvement could result as DLA invests the
initiative*s remaining $119 million in fiscal year 2004* the fourth and
last year of

investment allocation* in the initiative*s remaining parts. 13 However,
5,414 of these critical aviation parts were below DLA*s 85- percent goal
as of the end of fiscal year 2002. DLA measures its supply support
effectiveness by its ability to provide customers the parts they need
based on meeting an aggregate 85- percent availability rate. This means
that the first time a customer requisitions a part, it will be available
for delivery, on average, 85 percent of the time. Using an aggregate
measure means that the actual supply availability for individual parts
will vary* some items will be above 85 percent and some

well below 85 percent. But DLA targets the average availability of the
group at 85 percent. Our analysis shows significant improvement in the
availability of critical aviation spare parts resulting from investments
made during fiscal years 2000 to 2002. It also shows that many critical
aviation parts will continue to be available well below 85 percent of the
time. This occurred, in part, because of DLA*s 85- percent aggregate
measure of supply support effectiveness that was applied to each of three
critical part groups, 14 and

13 As of December 2002, there were 15,708 parts in the Aviation Investment
Strategy initiative. We excluded 5,412 parts that remained for targeted
investment in the initiative*s fourth year, fiscal year 2003, because the
investment results of those parts were not available. Additionally, we
excluded five parts for which the Marine Corps was the predominant user,
leaving a balance for our analysis of 10, 291.

14 As identified by the military services, Tier 1 parts are the most
critical, Tier 2 parts are critical, and Tier 3 parts are the least
critical.

not individual parts, and a DOD regulation that until recently limited the
safety level inventory investment. Thus, many parts in the initiative will
have availability rates at 85 percent or higher after they receive
investment allocation, but other parts will continue to experience low
availability until

further investment is made. For example, of the 10,291 parts that received
investment through fiscal year 2002, 1, 397 had supply rates greater than
or equal to 85 percent before the initiative*s investment. After
investment through the initiative for 3 years, that number increased to
4,877* about a 250- percent increase. However, 5,414 parts still had
availability rates less than the DLA 85- percent aggregate goal; and 2,
904, or 54 percent, of these parts* such as engine mount fittings for the
B- 52 bomber, shoulder bolts for the F- 14 Tomcat, and landing gear axles
for the UH- 60A

helicopter* were available below 35 percent of the time. Nearly 2,400 of
these were tier 1, or the most critical, spare parts.

Tables 5 through 8 illustrate that this trend holds true, not only for all
parts in the Aviation Investment Strategy initiative as a whole, but also
for each of the three critical part groups. Table 5 shows the aggregate
improvement for 10, 291 DLA- managed critical aviation parts through
investment year 2002 by various availability percent stratifications.
Table 6 shows the same information for the 8,300 Tier 1 parts, the most
critical group; table 7 reflects the results of the 1,415 parts in the
Tier 2 critical part group, and table 8 shows the results of the 576 parts
in the Tier 3 least critical part group. Furthermore, similar improvement
occurred in each of the military services over the same period.

Tabl e 5: Impact of Investment Results on All Tier Groups of Critical
Aviation Parts, as of the End of Fiscal Year 2002 Status before investment
Supply availability percent

(number of items in base year Status after investment

Percent stratification

preceding investment) (number of items) Difference change

85 and above 1,397 4,877 3,480 249 84 to 75 881 641 -240 -27 74 to 65 905
524 -381 -42 64 to 55 860 455 -405 -47 54 to 45 803 516 -287 -36 44 to 35
791 374 -417 -53 Below 35 4,654 2,904 -1,750 -38

Tot al 10, 291 10, 291 Source: GAO analysis of DLA data.

Tabl e 6: Impact of Investment Results on Tier 1 Most Critical Aviation
Parts, as of the End of Fiscal Year 2002 Status before investment Supply
availability percent

(number of items in base year Status after investment

Percent stratification

preceding investment) (number of items) Difference change

85 and above 1,101 3,886 2,785 253 84 to 75 694 495 -199 -29 74 to 65 730
436 -294 -40 64 to 55 690 373 -317 -46 54 to 45 657 422 -235 -36 44 to 35
636 293 -343 -54 Below 35 3,792 2,395 -1,397 -37

Tot al 8,300 8,300

Source: GAO analysis of DLA data. Tabl e 7: Impact of Investment Results
on Tier 2 Critical Aviation Parts, as of the End of Fiscal Year 2002
Status before investment Supply availability percent

(number of items in base year Status after investment

Percent stratification

preceding investment) (number of items) Difference change

85 and above 222 706 484 218 84 to 75 125 106 -19 -15 74 to 65 123 64 -59
-48 64 to 55 126 59 -67 -53 54 to 45 112 61 -51 -46 44 to 35 98 57 -41 -42
Below 35 609 362 -247 -41

Tot al 1,415 1,415

Source: GAO analysis of DLA data.

Tabl e 8: Impact of Investment Results on Tier 3 Least Critical Aviation
Parts, as of the End of Fiscal Year 2002 Status before investment Supply
availability percent

(number of items in base year preceding Status after investment

Percent stratification

investment) (number of items) Difference change

85 and above 74 285 211 285 84 to 75 62 40 -22 -35 74 to 65 52 24 -28 -54
64 to 55 44 23 -21 -48 54 to 45 34 33 -1 -3 44 to 35 57 24 -33 -58 Below
35 253 147 -106 -42

Tot al 576 576

Source: GAO analysis of DLA data.

Furthermore, our analysis of information provided by DLA revealed that
3,342 of the 15,708 critical aviation parts in the Aviation Investment
Strategy initiative as of December 2002 could remain below DLA*s 85
percent aggregate availability rate, regardless of funds available for
investment. According to DOD officials, this is because DOD Supply Chain
Materiel Management Regulation 4140. 1- R limits safety level investments
by requiring they meet a specific demand limit unless that limit is waived
in cases where application of the limit significantly impairs weapon
system support. 15 Without such a waiver, these spare parts could
continually be below DLA*s availability goal, adversely affect readiness,
and increase DLA backorders. Furthermore, DLA*s supply support
effectiveness and

critical aviation spare parts availability to customers could continue to
be limited.

DLA is planning another investment strategy, scheduled to begin in fiscal
year 2004 called Weapon System Readiness Improvement, subsequent to

15 Section C2.6.3.2.6.1 of DOD*s Supply Chain Materiel Management
Regulation 4140. 1- R states that to dampen any overstatement of safety
level requirements due to imprecise safety level models and thereby avoid
unnecessary procurement or repair actions, an item*s safety level shall be
constrained to a maximum of three standard deviations of lead- time

demand or the lead- time demand, whichever is less. Lead- time demand for
a particular supply item is the number of the item needed in a specified
time period multiplied by the projected lead time for the item. The
regulation was amended on May 23, 2003, to allow waivers. Under the
amended regulation, the lead- time demand limit may be waived for weapon
system items where credible evidence exists that its application
significantly impairs weapon system support.

the conclusion of the Aviation Investment Strategy initiative that could
also improve supply readiness. It is expected to target critical aviation,
land, and maritime weapon systems spare parts for investment to achieve a
minimum availability of 80 percent for each part. However, the same lead-
time constraints contained in DOD*s Supply Chain Materiel Management
Regulation 4140. 1- R could also prevent some of these critical

spare parts from reaching the 80- percent availability goal, meaning they
will not be available to customers when needed.

An Office of the Secretary of Defense Inventory Management Study conducted
in August 2002 addressed a need for a focused investment in critical spare
parts that affect supply readiness. The study concluded that low stockage
levels for high- cost, low- demand consumable parts were the predominate
cause of supply- related Not Mission Capable rates in the Air Force and
Navy. Furthermore, it stated that DLA*s optimization requirements models
favor the procurement of the higher- demand, lower- cost parts, continuing
the low availability trend for critical spare

parts. The Comptroller, Office of the Under Secretary of Defense,
recommended in the August 2002 DOD management study that DLA and the
services should continue efforts to ensure that high- cost, low- demand
items that would improve weapon system readiness are available when
needed* an effort that might require DLA to prioritize its funding to
increase appropriate weapon system inventories to meet higher availability
of critical parts.

The August 2002 Office of the Secretary of Defense Inventory Management
Study stated that additional efforts are required to improve the supply
managers ability to make purchase decisions based on readiness impacts
instead of aggregate availability goals. It recommended long and short-
term actions intended to more closely align supply management
accountability with readiness. The long- term recommendation was to ensure
that the department*s logistics systems provide the data needed to link
readiness and supply management decisions supporting readiness based
sparing models. It noted that the Army, Navy and DLA are in the process of
changing their supply management functions from legacy systems to new
commercial systems, but this change to new commercial systems introduces
an interoperability risk because the department does not have an
overarching enterprise architecture defining the interoperability
requirements. Therefore, the study also recommended that in the interim
time remaining before the new systems are implemented the military
departments should continue to apply higher supply targets to the
inventory items associated with weapons systems that report readiness

rates below established goals. It specified that these supply targets
should be measured by several factors including supply availability.

DLA Can Estimate DLA can estimate that added investment in safety level
inventories of

the Impact of critical readiness- related spare parts will increase parts
availability and

will likely improve supply readiness of the military services. However,
Additional Investment there is no assurance that increased investments
would affect overall

on Supply Availability, unit readiness. Which Contributes to

At our request, the DLA Office of Operations Research and Resource Supply
Readiness Analysis provided investment estimates 16 as of November 2002 to
indicate what it would cost to achieve supply availability rates of 85,
90, and 95 percent for over 219, 000 of the spare parts most critical to
readiness. Part criticality was determined by the military services.
Estimates

disregard DOD*s limiting regulatory requirement and are based on a minimum
availability rate for each part instead of an aggregate. Because DLA
maintains some parts at rates higher than 85 percent, the overall rate for
the group will generally be higher than the minimum. Table 9 shows the
investment cost estimates at the various supply availability rates and the
effective overall availability rate for 219,071 of the military services*
most critical aviation, land, and maritime parts. For example, an
investment of $748 million was estimated to achieve a minimum supply
availability rate of 85 percent for the most critical parts. When all
parts that exceed the minimum rate are considered, the overall supply
availability rate is

estimated at 92 percent. As indicated in table 9, investment costs
increase considerably to achieve the 5 percent increments at the higher
minimum availability rates with little effect on the overall rate.

16 We did not validate the accuracy of these estimates.

Tabl e 9: Estimated Investment to Achieve Various Minimum Supply
Availability Rates for the Most Critical Aviation, Land, and Maritime
Military Service Parts

Dollars in millions

Supply availability minimum rate 85 percent 90 percent 95 percent

Estimated investment $748 $1,256 $2, 215 Overall supply availability rate
92 percent 93 percent 96 percent Number of critical items 219,071 219,071
219, 071 Source: GAO analysis of DLA data.

Inventory quantities needed to achieve these supply levels could take
years to acquire and affect a part*s availability rate. It takes up to 3
years in some cases to procure certain critical parts; and when delivered,
the purchased quantities do not necessarily have an immediate impact on
supply availability rates. Some parts, particularly aviation parts, have

several years of acquisition lead time. 17 For example, 351 critical
aviation parts contained in the Aviation Investment Strategy initiative
have acquisition lead times of 2 years or greater. Several parts even
exceeded 3 years. In addition to this acquisition lead time, an initiative
official told us

that it generally takes about 2 years before parts received from vendors
actually affect or increase supply availability rates because initial
investment dollars are used to fill an item*s backorders before increasing
the part*s safety level quantities. Thus, it could take as long as 5 years
in total to improve the supply availability of long acquisition lead- time
parts.

Increasing safety levels of critical spare parts inventories will likely
increase supply availability and therefore supply support readiness.
However, because of the multiple factors that affect a unit*s readiness*
including supply, equipment, training, and personnel* investment in
critical parts does not necessarily mean that a unit*s overall readiness
posture will improve. For example, an operating unit having sufficient

spare parts could still have impaired readiness due to maintenance,
training, and personnel problems. 17 Acquisition lead time is the
administrative and production time required between identification of a
need to buy and the letting of a contract or the placing of an order and
receipt into the supply system of materiel purchased.

Conclusions It is important for DLA, the procurer and manager of most
spare parts for the military services, to have effective supply
acquisition, inventory

management, and distribution systems to ensure DOD*s readiness. The
agency*s strategy for its logistics planning system and its initiatives
have the attributes that, if fully implemented, could help resolve causes
for shortages and improve supply support. The strategy and initiatives
also provide a baseline for measuring progress. However, three things*
DOD*s

Supply Chain Materiel Management Regulation 4140.1- R, DLA*s aggregate
measurement goal for assessing supply effectiveness, DLA*s requirements
models that do not prioritize high- cost, low- demand critical spare
parts* could significantly lessen DLA*s potential to mitigate critical
spare parts shortages and increase military readiness. Unless waivers to
the lead- time demand limits are requested and approved as appropriate
under the current regulation, the availability of certain critical spare
parts for customers could continue to be less than 85 percent* many even
below 35 percent. Thus, DLA*s follow- on investment initiative scheduled
to begin in fiscal year 2004 will not be as effective as it could be in
increasing the availability of critical parts that, in turn, may increase
military readiness. Continuing to manage critical spare parts based on an
85- percent aggregate availability goal also contributes to the disparity
in the availability of these

parts. Absent a minimum availability goal for buying and stocking critical
spare parts and annual performance targets for assessing progress toward
that goal, many critical spare parts shortages that impede readiness could
continue. Furthermore, prioritizing investments in spare parts is
important. Had DOD not directed DLA to focus $500 million on critical
aviation parts

in the Aviation Investment Strategy, DLA would likely have continued using
quantitative models that prioritized buying and stocking low- cost,
highdemand parts and not those high- cost, low- demand parts that most
impact readiness. The success of the DOD- directed initiative has shown
that prioritizing funding for critical spare parts can improve their
availability over several years and likely enhance supply readiness. Such
a focused investment is also consistent with the recommendation of the
Comptroller, Office of the Under Secretary of Defense, to invest in those
high- cost,

low- demand items that are critical to supply readiness. Linking funding
to the annual performance targets could be an effective management tool
for decision makers.

Recommendations for To improve the supply availability of critical
readiness degrading spare

Executive Action parts that may improve the overall readiness posture of
the military

services, we recommend that the Secretary of Defense direct the Director
of the Defense Logistics Agency to

 submit, as appropriate, requests for waiver( s) of the provisions of the
DOD Supply Chain Materiel Management Regulation 4140.1- R that limit the
safety level of supply parts to specific demand levels. Such waivers would
allow DLA to buy sufficient critical spare parts that affect readiness of
service weapon systems to attain an 85- percent minimum availability goal;

 change the agency*s current aggregate 85- percent supply availability
goal for critical spare parts that affect readiness, to a minimum
85percent supply availability goal for each critical spare part, and
because of the long lead times in acquiring certain critical parts,
establish annual performance targets for achieving the 85- percent minimum
goal; and

 prioritize funding as necessary to achieve the annual performance
targets and ultimately the 85- percent minimum supply availability goal.

Agency Comments and In written comments on this report, DOD generally
concurred with the

Our Evaluation draft report and the intent of the recommendations, but not
all of the

specified actions we recommended. Furthermore, DOD concluded its proposed
actions regarding each of our recommendations are sufficient and no
further directions or actions are required. DOD*s written comments are
reprinted in their entirety in appendix II.

In concurring with the first recommendation, DOD acknowledged that the
amended DOD 4140.1- R, dated May 2003, gives the military services and DLA
authority to waive the lead- time demand maximum in cases where

creditable evidence exists. We agree with that action. Although DOD
concurred with the intent of our second and third recommendations, DOD did
not agree with the need to replace the aggregate 85- percent supply
availability goal with a minimum 85- percent supply availability goal for
critical spare parts, establish annual performance targets for achieving
the minimum goal, or prioritize funding to achieve it. Instead, DOD said
DLA is working toward a readiness- based sparing concept of tailoring
different support level goals by item with a link

between an item*s availability and desired inventory levels rather than
one standard level of support for all critical items. Additionally, DOD
stated that setting an 85- percent minimum goal across the universe of
critical items would undermine the efficiencies of optimization that may
be achieved by working toward different supply availability goals for
different parts based on readiness impact. It cited that its Customer
Relationship Management initiative, which is scheduled to start in fiscal
year 2005 and be fully operational in fiscal year 2009, will use service
level agreements to provide this type of tailored support. It stated that
funding would then be prioritized accordingly in concert with the
implementation of the new

tailored approach. We disagree that the actions DOD prescribes will be
sufficient, particularly in the near term, to address the need for DLA to
increase critical spare parts availability. As our report notes, DLA is
responsible for managing hundreds of thousands of critical parts that the
services have identified as crucial to weapons systems readiness. However,
many of these parts are

not available to meet service needs. DLA has been using the same 85percent
aggregate goal for stocking these critical parts as it has for non-
critical parts. Based on our work, DLA was not managing its inventory by
developing individual item supply availability targets tailored to desired
readiness levels. Although DLA has started using service level agreements,
which are a component of DLA*s Customer Relationship Management

initiative, as our report notes, these agreements have a limited scope and
are considered a work in progress. DLA plans to execute 11 agreements by
the end of fiscal year 2003 and as noted, full implementation for the

Customer Relationship Management initiative is scheduled for fiscal year
2009. Furthermore, managing to an 85- percent aggregate goal does not
reveal the significant shortages in availability of many individual
critical parts. For example, after 3 years of focused investment to
increase the availability of over 10,000 critical aviation parts, 53
percent were not

available at the 85- percent aggregate goal and over half of these parts
were available below 35 percent of the time.

DOD*s response proposes, what we agree is, an optimum approach that is
consistent with the desire expressed in the August 2002 Office of
Secretary of Defense Inventory Management Study for supply managers to
make purchase decisions based on readiness impacts instead of aggregate

availability goals. However, according to the August report, implementing
this approach is a long- term effort dependent on DLA and the services*
logistics systems providing the data needed to link readiness and supply
management decisions that has interoperability risks because the

department does not have an overarching architecture for integrating such
systems. The August report, therefore, recommended that until these new
systems are implemented to provide more visibility into the relationship
between inventory levels and weapon system readiness, DLA and the military
departments should continue to apply higher supply availability targets to
the inventory items associated with weapon systems where readiness is
below established goals.

As DLA plans another investment strategy, subsequent to the conclusion of
the Aviation Investment Strategy initiative, that will expand the number
of critical parts that are targeted for investment by including land and
maritime items, it needs a clear minimum goal for the availability of
these parts, annual performance targets for measuring progress, and
focused funding. Therefore, until the systems, initiatives, and agreements
are in place to support the department*s prescribed approach for
optimizing efficiencies of supply availability and investment, we continue
to believe our recommendations to set a minimum goal of 85 percent for
each critical spare part, establish annual performance targets for
achieving the goal, and prioritize funding accordingly are reasonable
interim actions to meet the services* readiness goals for parts they have
identified as critical to readiness.

We are sending copies of this report to the Secretary of Defense; the
Director, Defense Logistics Agency; the Director, Office of Management and
Budget; and other interested congressional committees and parties. We will
also make copies available to others upon request. In addition,

the report will be available at no charge on the GAO Web site at http://
www. gao. gov.

Please contact me on (202) 512- 8365 or Richard Payne on (757) 552- 8119
if you or your staff have any questions concerning this report. Other
contacts and key contributors are listed in appendix VI.

Sincerely yours, William M. Solis, Director Defense Capabilities and
Management

Appendi Appendi xes x I

Scope and Methodology To determine the adequacy of DLA*s strategic plans
to address critical spare parts shortages and their effect on readiness,
we obtained and analyzed DLA planning documents that pertained to spare
parts or logistics. We assessed the adequacy of DLA*s strategic planning
by comparing DLA planning to the requirements outlined in the Government
Performance and Results Act of 1993 to determine if DLA*s planning
contained key management attributes that are necessary to reduce spare
parts shortages. We interviewed DLA officials at DLA Headquarters, Fort
Belvoir, Virginia, regarding DLA strategic planning efforts and to
determine the extent to which DLA*s strategic planning had been
coordinated with the Office of the Secretary of Defense and the services.

To determine the likelihood that DLA*s strategic logistics initiatives
will achieve their intended results and help mitigate spare parts
shortages that affect readiness, we obtained and analyzed information and
documentation related to (1) initiatives to overcome shortages, (2)
chronic shortage items degrading the readiness of forces, and (3) chronic
and recurring causes for shortages. We obtained a list of initiatives that
DLA officials identified as either specifically improving spare parts
shortages or improving systems and processes that could impact shortages.
We analyzed the initiatives to see if they contained performance measures

and milestones to track the progress of the initiatives. To determine the
impact of a $500 million DOD- directed aviation investment to improve the
availability of critical spare parts, we obtained and analyzed DOD-
directed aviation investment data on supply availability. We sorted the
data by critical part group, predominant user, funding year,

fiscal year, and supply availability percentage increments/
stratifications (85 percent and greater, 84 to 75 percent, 74 to 65
percent, 64 to 55 percent, 54 to 45 percent, 44 to 35 percent, and less
than 35 percent) to detail

changes in parts availability before and after investment. We interviewed
program and budget officials at DLA Headquarters concerning which
initiatives contained in their strategic planning would impact spare parts
shortages. We also interviewed officials at the Defense Supply Center in
Richmond, Virginia, concerning the separate DOD- directed Aviation
Investment Initiative and the spare parts shortages that the services
identified as critical to weapon system readiness, as well as the key DLA-
identified initiatives. We focused on the Richmond Supply center

because it is the lead center for aviation and because aviation items have
been predominant readiness degrading items for the Air Force and Navy.

To determine the extent to which DLA can identify how increased investment
impacts critical spare parts inventories and readiness, we requested DLA*s
Office of Operations Research and Resource Analysis to

estimate the investment cost necessary to increase supply availability of
critical aviation spare parts to a minimum rate of 85 percent. However, we
did not independently validate or verify the accuracy of DLA*s estimates

that show the relationship between investment and supply availability or
of DLA*s optimization models that determine logistics requirements, given
funding constraints.

We performed our work from August 2002 to May 2003 in accordance with
generally accepted government auditing standards.

Appendi x II Comments from the Department of Defense

Schematic of Defense Logistics Agency

Appendi x III Strategic Management System

Description of DLA Initiatives Aimed at

Appendi x IV

Mitigating Spare Parts Shortages DLA identified 18 strategic initiatives
in varying stages of implementation in its Strategic Management System
that are aimed at mitigating shortages of spare parts, including critical
ones. Of these, three* Strategic Material Sourcing, Manufacturing on
Demand, Customer Relationship Management* are umbrella initiatives with
five, three, and one additional initiative, respectively, under them. What
follows is DLA*s description of the initiatives. We have not verified the
details of these descriptions.

Strategic Materiel The Strategic Materiel Sourcing initiative represents
DLA*s attempt to

Sourcing Initiative procure items needed for readiness by applying
commercial best practices

to several initiatives that fall under that initiative*s *umbrella,*
including Strategic Supplier Alliances, Strategic Materiel Sourcing/ Rapid
Manufacturing initiative, Supplier Relationship Management, Corporate
Contracts, and Prime Vendor Contracts.

Strategic Supplier Alliance The Strategic Supplier Alliance develops
agreements between suppliers

Initiative and DLA to arrange long- term contracts for sole- source items
using best

commercial practices such as partner- driven, integrated supply chain
management whereby the buyer and seller cooperate to maximize their mutual
benefit. One of the initiative*s goals is to improve the readiness of
weapon systems, and this is accomplished in part by reducing the customer
wait time for spare parts. Other potential benefits include improved
capacity utilization, increased process reliability, reduced inventories,
reduced cycle times, leveraging of shareholder strength, increased
flexibility, increased customer service, shared innovations and
technologies, and reduced total system costs. The initiative is composed
of a charter, goals, improvements, and metrics.

According to a March 2002 report by the DOD Inspector General, a Strategic
Supplier Alliance with Honeywell International has had positive results.
The DOD Inspector General report stated that a DLA alliance with Honeywell
produced three primary sole- source contracts for spare parts that
resulted in improved wait time, reduced inventory for DLA to manage, and
lower prices for DLA customers. The report also noted that (1) the
contracts had resulted in a $9.8 million cost reduction of DLA managed

inventory for the first 221 catalog contract items and (2) the alliance
contracts will ultimately result in a price reduction of $59 million over
12 years for the first 594 items placed on the three contracts.
Additionally, administrative lead* time for one of the contract items was
reduced from

180 to 10 days. Other potential suppliers that DLA had identified as
Strategic Supplier Alliance candidates include Lockheed Martin, Northrop
Grumman, and Rolls Royce.

Strategic Material The Strategic Material Sourcing/ Rapid Manufacturing
initiative is likely to

Sourcing/ Rapid improve spare parts shortages because it is intended to
guarantee DLA

Manufacturing Initiative sources of low- demand, high- dollar items by
forming long- term contracts

with their manufacturers, stipulating that DLA will also purchase other
low- priced, higher- demand items from those same manufacturers. The group
of low- demand, high- priced items and the high- demand, low- priced items
to be purchased through one of the initiative*s contracts is referred to
as a *market basket.* Insurance or numeric stockage objective and
replenishment items with production lead- times of 60 days or greater that
are projected to be purchased within the next 5 years will be included in
the program, but critical weapon system parts will be excluded. At the
time of our review, this initiative was still in the demonstration phase;
and items were being identified to include in the market baskets.
According to DLA officials, the demonstration phase will involve 18 groups
of items covering approximately 11,000 individual items. The candidate
population for the

initiative includes 39,000 items with an annual demand of $67 million.
Also, long- term sources for hard- to- find spare parts can be obtained by
agreements tailored to the Strategic Material Sourcing/ Rapid
Manufacturing Initiative program. The initiative*s contracts to produce a
market basket*s items for DLA can last up to 11 years: 5 years under the
original contract and as many as three additional 2- year options if

performance targets are met. Supplier Relationship

The Supplier Relationship Management program seeks to improve Management
Initiative

spare parts shortages by facilitating communication between DLA and its
suppliers with the end goal of receiving the desired quantity of a
particular item when it is needed. Supply Relationship Managers meet
periodically with the suppliers to ensure that the supplier will meet the
performance levels and targets, which are specified in the contract with
DLA, to provide spare parts.

Corporate Contracts Corporate contracts are a form of long- term contract
that DLA uses to negotiate an agreement with a manufacturer to supply a
range of items.

With such a contract, DLA can use a single source to provide an assortment
of items that are managed by one or more inventory control points. The one
contract thus reduces spot buying activity and business transaction costs.
According to DLA, additional benefits potentially include lower production
costs, improved delivery, ease of use, and reduced customer support

infrastructure. Further, corporate contracts will likely improve spare
parts shortages by locating a long- term source of spare parts with
improved delivery, and this improved delivery will increase supply
availability, which contributes to readiness. As of the beginning of
fiscal year 2002, there were nearly 100 suppliers that had entered into
corporate contracts with DLA.

Prime Vendor Initiative The Prime Vendor initiative is another DLA supply
support vehicle that uses single commercial distributors to supply
customers through long- term

contracting in a particular region. Prime Vendor*s long- term contracts
allow military customers to requisition market- ready or commercial
products directly from a commercial distributor as the items are needed.
The DLA supply centers negotiate the long- term contracts with the
vendors, and the customers can order the items directly from the supplier
via an electronic catalog. According to this initiative, with Prime
Vendor, the customer receives an order confirmation within minutes; and
the delivery is to occur

within 24 to 48 hours. According to DLA, because the military customers
can direct- order items when they need them directly from the vendor and
receive them within 48 hours, spare parts shortages will improve, supply
availability will increase and readiness may be improved. Another benefit
is the reduced inventory management costs to DLA because there will be no
need for DLA to maintain items long- term in its warehouses if the
customers are ordering items directly from the manufacturer when they are
needed. Virtual Prime Vendor is the advancement of the Prime Vendor
concept and is designed to anticipate customer needs and provide items or
services as they are needed. Virtual Prime Vendor includes additional
logistics support and

other services such as forecasting requirements, inventory management,
engineering support, technical services, and other services related to
customer satisfaction.

Manufacturing on The Manufacturing on Demand initiative seeks to improve
spare parts

Demand shortages by identifying manufacturers for parts that are no longer

produced by the original source, yet are still critical components of
weapon systems, such as cast and forged parts and microcircuits. Such
spare parts often cannot be purchased from the original source because the
original manufacturer does not produce the part anymore or the original
manufacturer is no longer in business. Manufacturing on Demand is the
umbrella initiative for the Casting and Forging, the Generalized

Emulation of Microcircuits, and the Warstoppers initiatives. In addition,
it includes, in part, the Strategic Material Sourcing/ Rapid Manufacturing
initiative, which is also under the Strategic Materiel Sourcing initiative
and

is discussed there. Casting and Forging

DLA*s Casting and Forging initiative seeks to improve spare parts
shortages Initiative

by obtaining cast and forged spare parts that were difficult to find and
often no longer produced by the original manufacturer. Typically,
foundries and forging operations are known as *third tier* suppliers that
do not manufacture spare parts for a weapon system once it is out of
production. DLA coordinates with the American Metalcasting Consortium and
the Forging Defense Manufacturing Consortium to locate manufacturers that

will produce critically needed spare parts with materials and processes
that DLA and the consortiums deemed suitable. The American Metalcasting
Consortium alone involves 230 companies, 37 contractors, and 94 shops

that account for the production of 455 parts for 59 weapon systems. In
sum, as of January 2003, the casting and forging program was producing
over 560 parts from 65 different weapon systems, according to DLA
officials.

Generalized Emulation of The Generalized Emulation of Microcircuits
initiative was designed

Microcircuits Initiative to identify a source of replacement microcircuits
that are critical components of older weapon systems still used by the
services. The

original microcircuits on older weapon systems are now obsolete because
technology has advanced since their introduction, and the original
manufacturers do not produce the microcircuits anymore because the
commercial demand is not high enough to encourage them to incur production
costs. However, these microcircuits are still critically needed on several
weapon systems; therefore, DLA currently has a contract with the Sarnoff
Corporation to provide replacements for the microcircuits

that are no longer in production by imitating their original designs. This
initiative seeks to improve the supply of these critically needed spare

parts through the development of a steady supply source, and high supply
availability could contribute to supply readiness. Other potential
benefits of emulated microcircuits include the elimination of redesign
costs, audited reliability testing/ screening, indefinite supply
availability, and direct orders placed with the supplier. Additionally,
the replacement supply of microcircuits could provide another option for
maintaining missionready status for weapons systems such as MLRS, Patriot,
AV- 8B, B- 2, and the B- 52. As of May 2003, this initiative has emulated
over 300 designs from the government- owned library and has supplied over
45,000 microcircuit devices to customers, which include DLA, Hanscom Air
Force Base, Naval Surface Warfare, Warner Robins Air Force Base, and the
National Aeronautics and Space Administration.

Warstoppers Initiative The Warstoppers initiative seeks to impact the
shortage of spare parts by identifying (1) critical, mission- essential
items with long production

lead- times that are low- demand items during peacetime but experience
high demand during periods of war and (2) vendors that will be able to
meet the wartime surge and sustain wartime requirements for those items.
An integral part of this initiative is DLA*s industrial base evaluation
tool known as the World Wide Web Industrial Capabilities Assessment
Program. The program is DLA*s effort to collect current data directly from
private industry, via the Internet, on thousands of parts and then analyze
that data to identify actual or potential part availability problems when
there is a surge in demand for those parts in wartime. The program also
emphasizes investment in technology resources and the pre- positioning of
raw materials so that items can be produced as needed during wartime with
reduced lead- times, rather than procuring items and storing them as war
reserves. According to this initiative, it is more cost effective to
invest in the industrial base that will produce critical items than to
store quantities of those same items as war reserve inventory until they
are needed.

In July 2002, we reported 1 that the World Wide Web Industrial
Capabilities Assessment Program *has several attributes reflecting sound
management practices that are required for reliable industrial base
capability assessments.* According to DLA, benefits of Warstoppers include
reduced lead- times, reduced prices, and reduced wartime inventory costs.

1 U. S. General Accounting Office, Defense Inventory: Improved Industrial
Base Assessments for Army War Reserve Spares Could Save Money, GAO- 02-
650 (Washington, D. C., July 12, 2002).

Examples of acquisitions for weapon system spare parts that benefited from
the Warstoppers program include DC motors for the H- 2, H- 60, AH- 1, and
UH- 1 helicopters; hydraulic tubes for the F- 15 fighter; and the clip- on
nut used on several weapon system engines.

Organic Manufacturing Organic Manufacturing refers to the production of
items by governmentowned

Initiative and -operated facilities because the private sector cannot meet
the

need for those parts. Government facilities that produce these parts
include arsenals, military repair depots, and other DOD* operated
factories. These facilities produce the hard to find items when no offer
is received to produce them, there is no source, the part is an Emergency
Supply Operations Center Requirement, the private sector price is
unacceptable, or the private sector delivery time frame is unacceptable.
Organic manufacturing improves spare part shortages by producing items for
34

Level* A (most critical) weapon systems including multiple weapon systems
at 35 organic manufacturing sources.

Improved Supply DLA uses supply availability as a measure of supply
effectiveness. DLA*s

Availability Initiative goal is to maintain an aggregate 85 percent, or
greater, supply availability

for weapon systems parts for each of the military services for each fiscal
year. By increasing supply availability, backorders for spare parts are
reduced, and the readiness of weapon systems could increase because the

critical spare parts essential to mission performance would be available
at a higher rate.

The 85- percent supply availability initiative supports DLA Strategic Plan
Goal 1* to provide responsive, best value supplies and services
consistently to its customers. According to DLA officials, the 85- percent
target availability rate is based on the statistical rule that 85 percent
of the population lies within one standard deviation of the mean. Further,
DLA officials maintain that 85 percent is an acceptable supply
availability goal because it is cost- effective, and supplying items at
rates above 85 percent would be cost prohibitive. However, as discussed
earlier in this report, the 85- percent availability rate is an aggregate
rate, meaning that DLA*s items are to be available 85 percent of the time
on average. The 85- percent measure does not specifically relate to each
individual item that DLA manages. Rather, it is an average measure of the
supply availability of each item, which means that some items are
available at rates greater than

85 percent of the time, and other items are available at rates well below
85 percent.

Backorder Reduction Backorder reductions support DLA*s Strategic Plan Goal
1; and the

Initiative backorder reduction initiative supports the DLA strategy to
focus, manage,

and measure logistics support by customer segment, based on customer
requirements. Through the initiative, DLA plans to reduce hardware
backorders to 250,000 by the end of fiscal year 2007. A benefit to
backorder reductions in addition to contributing to readiness, according
to a DLA official, is the reduction of cannibalization, where parts are
taken from one system and used on another. DLA officials also stated that
backorders are filled on average in 80 days and about one- third are
filled within 30 days. DLA reported in the spring of 2003 that backorders
had been reduced from a high of approximately 525, 000 in May 2000 to a
little over 314,000 in September 2002. This means that more items are
available to DLA customers.

Customer Relationship The Customer Relationship Management program is an
initiative

Management and designed to foster a better relationship between DLA and
the services

by incorporating input from the services. The customer relationship
Service Level

management element of DLA*s business practices is designed to use
Agreements Initiatives

information obtained to provide customer service and anticipate the
individual needs of each customer. The focus of the initiative is on
collaborative demand planning between DLA and the customer to determine
how much of a particular part is needed for wartime activities

as opposed to peacetime activities. Through its processes and system that
emphasizes customer satisfaction, the Customer Relationship Management
initiative supports the DLA plan to (1) provide responsive, best value
supplies and services; (2) focus, manage, and measure logistics support;
and (3) improve customer support.

The Service Level Agreements initiative is an integral component of the
Customer Relationship Management initiative. Service level agreements are
formally negotiated between DLA and its customers and set priorities to
meet customer needs, performance measures, and targets. The initiative
seeks to establish a set of common expectations between DLA and its

customers and to encourage collaboration. This collaboration seeks to
improve customer satisfaction, which is an objective DLA is targeting at
90 percent by the end of fiscal year 2007. The application of service
level

agreements also seeks to support DLA*s plan to (1) provide responsive,
best value supplies and services consistently to its customers and (2)
negotiate and honor performance agreements with its customers. Each
service level agreement typically is composed of a scope/ objective,
detail of service to be provided, and the performance measurement
standards to be met. According to DOD this initiative addresses the
readiness based sparing concept by using service level agreements to
provide tailored support levels for weapon systems parts.

Service Level Agreements have a limited scope and are considered a work in
progress. According to a DLA official, DLA is negotiating with the Air
Force Materiel Command to develop a service level agreement, and other
agreements are planned with NADEP and NAVAIR. In total, DLA plans to
execute 11 agreements by the end of fiscal year 2003. The Service Level
Agreement initiative is likely to improve spare parts shortages by its
existence as a contracting instrument of the CRM program that is a product
of encouraged communication between the customers and DLA to anticipate
customer demand.

Other Customer Relationship Management initiatives involve  identifying
the appropriate customers to receive service level agreement

offers,  establishing a process to approach and train customers, 
designing the future DLA organization focusing on customer

interactions,  establishing key performance indicators consistent with
BSC,  developing the right customer communication plan, and  determining
the customers to contact personally.

National Inventory According to DLA, the National Inventory Management
Strategy initiative Management Strategy

seeks to achieve a DLA managed single National Inventory combining
military service managed consumable inventories with DLA*s inventory.
Initiative DLA anticipates that a national inventory will provide total
asset visibility to DOD- wide inventories and improve supply performance
by eliminating redundancy in all levels of inventory and information
systems managed by DLA and the services. DLA expects the National
Inventory Management Strategy to increase DLA efficiency in providing
items to its customers because it allows DLA to locate all of the parts
that the services previously managed. This total visibility will allow DLA
to determine how many parts are in the inventory, which parts have
shortages, and where they are needed. The faster DLA can locate a part,
the faster it can supply that part to the customer. Table 10 highlights
some of the expected initiative benefits to the services and to DLA.

Tabl e 10: Expected Benefits of the National Inventory Management Strategy
to the Services and DLA

Benefits to the services Benefits to DLA

Higher levels of supply readiness Supplier of choice Tailored logistics
support solutions Core competencies Optimized supply chain Better
decisions Focus on core competency Resource allocation Better resource use
Source: DLA (data), GAO (presentation).

In addition, according to DLA, a uniform DLA- managed system will help
reduce wait time for items because supplies will be regionally located
according to regional usage and customer input. Reducing customer wait
time should increase the availability of many spare parts, and the
increase

in parts availability will contribute to the supply readiness of the
military services. The National Inventory Management Strategy initiative
also incorporates milestones for completion, and performance metrics will
be jointly established by DLA and the services. According to a DLA
official, the initiative*s metrics include (1) supply chain availability,
(2) item transfer, (3) customer relations, and (4) resource management.
The initiative supports DLA*s Strategic Plan to structure internal
processes to deliver customer outcomes effectively and efficiently, reduce
redundant

DOD inventory and improve responsiveness, and improve supply chain
effectiveness.

DLA has over a hundred potential sites to include in the National
Inventory Management Strategy initiative; and current pilot sites using
the initiative, according to a DLA official, include the Defense Depot
Yokosuka, Japan, where DLA has assumed control of managing 11,000 items
previously

owned by the Navy; Naval Air Station Lemoore, California, where DLA has
improved supply support; and Naval Air Italy. Additional pilot program
sites, according to a DLA official, will include Fort Carson, Colorado;
Camp Lejeune, North Carolina; Tinker Air Force Base, Oklahoma; and
Ingleside Navy Base, Texas. The National Inventory Management Strategy is
being developed in four phases. As of April 2003, this initiative was in
its testing period (Phase III) with the DOD- wide implementation process
scheduled from fiscal years 2004 into 2009.

Inventory Accuracy The Inventory Accuracy Improvement initiative is
designed to improve Improvement Initiative

inventory record accuracy by using independent contractors to perform
sample inventories for over 4 million DLA- managed items. This initiative
seeks to support DLA*s plan to structure internal processes to deliver
customer outcomes effectively and efficiently and improve processes. Also,
DLA plans to improve inventory accuracy for high- dollar, general supplies
to at least 99 percent by the end of fiscal year 2007, and it plans to
achieve a 95- percent accuracy level for all other items by the end of
fiscal year 2007 as well. Improved inventory accuracy will likely improve
spare parts

shortages by giving inventory managers better supply information about
items that are critically needed for systems that affect readiness. This
information can factor into the decision to purchase more of those
critical spare parts to increase their supply availability, which in turn
can contribute to supply readiness of the services. DLA developed the
inventory improvement accuracy initiative based on a GAO report released
in June 1999. 2

2 U. S. General Accounting Office, Financial Management: Better Controls
Essential to Improve the Reliability of DOD*s Depot Inventory Records,
GAO/ AIMD- 99- 132 (Washington, D. C., June 28, 1999).

Product Conformance, DLA expects that the Product Conformance initiative
is designed to

Aviation improve aviation spare parts shortages by conducting monthly
quality

assurance testing to baseline aviation products and identifying where
improvements are necessary to meet performance goals for items that the
services have identified as critical. According to a DLA official, the
Product Conformance initiative has four metrics: (1) identification of
critical items by the services, (2) the impact the critical items will
have on readiness, (3) identification by the services of procurement
sources to procure those items, and (4) the cost of the items. DLA*s aim
is to achieve 97- percent production conformance for critical aviation
material on hand by the end of fiscal year 2005 and 99 percent conformance
by the end of fiscal year 2007. Also, DLA explains that Product
Conformance supports DLA*s plan to (1) structure internal processes to
deliver customer outcomes effectively and efficiently, (2) improve
processes, and (3) leverage industry.

Description of DLA Initiatives Aimed at

Appendi x V

Improving Logistics Systems and Processes DLA identified six strategic
initiatives in varying stages of implementation in its Strategic
Management system that seek to modernize and improve DLA*s logistics
processes and systems and better serve its customers. DLA believes that
doing so will indirectly improve spare parts availability and supply
readiness. The six include the Business Systems Modernization,
Distribution Planning and Management System, Strategic Distribution,
Logistics Response Time Reduction, Direct Vendor Delivery Processing

time, and Overall Purchase Request Processing Time Improvement
initiatives.

Business Systems Business Systems Modernization is an approximately $850-
million

Modernization initiative that seeks to transform how DLA conducts its
logistics

operations. The transition initiative includes the eventual replacement
Initiative

of DLA*s older logistics materiel management systems, or legacy systems,
with commercial off- the- shelf software by January 2006. The Standard
Automated Materiel Management System and the DLA Integrated Subsistence
Management System are the legacy logistics systems

that DLA has used to manage its inventory for over 30 years. Other
initiative objectives that DLA seeks to achieve by the end of 2005 are
reengineering by fielding best practices, improved customer service
through collaboration with customers and suppliers, and providing best
value solutions.

DLA explains that according to this initiative, commercial off- the- shelf
software will replace the legacy systems as a single, integrated system.
All order fulfillment, planning, and financial management activities will
be supported by the new software that impacts DLA*s financial, material
management, and sales and distribution logistics operations. DOD approved
the initiative on December 21, 1999, and DLA began a concept demonstration
test phase, also referred to as *Release 1,* of the new initiative
software on July 31, 2002. DLA transferred about 170,000 items for the
initial test phase from its legacy systems among its three inventory
supply centers at Columbus, Ohio; Philadelphia, Pennsylvania; and
Richmond, Virginia. About 2.5 million customer orders have been made using
the new BSM technology involving around $500 million in sales. A follow-
on test phase, or *Release 2,* of the initiative is scheduled to begin in
July 2004, and it will include 50 percent of the remaining items that DLA
manages. As of April 2003, initiative implementation across DLA was
targeted for January 2006.

Distribution Planning The Distribution Planning and Management System
initiative seeks to

and Management improve DLA business processes by enhancing existing
systems with new

commercial best practices that include re- engineered logistics processes
System Initiative

and industry- based integrated supply chain solutions. Electronic
logistics data will provide real- time information about orders, including
asset visibility of requisitioned spare parts, as they are in- transit to
the customer. The initiative supports DLA*s plan to structure internal
processes to (1) deliver customer outcomes effectively and efficiently,
(2) design and implement a best value enterprise information technology
environment, and (3) improve distribution responsiveness and reduce costs.
By

improving the supply process by which spare parts are provided to
customers, as well as reducing wait time, the Distribution Planning and
Management System initiative could contribute to the improvement of

spare parts shortages and potentially the readiness of the military
services. The initiative seeks to meet assigned objectives for weapon
systems readiness support. According to DLA, additional benefits include
cost reductions for transportation and overall distribution; greater use
of DOD negotiated rates, more consolidated shipments, and increased
productivity of distribution and transportation operations. Additionally,
DLA projects that the completion of the initiative will result in net
projected savings to the agency of $63 million by the end of fiscal year
2007.

Strategic Distribution The Strategic Distribution initiative is intended
to reduce transportation

Initiative costs by identifying international locations that can be used
as strategic

distribution points. Because critically needed items at the distribution
points are located closer to the customer, customer wait time is reduced.
A reduction in customer wait time could improve spare parts shortages by
providing items to the customer faster than if the items had to be
delivered from more distant distribution points. An additional benefit
could be reduced shipping costs because strategic distribution emphasizes
the use of other shipping methods, such as dedicated trucks for deliveries
within the United States and surface transports for overseas shipping, to
replace air transport, which has a higher material shipping cost.
According to DLA officials, Strategic Distribution has been used for 2
years in three locations: Germansheim, Yokosuka, and Pearl Harbor.

Logistics Response The Logistics Response Time Reduction initiative is a
DLA effort to

Time Reduction improve supply chain performance by reducing the number of
days that its

customers must wait for subsistence, medical, pharmaceutical, clothing,
Initiative and textile items, as well as repair parts. According to DLA
officials, the initiative complements the Business Systems Modernization
initiative and is an integral part of the DLA transition from older
business practices and logistics management. Also, the Logistics Response
Time Reduction initiative supports DLA*s strategic goal to improve average
performance for customer delivery by the end of fiscal year 2007. Table 11
demonstrates the

improvement in response time for categories of DLA- managed items.

Tabl e 11: Response Time Improvement by Item Category Item category
Response time improvement

Repair Parts 15 days Medical and Pharmaceutical 1.9 days Subsistence 2.5
days Clothing and Textile 21 days Source: DLA.

The Logistics Response Time Reduction initiative also supports DLA*s
strategic plan to structure internal processes to deliver customer
outcomes effectively and efficiently and improve supply chain
effectiveness. According to DLA, by improving the response time of DLA*s
system for spare parts delivery, the availability of those parts will
increase, which could contribute to readiness.

Direct Vendor Delivery Direct vendor delivery is the DLA arrangement with
suppliers that allows

Processing Time its customers to receive items from the suppliers
directly, instead of DLA

receiving the items first and then distributing them to the customers.
Initiative

Although DLA does not take delivery of the items, it still monitors the
delivery performance of the suppliers, and it is also involved in the
direct vendor delivery planning and procurement processes. Customers may
take direct delivery from direct vendor delivery sales, but DLA obligates
and commits the funds to pay the supplier. The aim of the Direct Vendor
Delivery Processing Time initiative is to improve the average processing
time for the planned direct vendor delivery inventory control point/
vendor to 13 days by the end of fiscal year 2003, which matches the
Uniform

Materiel Movement Issue Priority System processing time. By improving
delivery time, customer wait time is reduced, and supply availability is
increased, which can positively affect readiness. The Direct Vendor
Delivery Processing Time initiative also supports DLA*s plan to structure
internal processes to deliver customer outcomes effectively and
efficiently, as well as leverage industry.

Overall Purchase The Overall Purchase Request Processing Time Improvement
initiative

Request Processing is intended to improve purchase request processing time
by reducing

inventory control point processing, as well as meeting lead- time
processing Time Improvement requirements 75 percent of the time by the end
of fiscal year 2007. Another Initiative

objective is to reduce the number of open purchase requests, according to
a DLA official. This initiative seeks to improve spare parts shortages by
reducing customer wait time to receive critically needed items, thus

improving supply support. Also, this initiative could also improve unit
readiness by delivering critical parts as they are needed to operate
systems used by the military services. According to a DLA official, the
metrics developed for this process improvement include (1) monitoring the
number of open purchase requests and (2) monitoring the number of purchase
requests that exceeded the administrative lead- time processing
requirements. This initiative supports DLA*s plan to structure internal

processes to deliver customer outcomes effectively and efficiently as well
as improve processes.

Appendi x VI

GAO Contacts and Staff Acknowledgments GAO Contacts Richard G. Payne (757)
552- 8119 Dudley C. Roache, Jr. (757) 552- 8117 Acknowledgments In
addition to those named above, M. Todd Dice, M. Jane Hunt, Latrealle

Lee, Charles W. Perdue, Barry L. Shillito, and John Wren also made
significant contributions to this report.

(350251)

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Report to the Chairman, Subcommittee on Defense, Committee on
Appropriations, House of Representatives

August 2003 DEFENSE INVENTORY Several Actions Are Needed to Further DLA*s
Efforts to Mitigate Shortages of Critical Parts

GAO- 03- 709

Contents Letter 1

Results in Brief 3 Background 6 DLA*s Strategic Management System
Addresses Mitigating Critical Spare Parts Shortages That Adversely Affect
Readiness 8

Some Strategic Initiatives Could Help Mitigate Spare Parts Shortages and
Improve Supply Readiness 12 A Separate DOD- Directed Aviation Investment
Initiative Has

Significantly Increased Availability of Some Critical Aviation Parts, but
Others Remain in Short Supply 16 DLA Can Estimate the Impact of Additional
Investment on Supply

Availability, Which Contributes to Supply Readiness 22 Conclusions 24
Recommendations for Executive Action 25 Agency Comments and Our Evaluation
25

Appendixes

Appendix I: Scope and Methodology 29

Appendix II: Comments from the Department of Defense 31

Appendix III: Schematic of Defense Logistics Agency Strategic Management
System 34

Appendix IV: Description of DLA Initiatives Aimed at Mitigating Spare
Parts Shortages 35 Strategic Materiel Sourcing Initiative 35 Manufacturing
on Demand 38 Organic Manufacturing Initiative 40 Improved Supply
Availability Initiative 40 Backorder Reduction Initiative 41 Customer
Relationship Management and Service Level Agreements

Initiatives 41 National Inventory Management Strategy Initiative 43
Inventory Accuracy Improvement Initiative 44 Product Conformance, Aviation
45

Appendix V: Description of DLA Initiatives Aimed at Improving Logistics
Systems and Processes 46 Business Systems Modernization Initiative 46
Distribution Planning and Management System Initiative 47 Strategic
Distribution Initiative 47

Logistics Response Time Reduction Initiative 48 Direct Vendor Delivery
Processing Time Initiative 48 Overall Purchase Request Processing Time
Improvement Initiative 49

Appendix VI: GAO Contacts and Staff Acknowledgments 50 GAO Contacts 50
Acknowledgments 50

Tables Table 1: DLA*s 2002- 2007 Strategic Goals and the Number of
Strategies, Objectives, and Initiatives 9

Table 2: Representative Strategies, Objectives, and Action Plan
Initiatives of DLA's 2002- 2007 Strategic Plan Customer Goal (strategic
goal 1) 10 Table 3: DLA Initiatives Specifically Aimed at Improving Spare

Parts Shortages 14 Table 4: DLA System and Process Initiatives 16 Table 5:
Impact of Investment Results on All Tier Groups of Critical

Aviation Parts, as of the End of Fiscal Year 2002 18 Table 6: Impact of
Investment Results on Tier 1 Most Critical

Aviation Parts, as of the End of Fiscal Year 2002 19 Table 7: Impact of
Investment Results on Tier 2 Critical Aviation Parts, as of the End of
Fiscal Year 2002 19

Table 8: Impact of Investment Results on Tier 3 Least Critical Aviation
Parts, as of the End of Fiscal Year 2002 20 Table 9: Estimated Investment
to Achieve Various Minimum Supply

Availability Rates for the Most Critical Aviation, Land, and Maritime
Military Service Parts 23 Table 10: Expected Benefits of the National
Inventory Management

Strategy to the Services and DLA 43 Table 11: Response Time Improvement by
Item Category 48

Figure Figure 1: DLA*s Supply- Chain Management Process 7

Abbreviations

DLA Defense Logistics Agency DOD Department of Defense GPRA Government
Performance and Results Act

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a

GAO United States General Accounting Office

DLA*s Strategic Management System, meant to transform its 2002- 2007
logistics operations, addresses the mitigation of readiness- affecting
shortages of critical spare parts. The system includes a strategic plan
with goals, strategies, and objectives; a balanced scorecard to monitor
progress; and a business plan that contains 97 initiatives. Of these
initiatives, DLA identified 24 as linked to spare parts shortages. The DLA
strategic system incorporates attributes of strategic planning outlined in
the Government

Performance and Results Act of 1993. The 24 initiatives, if fully
implemented, could help mitigate critical spare parts shortages and
improve supply readiness because, in part, they address causes for the
shortages. Of the 24 DLA- identified initiatives, 18 should improve
availability of parts identified by the services as critical to readiness;
and 6 should indirectly improve parts availability through modernized
logistics systems and business processes.

A $500- million DOD- directed aviation investment initiative, not part of
DLA*s strategic system, increased critical parts availability and likely
supply readiness. It improved the aggregate, or total average,
availability of three critical groups of DLA- managed parts in the first 3
fiscal years* 2000- 2002* of the 4- year initiative. However, DLA*s
aggregate 85- percent goal does not clearly reveal that many parts are
still far below 85 percent. For example, at the end of fiscal year 2002,
of the 10, 291 critical aviation parts selected for investment, about
4,900 met or exceeded the aggregate measure, but over 5,400 did not. Of
these, about 2,900 parts were available under 35 percent of the time. A
DOD regulation, since revised to allow waivers, caused 3, 342 parts to be
below the 85- percent availability goal.

Aviation Initiative*s Effect on Parts Availability over 3 Years Parts
availability (percent) No. of parts before investment No. of parts after
investment 85 and above 1,397 4,877

84 to 75 881 641 74 to 65 905 524 64 to 55 860 455 54 to 45 803 516 44 to
35 791 374 Below 35 4654 2,904

Total 10,291 10,291

Source: GAO analysis of DLA data.

DLA can estimate the impact of increased funding on supply availability.
Investment costs, however, will be significant* DLA estimated $748 million
to obtain an 85- percent minimum availability of the 219,071 most critical
parts. Also, necessary inventory levels may take years to build, and
increases in unit readiness are not assured because supply is only one
readiness factor. DOD*s management, funding, and

reporting of spending for spare parts programs have been a focus of GAO
high risk reports for over a decade. They noted that spare parts shortages
adversely affect military operations and readiness. Despite funding of
about $1. 9 billion over fiscal years 1999- 2002 to increase availability
of spare parts,

managing to mitigate shortages still challenges the Defense Logistics
Agency (DLA).

GAO examined if (1) DLA*s strategic planning addresses mitigating critical
spare parts shortages that affect readiness, (2) strategic initiatives
will likely mitigate these shortages, (3) a

DOD- directed initiative has improved availability of critical aviation
parts, and (4) DLA can

identify the impact of added investment on parts availability.

GAO recommends DOD direct DLA to (1) submit requests for waivers to a DOD
regulation to allow the

investment necessary to attain a minimum 85- percent availability goal for
each critical part that affects readiness, (2) change its

aggregate supply availability goal to an 85- percent minimum goal and
establish annual performance targets for measuring progress, and (3)
prioritize funding to achieve the minimum 85- percent goal. In written
comments, DOD generally concurred with the intent

of our recommendations, but not with all of the specific actions.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 709. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact William M. Solis at (202) 512- 8365 or solisw@ gao.
gov. Highlights of GAO- 03- 709, a report to the

Chairman, Subcommittee on Defense, Committee on Appropriations, House of
Representatives

August 2003

DEFENSE INVENTORY

Several Actions Are Needed to Further DLA*s Efforts to Mitigate Shortages
of Critical Parts

Page i GAO- 03- 709 Defense Inventory

Contents

Page ii GAO- 03- 709 Defense Inventory

Contents

Page iii GAO- 03- 709 Defense Inventory

Page 1 GAO- 03- 709 Defense Inventory United States General Accounting
Office Washington, D. C. 20548

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Appendix I

Appendix I Scope and Methodology

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Appendix II

Appendix II Comments from the Department of Defense Page 32 GAO- 03- 709
Defense Inventory

Appendix II Comments from the Department of Defense Page 33 GAO- 03- 709
Defense Inventory

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Appendix III

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Appendix IV

Appendix IV Description of DLA Initiatives Aimed at Mitigating Spare Parts
Shortages

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Appendix IV Description of DLA Initiatives Aimed at Mitigating Spare Parts
Shortages

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Appendix IV Description of DLA Initiatives Aimed at Mitigating Spare Parts
Shortages

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Appendix IV Description of DLA Initiatives Aimed at Mitigating Spare Parts
Shortages

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Appendix IV Description of DLA Initiatives Aimed at Mitigating Spare Parts
Shortages

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Appendix IV Description of DLA Initiatives Aimed at Mitigating Spare Parts
Shortages

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Appendix IV Description of DLA Initiatives Aimed at Mitigating Spare Parts
Shortages

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Appendix IV Description of DLA Initiatives Aimed at Mitigating Spare Parts
Shortages

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Appendix IV Description of DLA Initiatives Aimed at Mitigating Spare Parts
Shortages

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Appendix IV Description of DLA Initiatives Aimed at Mitigating Spare Parts
Shortages

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Appendix V

Appendix V Description of DLA Initiatives Aimed at Improving Logistics
Systems and Processes

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Appendix V Description of DLA Initiatives Aimed at Improving Logistics
Systems and Processes

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Appendix V Description of DLA Initiatives Aimed at Improving Logistics
Systems and Processes

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Appendix VI
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