DOD's High-Risk Areas: Efforts to Improve Supply Chain Can Be	 
Enhanced by Linkage to Outcomes, Progress in Transforming	 
Business Operations, and Reexamination of Logistics Governance	 
and Strategy (10-JUL-07, GAO-07-1064T). 			 
                                                                 
The availability of spare parts and other critical items provided
through the Department of Defense's (DOD) supply chains affects  
the readiness and capabilities of U.S. military forces. Since	 
1990, GAO has designated DOD supply chain management as a	 
high-risk area. In 2005, DOD developed a plan aimed at addressing
supply chain problems and having GAO remove this high-risk	 
designation. DOD's plan focuses on three areas: requirements	 
forecasting, asset visibility, and materiel distribution. GAO was
asked to provide its views on (1) DOD's progress in developing	 
and implementing the initiatives in its plan, (2) the results of 
recent work relating to the three focus areas covered by the	 
plan, and (3) the integration of supply chain management with	 
efforts to improve defense business operations. GAO also	 
addressed broader issues of logistics governance and strategic	 
planning. This testimony is based on prior GAO reports and	 
analysis. To determine whether to retain the high-risk		 
designation for supply chain management, GAO considers factors	 
such as whether DOD makes substantial progress implementing	 
improvement initiatives; establishes a program to validate the	 
effectiveness of the initiatives; and completes a comprehensive, 
integrated strategy.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1064T					        
    ACCNO:   A72326						        
  TITLE:     DOD's High-Risk Areas: Efforts to Improve Supply Chain   
Can Be Enhanced by Linkage to Outcomes, Progress in Transforming 
Business Operations, and Reexamination of Logistics Governance	 
and Strategy							 
     DATE:   07/10/2007 
  SUBJECT:   Defense cost control				 
	     Defense procurement				 
	     Inventory control					 
	     Logistics						 
	     Military forces					 
	     Military inventories				 
	     Military materiel					 
	     Spare parts					 
	     Strategic planning 				 
	     Supply chain management				 

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GAO-07-1064T

   

     * [1]Summary
     * [2]Background
     * [3]DOD Has Made Progress in Developing and Implementing the Ini
     * [4]Recent GAO Reviews Have Found That Systemic Supply Chain Man

          * [5]Requirements Forecasting Problems Exist in Managing Spare Pa
          * [6]Effective Management of Supplies Is Hindered by Problems in
          * [7]Challenges Remain in Coordinating and Consolidating Distribu

     * [8]Transforming and Improving Defense Business Operations Are I
     * [9]Improving Supply Chain Management May Involve Reexamining Fu
     * [10]Concluding Observations
     * [11]Contacts and Acknowledgments

          * [12]Order by Mail or Phone

Testimony

Before the Subcommittee on Oversight of Government Management, the Federal
Workforce, and the District of Columbia, Committee on Homeland Security
and Governmental Affairs, U.S. Senate

United States Government Accountability Office
GAO

For Release on Delivery
Expected at 2:30 p.m. EDT
Tuesday, July 10, 2007

DOD'S HIGH-RISK AREAS

Efforts to Improve Supply Chain Can Be Enhanced by Linkage to Outcomes,
Progress in Transforming Business Operations, and Reexamination of
Logistics Governance and Strategy

Statement of William M. Solis, Director
Defense Capabilities Management

GAO-07-1064T

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the progress made by the
Department of Defense (DOD) toward resolving long-standing problems with
supply chain management. The availability of spare parts and other
critical items that are procured and delivered through DOD's supply chain
network affects the readiness and capabilities of U.S. military forces,
and can affect the success of a mission. In addition, the investment of
resources in DOD's supply chains is substantial, amounting to more than
$150 billion a year according to DOD, and supply inventory levels have
grown by 35 percent from $63.3 billion in fiscal year 2001 to $85.6
billion in fiscal year 2006.^1 DOD also invests billions in information
technology systems that support supply chain management and other business
operations. Over time, DOD has sought to better integrate its supply chain
operations to effectively support military forces and to make its supply
chains more efficient from source of supply to point of consumption.
However, the challenges to successfully improving management of DOD's vast
and complex supply chain network are formidable, and problems with supply
chain management have yet to be fully resolved. Today's hearing is the
third time since 2005 that we have testified before this Subcommittee on
supply chain management.^2 Your active involvement has been and will
continue to be vital to keeping attention focused on this important aspect
of DOD's business and logistics support operations.

GAO's audits and evaluations have identified a number of federal programs
and operations that are high risk because of their greater vulnerabilities
to fraud, waste, abuse, and mismanagement. In recent years, GAO's
high-risk program has increasingly focused on those major programs and
operations that need urgent attention and transformation in order to
ensure that our government functions in the most economical, efficient,
and effective manner possible. We first designated DOD inventory
management as a high-risk area in 1990 because of ineffective and
inefficient inventory systems and practices. The problems we found--based
on a large body of work on the management of military supplies--included
on-hand inventory that was not needed to meet required inventory levels,
inadequate controls over items, and cost overruns. We have reported on
efforts to address this and other high-risk areas in our biennial updates
to our high-risk programs since then. In preparing the 2005 update of the
high-risk series, we determined that systemic supply problems extended
beyond inventory management to other aspects of the supply chain,
including inaccurate supply forecasts, poor asset visibility, and
ineffective distribution. We therefore expanded our high-risk designation
to include the entirety of "DOD supply chain management."

^1Part of this growth was caused by inflation. The inflation rate over
this period as measured by the Gross Domestic Product Price Index was a
little over 13 percent.

^2GAO, DOD's High-Risk Areas: High-Level Commitment and Oversight Needed
for DOD Supply Chain Plan to Succeed, [13]GAO-06-113T (Washington, D.C.:
Oct. 6, 2005); and DOD's High-Risk Areas: Challenges Remain to Achieving
and Demonstrating Progress in Supply Chain Management, [14]GAO-06-983T
(Washington, D.C.: July 25, 2006).

Over the years DOD has taken actions toward its goal of integrating and
improving supply chain management. For example, it has revised policies
and practices aimed at addressing shortcomings identified during Operation
Iraqi Freedom. It has implemented recommendations made by our office and
other audit organizations regarding specific aspects of its supply chain
operations. It has also identified technologies and commercial best
practices that could lead to substantial improvements over the long term.
Another step has been the development of DOD's supply chain management
improvement plan. In 2005, with the encouragement of the Office of
Management and Budget (OMB) and input from our office, DOD developed this
plan with the intent of addressing the problems that have prompted us to
retain this high-risk designation. (We subsequently refer to this document
as the plan.) DOD's plan lists 10 initiatives aimed at making improvements
in three focus areas of supply chain management--requirements forecasting,
asset visibility, and materiel distribution.

DOD officials believe the commitment they have demonstrated to resolving
supply chain management problems, including developing the plan and making
progress implementing initiatives, justifies removing this area from our
high-risk list. In December 2006, the Under Secretary formally requested
that we consider removing supply chain management from our list of
high-risk areas. We decided that notwithstanding positive steps taken by
DOD to address problems, supply chain management should remain a high-risk
area until DOD can successfully demonstrate improvements in requirements
forecasting, asset visibility, and materiel distribution, and we retained
this designation in the 2007 biennial update of our high-risk series.^3

3GAO, High-Risk Series: An Update, [15]GAO-07-310 (Washington, D.C.:
January 2007).

Today, I would like to provide our perspectives on (1) DOD's progress in
developing and implementing the initiatives in its plan, (2) the results
of our recent work relating to the three focus areas covered by the plan,
and (3) the integration of supply chain management with efforts to
transform and improve defense business operations. Finally, I will address
broader issues of logistics governance and strategic planning within DOD.
My statement is based on previous GAO reports and analysis, including a
report we are releasing today on DOD's efforts to develop and implement
joint theater logistics,^4 one of the initiatives in the plan. In
addition, we have met regularly with DOD and OMB staff to obtain updates
on DOD's plan and information on the specific initiatives. We conducted
our work in accordance with generally accepted government auditing
standards.

Summary

The most recent update to the plan shows that DOD has made progress
developing and implementing its supply chain management improvement
initiatives, but the current performance measures in the plan do not fully
demonstrate results. DOD is generally staying on track for implementing
its initiatives, although there have been delays in meeting certain
milestones. Notwithstanding this overall progress and the commitment of
DOD leadership to resolving supply chain problems, the long-term time
frames for many of these initiatives present challenges to the department
in sustaining progress toward substantially completing their
implementation. Moreover, the plan lacks outcome-focused performance
measures that could gauge the results of many of the individual
improvement initiatives or demonstrate progress in the three focus areas,
limiting DOD's ability to fully demonstrate the results achieved through
its plan. Increasing the plan's focus on measurable outcomes will enable
DOD's internal and external stakeholders, including Congress and OMB, to
track the interim and long-term success of DOD's initiatives and help DOD
determine if it is meeting its goals of achieving more effective and
efficient supply chain management.

In addition, our recent work has identified continuing problems related to
the three focus areas in DOD's plan.

^4GAO, Defense Logistics: Efforts to Improve Distribution and Supply
Support for Joint Military Operations Could Benefit from a Coordinated
Management Approach, [16]GAO-07-807 (Washington, D.C.: June 29, 2007).

           o In the area of requirements forecasting, the military services
           are experiencing difficulties estimating the length of time
           between the initiation of a procurement action and the receipt of
           spare parts into the supply system for equipment and weapon
           systems. We also found continuing problems in the Air Force's
           inventory management practices, hindering its ability to
           efficiently and effectively maintain its spare parts inventory for
           military equipment. Specifically, an average of 52 percent ($1.3
           billion) of the Air Force's secondary on-order inventory was not
           needed to support on-order requirements. Further, about 65 percent
           ($18.7 billion) of on-hand inventory was not needed to support
           required inventory levels. We calculated that it costs the Air
           Force from $15 million to $30 million annually to store its
           unneeded items. Problems also continue in managing prepositioned
           stocks.
           o Our work in the area of asset visibility has indicated numerous
           challenges, from lack of interoperability among information
           technology systems to problems with container management.
           Limitations in asset visibility capabilities make it difficult to
           obtain timely and accurate information on the assets that are
           present in the theater of operations.
           o With respect to materiel distribution, we have found that
           challenges remain in coordinating and consolidating distribution
           and supply support within a theater. For example, DOD is
           establishing separate organizations to coordinate surface
           transportation and lacks a single organization with authority to
           integrate and synchronize surface deployment and distribution
           movements. One key challenge has been establishing an effective
           mechanism that would enable a joint force commander to exercise
           appropriate command and control over transportation and other
           logistics assets in the theater.

           Further, transforming and improving defense business operations
           are integral to resolving supply chain management problems. As we
           have previously stated, progress in DOD's overall approach to
           business transformation is needed to confront problems in other
           high-risk areas, including supply chain management. Because of the
           complexity and long-term nature of business transformation, we
           have stated that DOD needs a Chief Management Officer with
           significant authority, experience, and a term that would provide
           sustained leadership and the time to integrate DOD's overall
           business transformation efforts. Our work, pending legislation,
           and other recent studies indicate a consensus that the status quo
           is no longer acceptable. In addition to business transformation,
           we have identified two other DOD high-risk areas that are closely
           linked with supply chain management--modernizing business systems
           and improving financial management.

           Our recent review of joint theater logistics raises concerns about
           whether DOD can effectively implement this initiative without
           reexamining fundamental aspects of the department's logistics
           governance and strategy. In this respect, joint theater logistics
           may serve as a microcosm of some of the challenges DOD faces in
           resolving supply chain management problems. We found during our
           review that DOD has not developed a coordinated and comprehensive
           management approach to guide and oversee implementation of joint
           theater logistics across the department. Moreover, we recommended
           in that report that DOD align its approach to joint theater
           logistics with ongoing actions the department is taking to reform
           its logistics governance and develop its logistics strategy.
           Regarding logistics governance, DOD has been testing a new
           approach to managing joint capabilities as a portfolio, but key
           decisions are still to be made on how to implement this approach.
           In addition, DOD has plans to develop an overarching logistics
           strategy but has delayed completion of this strategy until
           sometime next year. The diffused organization of DOD's logistics
           operations, including separate funding and management of resources
           and systems, complicates DOD's ability to adopt a coordinated and
           comprehensive approach. Several recent studies of DOD's logistics
           system have recommended changes to DOD's organizational structure
           for providing joint logistics and supply support to military
           operations.
			  
			  Background

           DOD relies on a number of individual processes and activities,
           known collectively as supply chain management, to purchase,
           produce, and deliver items and services to military forces. The
           department relies on working capital (revolving) funds maintained
           by the defense and service logistics agencies to finance the flow
           of these items to the forces. Working capital funds allow these
           agencies to purchase needed items from suppliers. Military units
           then order items from the logistics agencies and pay for them with
           annually appropriated operations and maintenance funds when the
           requested items--either from inventory or manufacturers--are
           delivered to the units.

           The Under Secretary of Defense (Acquisition, Technology, and
           Logistics) has been designated by the Secretary of Defense as the
           department's Defense Logistics Executive, with authority to
           address logistics and supply chain issues. Officials within the
           Office of the Assistant Deputy Under Secretary of Defense for
           Supply Chain Integration completed the first iteration of the plan
           in July 2005 and have updated it several times since then based on
           information provided by designated lead proponents for the
           individual initiatives. DOD has shared its plan externally with
           Congress, OMB, and our office. OMB has characterized the plan as a
           model for other federal agencies to use in developing their own
           plans to address their high-risk areas.

           The plan has three focus areas: requirements forecasting, asset
           visibility, and materiel distribution--issues that we have
           identified based on GAO audits since 1995 as critical to improving
           DOD supply chain management. Accurately forecasted supply
           requirements are a key first step in buying, storing, positioning,
           and shipping items that the warfighter needs. DOD describes asset
           visibility as the ability to provide timely and accurate
           information on the location, quantity, condition, movement, and
           status of supplies and the ability to act on this information.
           Distribution is the process for synchronizing all elements of the
           logistics system to deliver the "right things" to the "right
           place" at the "right time" to support the warfighter. Our prior
           work has identified problems in these three focus areas, as well
           as other aspects of supply chain management.

           DOD's plan identifies joint theater logistics as an initiative
           that will improve both asset visibility and materiel distribution.
           Joint theater logistics is intended to enhance the ability of a
           joint force commander to direct various logistics functions,
           including distribution and supply support activities, across the
           theater and, for several years, has been part of DOD's planned
           transformation of logistics capabilities. Joint theater logistics
           is one of seven future logistics capabilities that DOD has grouped
           under "focused logistics." DOD has broadly defined joint theater
           logistics as an adaptive ability to anticipate and respond to
           emerging theater logistics and support requirements.

           In general, when legislative and agency actions result in
           significant and sustainable progress toward resolving a high-risk
           problem, we remove the high-risk designation. Key determinants
           include a demonstrated strong commitment to and top leadership
           support for addressing problems, the capacity to do so, a
           corrective action plan, and demonstrated progress in implementing
           corrective measures.^5 From 1990 through 2007, we removed 18 areas
           from the high-risk list. Our decisions on removing supply chain
           management from the high-risk list will be guided by whether DOD
           (1) sustains top leadership commitment and long-term institutional
           support for the plan; (2) obtains necessary resource commitments
           from the military services, the Defense Logistics Agency, and
           other organizations; (3) makes substantial progress implementing
           improvement initiatives across the department; (4) establishes a
           program to demonstrate progress and validate the effectiveness of
           the initiatives; and (5) completes the development of a
           comprehensive, integrated strategy for guiding supply chain
           management improvement efforts across the department.

^5The criteria for removing a high-risk designation are contained in GAO,
Determining Performance and Accountability Challenges and High Risks,
[24]GAO-01-159SP (Washington, D.C.: November 2000).

           DOD Has Made Progress in Developing and Implementing the Initiatives
			  in Its Plan, but Current Performance Measures Do Not Fully Demonstrate
			  Results

           The most recent update to the plan in May 2007 shows that DOD,
           over the past year, has made progress in developing and
           implementing its improvement initiatives. We noted this progress
           in the January 2007 update of our high-risk series. Specific
           examples of progress made include the following:

           o DOD has established joint deployment distribution operations
           centers in each geographic combatant command. In early 2004, DOD
           established the first of these operations centers in Kuwait, under
           U.S. Central Command, after distribution problems arose during the
           initial stages of Operation Iraqi Freedom. DOD has since expanded
           this organization to its other geographic combatant commands.
           These operations centers can help joint force commanders
           synchronize the arrival of supplies into a theater and assist in
           other aspects of distribution and supply support. They are
           designed to incorporate representatives from DOD components, such
           as U.S. Transportation Command, the Defense Logistics Agency, and
           the military services, who can provide a knowledgeable connection
           to logistics supply centers in the United States and facilitate
           the distribution of supplies to the theater. The expansion of
           these operations centers to all the geographic commands was based
           on the success of the first operations center in Kuwait, which has
           been credited with improving the management of supplies moving
           across the distribution system and achieving cost savings.^6 
			  
^6For example, U.S. Transportation Command officials said that the
operations center was responsible for shifting from the use of airlift to
sealift to transport supplies, which reduces costly airlift requirements
and frees up airlift capacity; coordinating the movement of personnel from
their point of origin to final destination rather than through
intermediate locations with time-consuming layovers (a concept referred to
as single ticket); and improving distribution management by facilitating
the use of pure-packed pallets and containers, developing a container
management plan, and improving the return of Army materiel from the
theater. According to data provided by U.S. Transportation Command, the
activities of this joint deployment distribution operations center
resulted in total cost avoidance and savings of $343 million between
fiscal years 2004 and 2007.
           
			  o DOD has reported initial success with an initiative aimed at
           streamlining the storage and distribution of common items for
           multiple military service locations through the use of Defense
           Logistics Agency hubs. The objectives of this initiative, called
           joint regional inventory and material management, include
           eliminating duplicate materiel handling and inventory layers. DOD
           has met key milestones in this initiative and recently completed
           the pilot program in Hawaii. U.S. Pacific Command officials stated
           that they had reduced redundant service-managed inventories, the
           number of times they handle parts, and customer wait times over
           the course of the pilot. They estimated that the services had
           reduced their inventory levels by more than $10 million. In March
           2007, the Defense Logistics Agency was tasked to be the lead
           proponent for continued worldwide implementation of joint regional
           inventory and material management.
           o DOD also made progress toward improving transportation
           management of military freight. Before the end of this fiscal
           year, U.S. Transportation Command plans to award a contract to a
           third-party logistics provider, or 3PL, to coordinate the movement
           of freight shipments within the continental United States. This
           effort, called the defense transportation coordination initiative,
           is aimed at improving the reliability, predictability, and
           efficiency of moving freight among DOD's depots, logistics
           centers, and field activities. In a recent report on this
           initiative,^7 we stated that DOD had taken numerous actions to
           incorporate the lessons learned from a prior prototype program
           and, moreover, had taken positive steps to adopt best practices
           employed by other public and private organizations to transform
           their culture. Still, the long-term success of this effort remains
           uncertain given the challenges in undertaking organizational
           transformation and because the program is still in its early
           stages.

           Despite the progress indicated by the development and
           implementation of these initiatives, the recent update of DOD's
           plan indicates some delays in achieving certain milestones. For
           example, the radio frequency identification (RFID)^8 initiative
           experienced a slippage from December 2006 to September 2007 in its
           milestone to implement passive RFID at the first 25 percent of
           Defense Logistics Agency's distribution centers located outside
           the continental United States. This milestone was adjusted based
           on lessons learned from the implementation of RFID at sites within
           the continental United States. Also, the item unique
           identification initiative^9 experienced a slippage of a year, from
           January 2007 to January 2008, for the milestone on demonstrating
           integration with international entities, because required
           ratification from the North Atlantic Treaty Organization was
           delayed. Schedule delays such as these may be expected given the
           long-standing nature of the problems being addressed, the
           complexities of the initiatives, and the involvement of multiple
           organizations. Furthermore, some of these initiatives are in the
           early stages of implementation, with full implementation several
           years away. The long-term time frames for many of these
           initiatives present challenges to the department in sustaining
           progress toward substantially completing their implementation.
			  
^7GAO, Defense Transformation: DOD Has Taken Actions to Incorporate
Lessons Learned in Transforming Its Freight Distribution System,
[25]GAO-07-675R (Washington, D.C.: May 8, 2007.)

^8RFID consists of electronic tags that are attached to equipment and
supplies being shipped from one location to another, enabling shipment
tracking.

           Since the last hearing before this Subcommittee in July 2006, we
           have not seen significant changes in how DOD proposes to measure
           the impact of its initiatives in its plan. The plan, as before,
           contains four performance metrics--backorders, customer wait time,
           on-time orders, and logistics response time.^10 While these four
           measures capture broad aspects of DOD's supply chain performance,
           they can be affected by variables other than the initiatives
           themselves. For example, natural disasters, wartime surges in
           requirements, or disruption in the distribution process could each
           result in increased backorders, longer customer wait time, fewer
           on-time orders, and slowed response time, regardless of DOD's
           initiatives. Consequently, changes in these high-level metrics
           might not be directly attributable to the initiatives in the plan.
           While it may take years before the results of programs become
           apparent, intermediate metrics can be used to provide information
           on interim results and show progress toward intended results. In
           addition, when program results could be influenced by external
           factors, intermediate metrics can be used to identify the
           program's discrete contribution to the specific result.
			  
^9Item unique identification provides for marking of personal property
items with a set of globally unique data items to help DOD value and track
items throughout their life cycle.

^10Backorders are the number of orders held in an unfilled status pending
receipt of additional parts or equipment through procurement or repair.
Customer wait time measures the number of days between the issuance of a
customer order and satisfaction of that order. On-time orders is the
percentage of orders that are on time according to DOD's established
delivery standards. Logistics response time refers to the number of days
to fulfill an order placed on the wholesale level of supply from the date
a requisition is generated until the materiel is received by the retail
supply activity.

           As we noted last July, the results of DOD's initiatives would be
           more apparent if DOD applied more outcome-oriented performance
           metrics for many of the individual initiatives and for the three
           focus areas. Outcome-oriented performance metrics show results or
           outcomes related to an initiative or program in terms of
           effectiveness, efficiency, impact, or all of these. Since last
           July, DOD has not added new outcome-focused performance metrics to
           its plan. DOD also continues to lack cost metrics that might show
           efficiencies gained through these supply chain efforts, either at
           the initiative level or overall. In total, DOD's plan identifies a
           need to develop outcome-focused performance metrics for 6
           initiatives, and 9 out of 10 initiatives lack cost metrics. We
           recommended in January that DOD develop, implement, and monitor
           outcome-focused performance and cost metrics for all the
           individual initiatives in the plan as well as for the plan's focus
           areas of requirements forecasting, asset visibility, and materiel
           distribution.^11 In response to our recommendation, DOD asserted
           that it had developed and implemented outcome-focused performance
           and cost metrics for logistics across the department, but it also
           acknowledged that more work needed to be done to link the outcome
           metrics to the initiatives in the plan as well as for the focus
           areas. DOD stated that these linkages will be completed as part of
           full implementation of each initiative.
			  
			  Recent GAO Reviews Have Found That Systemic Supply Chain Management
			  Problems Continue

           Our recent work has identified continued systemic weakness in
           aspects of DOD's supply chain management. I will briefly highlight
           some of the results from these reviews, structured around the
           three focus areas covered by DOD's plan.
			  
^11GAO, DOD's High-Risk Areas: Progress Made Implementing Supply Chain
Management, but Full Extent of Improvement Unknown, [26]GAO-07-234
(Washington, D.C.: Jan. 17, 2007).

           Requirements Forecasting Problems Exist in Managing Spare Parts
			  and Prepositioned Stocks

           In the area of requirements forecasting, the military services are
           experiencing difficulties estimating acquisition lead times to
           acquire spare parts for equipment and weapon systems.^12 Effective
           processes that identify and manage acquisition lead times are of
           critical importance to maintaining cost-effective inventories,
           budgeting, and having materiel available when it is needed. In
           March 2007, we reported that 44 percent of the services' lead time
           estimates varied either earlier or later than the actual lead
           times by at least 90 days.^13 Overestimates and underestimates of
           acquisition lead time contribute to inefficient use of funds and
           potential shortages or excesses of spare parts. We recommended a
           number of actions DOD should take to improve the accuracy and
           strengthen the management of lead times. For example, we made
           specific recommendations directed toward the Army, the Air Force,
           the Navy, and the Defense Logistics Agency with the intent of
           improving their accuracy in setting acquisition lead times. DOD
           mostly concurred with our recommendations.

           In a separate review of the Air Force's inventory management
           practices,^14 we found continuing problems hindering its ability
           to efficiently and effectively maintain its spare parts inventory
           for military equipment. From fiscal years 2002 through 2005, more
           than half of the Air Force's secondary inventory (spare parts),
           worth an average of $31.4 billion annually, was not needed to
           support required on-order and on-hand inventory levels. We found
           an average of 52 percent ($1.3 billion) of the Air Force's
           secondary on-order inventory was not needed to support on-order
           requirements.^15 This unneeded on-order inventory indicates that
           the Air Force did not cancel orders or deobligate funds for items
           that were not needed to support requirements. When the Air Force
           buys unneeded items, it is obligating funds unnecessarily, which
           could lead to not having sufficient funds to purchase needed
           items. The Air Force has continued to purchase unneeded inventory
           because its policies do not provide incentives--such as requiring
           contract termination review for all unneeded on-order inventory or
           reducing the funding available for the Air Force Materiel Command
           by an amount up to the value of the Air Force's on-order inventory
           that is not needed to support requirements--to reduce the amount
           of inventory on order that is not needed to support requirements.
           In addition, although the percentage of the Air Force's on-hand
           inventory was reduced by 2.7 percent during these years, about 65
           percent ($18.7 billion) of this inventory was not needed to
           support required inventory levels. We calculated that it costs the
           Air Force from $15 million to $30 million annually to store its
           unneeded items. We recommended that the Air Force improve its
           policies regarding on-order inventory, revalidate the need to
           retain items that are not needed to meet inventory requirements
           and for which there is no recurring demand, and take other actions
           to improve accountability for, and management of, its secondary
           inventory. DOD generally concurred with our recommendations.
			  
^12Acquisition lead time, also known as procurement lead time, measures
the length of time between the initiation of a procurement action and the
receipt of items into the supply system.

^13GAO, Defense Inventory: Opportunities Exist to Improve the Management
of DOD's Acquisition Lead Times for Spare Parts, [27]GAO-07-281
(Washington, D.C.: Mar. 2, 2007).

^14GAO, Defense Inventory: Opportunities Exist to Save Billions by
Reducing Air Force's Unneeded Spare Parts Inventory, [28]GAO-07-232
(Washington, D.C.: Apr. 27, 2007).

^15Secondary inventory items include reparable components; subsystems; and
assemblies other than major end items (such as aircraft), consumable
repair parts, bulk items and materiel, subsistence, and expendable end
items, including clothing and other personal gear. Inventory that is not
in DOD's possession but for which contracts have been awarded or funds
have been committed is considered to be on order.

           Another area of continuing concern has been the stocks maintained
           in the Army's prepositioning programs. Prepositioning is one of
           three ways, along with airlift and sealift, that the U.S. military
           can deliver equipment and supplies to field combat-ready forces.
           The Army drew heavily from its prepositioned stocks to support
           Operations Iraqi Freedom and Enduring Freedom, and these sustained
           operations have taken a toll on the condition and readiness of
           military equipment. In February 2007, we reported the Army was
           changing its overall prepositioning strategy and, in doing so,
           faced major strategic and management challenges.^16 One of these
           challenges was that despite recent efforts to improve requirements
           setting, the Army had not yet determined reliable requirements for
           secondary items and operational project stocks.^17 Also, the Army
           does not systematically measure or report readiness for the
           secondary item and operational project programs. Without sound
           requirements or reporting mechanisms, the Army cannot reliably
           assess the impact of any shortfalls, determine the readiness of
           its programs, or make informed investment decisions about them. We
           recommended that the Army develop an implementation plan that,
           among other things, completes ongoing reevaluation of the
           secondary item and project stock requirements as well as
           establishes systematic readiness measurement and reporting of
           secondary items and operational project stock programs. DOD
           concurred with this recommendation.

^16GAO, Defense Logistics: Improved Oversight and Increased Coordination
Needed to Ensure Viability of the Army's Prepositioning Strategy,
[29]GAO-07-144 (Washington, D.C.: Feb. 15, 2007).

^17Operational project stocks include items not typically part of unit
equipment, such as chemical defense equipment, pipeline systems, mortuary
units, and bare base sets for housing soldiers in austere environments.

           Effective Management of Supplies Is Hindered by Problems in
			  Achieving Asset Visibility

           Despite the benefits attributed to the joint deployment
           distribution operations center in Kuwait, effective management of
           supply distribution across the theater has been hindered by
           ongoing problems in achieving asset visibility. Senior military
           commanders in Kuwait attributed these problems to a lack of
           interoperability among information technology systems that makes
           it difficult to obtain timely, accurate information on assets in
           the theater.^18 We have previously reported that the defense
           logistics systems used by various components to order, track, and
           account for supplies are not well integrated and do not provide
           the information needed to effectively manage theater distribution
           and provide asset visibility.^19 Officials told us their staff
           must use manual work-arounds to overcome the problems caused by
           noninteroperable information systems and estimated that their
           staff spend half their time pulling data from information systems,
           e-mailing it around for validation or coordination, consolidating
           it on a spreadsheet, and then analyzing it to make management
           decisions. In January 2007, a joint assessment conducted by
           several DOD components at Camp Arifjan, Kuwait, found that
           separate movement control battalions in Kuwait and Iraq use both
           automated and handwritten transportation movement requests to
           track air and ground movements and must consolidate manual and
           automated data into spreadsheets in order to capture the total
           theater movement picture. Neither movement battalion has total
           visibility over what is occurring in both Kuwait and Iraq nor do
           they have total visibility of the surface transportation resources
           necessary to optimize the distribution of resources.
			  
^18Interoperability refers to the ability of different systems to
communicate effectively, including sharing information.

^19GAO, Defense Logistics: DOD Has Begun to Improve Supply Distribution
Operations, but Further Actions Are Needed to Sustain These Efforts,
[30]GAO-05-775 (Washington, D.C.: Aug. 11, 2005).

           In our review of joint theater logistics, we also found continuing
           problems with container management that hinder asset visibility
           and impede DOD's ability to effectively manage logistics
           operations and costs, although improvements had been made since we
           last reported on this issue in 2003.^20 Some challenges that DOD
           faces with container management include the application of RFID on
           containers in the supply chain, compliance with container
           management processes, and the return of commercial containers to
           maritime carriers.

           In 2004, the Under Secretary of Defense (Acquisition, Technology,
           and Logistics) directed the use of active RFID on all consolidated
           shipments moving to, from, or between overseas locations in order
           to provide global in-transit visibility, and U.S. Central Command
           has emphasized the need to use this technology to improve asset
           visibility in Iraq and Afghanistan. However, according to U.S
           Central Command officials, DOD continues to struggle with the
           application of RFID in the theater supply chain because of
           problems such as containers shipped without RFID tags or with tags
           that are broken, tags with incorrect information, or tags that are
           rewritten but not cross-referenced to the original shipping
           information. Noncompliance with container management processes
           established by U.S. Central Command can also limit asset
           visibility. For example, the Army's system has not been able to
           effectively track containers as they pass through distribution
           channels, significantly hampering asset visibility in theater
           because tagged containers can become "lost" in theater, with no
           one able to track the location of the container or its contents.
           In addition, if the container is commercially owned and not
           returned to the carrier within a specified time period, detention
           charges begin accumulating.

           During our review of joint theater logistics we also found that
           U.S. Transportation Command and the Military Surface Deployment
           and Distribution Command, to improve management and accountability
           over containers and to address the growing detention charges,
           developed a theater container management process and established
           the container management element--a unit responsible for tracking
           and providing management oversight of containers in the theater.
           In addition, the Army decided to purchase, or "buy out,"
           commercial containers to reduce monthly detention charges.
           Container management element officials told us that through a
           combination of container buyouts and increased oversight,
           detention charges decreased from approximately $10.7 million per
           month in December 2005 to $3.7 million per month in October 2006.
           However, although DOD has been able to reduce monthly detention
           charges on commercial containers, it is still experiencing
           problems with retaining visibility over containers, and its
           problem with commercial container detention charges is shifting
           from Iraq to Afghanistan.
			  
^20GAO, Defense Logistics: Preliminary Observations on the Effectiveness
of Logistics Activities during Operation Iraqi Freedom, [31]GAO-04-305R
(Washington, D.C.: Dec. 18, 2003).

           In addition, the Army continues to experience problems in
           developing and implementing system initiatives affecting asset
           visibility. For example, the Logistics Management Program, one of
           the Army's major business system modernization efforts intended to
           manage its inventory and depot maintenance operations, has
           continued to experience problems with accurately recognizing
           revenue and billing customers, and the accuracy of its financial
           reports continues to be questionable. If information contained in
           asset accountability systems is not accurate, complete, and
           timely, DOD's day-to-day operations could be adversely affected.
           As of September 30, 2006, the Army reported that approximately
           $452 million had been obligated for this system effort and
           estimates that it will invest at least another $895 million in
           this program. Also, its schedule to reach full operational
           capability has slipped from fiscal year 2005 to fiscal year
           2010.^21 We have recently reviewed the Army's progress in
           achieving asset visibility and expect to issue our report by the
           end of this month.^22
			  
^21Full operational capability means that the system has been deployed to
all intended locations.

^22 We conducted this engagement in response to a request from the
Subcommittee on Readiness and Management Support, Senate Armed Services
Committee.
			  
			  Challenges Remain in Coordinating and Consolidating Distribution
			  and Supply Support within a Theater

           In our review of joint theater logistics, we found that DOD
           components have made progress developing and implementing joint
           theater logistics initiatives in the areas of distribution and
           supply support; however, the department faces a number of
           challenges that hinder its ability to fully realize the benefits
           of these efforts. Unless DOD successfully addresses these
           challenges, the initiatives are not likely to significantly
           improve the ability of a joint force commander to harness the
           diffuse logistics resources and systems that exist within the
           department and effectively and efficiently direct logistics
           functions, including distribution and supply support activities,
           across the theater of operations to accomplish an assigned
           mission.

           For example, initiatives to improve the coordination of surface
           transportation assets--mainly trucks--in a theater of operations
           face challenges such as potential duplication of responsibilities,
           the unavailability of information technology tools, and unclear
           lines of command and control. According to a 2005 RAND Corporation
           study,^23 during the initial phase of Operation Iraqi Freedom
           there was no single organization deployed in theater with the
           authority to rebalance transportation assets across the theater
           and integrate and synchronize the surface deployment and
           distribution movements of materiel in support of the commander's
           priorities. As part of its modular transformation, the Army is
           creating theater and expeditionary sustainment commands that are
           aimed in part at centralizing control over Army surface
           transportation assets within a theater of operations.^24 In a
           separate initiative, U.S. Transportation Command created a new
           organization, the director of mobility forces-surface, to
           integrate surface deployment and distribution priorities set by
           the joint force commander.

           Army officials raised concerns about whether the theater and
           expeditionary sustainment commands would have the information
           technology tools and personnel necessary to effectively and
           efficiently carry out their missions. They said that these
           commands were designed to be smaller than their predecessors,
           based on an assumption that certain information technology tools
           would be available to enable the commands to operate with fewer
           personnel. However, some of these information technology
           tools--such as the next generation Mobile Tracking System, Battle
           Command Sustainment Support System, and Transportation
           Coordinator's Automated Information for Movements System II--have
           experienced problems during their development that have limited
           their capability or have delayed their fielding. According to Army
           officials, the shortcomings in available information tools have
           resulted in the need for additional staff in the theater and
           expeditionary sustainment commands and have required the commands
           to use manual, ad hoc techniques, which are cumbersome and
           manpower intensive, to validate, coordinate, and analyze data for
           decision making.
			  
^23RAND Corporation, Sustainment of Army Forces in Operation Iraqi
Freedom: Battlefield Logistics and Effects on Operations, Contract No.
DASW01-C-0003 (Santa Monica, Calif.: 2005).

^24Theater sustainment commands provide the Army a single headquarters
responsible for operational command and control of logistics operations
throughout the theater. Expeditionary sustainment commands, a forward
extension of the theater sustainment commands, have a primary role of
managing regional logistics operations in support of the joint task force
commander.

           The U.S. Transportation Command-led efforts to establish the
           director of mobility forces-surface have also faced implementation
           challenges. The initial assessment of the director of mobility
           forces-surface pilot in Kuwait by U.S. Transportation Command and
           U.S. Central Command indicated that the initiative faces a number
           of challenges related to command and control, availability of
           information technology tools, securing personnel with the
           expertise and knowledge to use the information technology tools
           that are available, and potential duplication of responsibilities
           with other Army organizations. U.S. Central Command discontinued
           the pilot in May 2007 until some of these issues were resolved. In
           addition, the Army reviewed more than 100 proposed
           responsibilities of the director of mobility forces-surface and
           found that most of these responsibilities are already covered by
           the Army's theater and expeditionary sustainment commands or other
           commands.

           DOD also has developed initiatives to consolidate and improve
           storage and shipping of materiel, including node management and
           deployable depot, joint regional inventory and material
           management, and theater consolidation and shipping point,^25 but
           such efforts have been implemented on a limited scale. During our
           visits to Kuwait, we found that the Defense Logistics Agency and
           the Army were operating separate facilities that have the
           potential for consolidation, which could result in more efficient
           use of resources. We discussed this issue with senior U.S.
           military officials in Kuwait and with Defense Logistics Agency
           officials. Following these discussions and the completion of our
           fieldwork, the Defense Logistics Agency assessed ways to improve
           theater distribution and made recommendations to consolidate and
           relocate existing operations. Specifically, in April 2007, the
           Defense Logistics Agency study team recommended terminating the
           theater consolidation and shipping point contract, assuming these
           functions at the defense distribution depot, and drawing down
           inventory and operations at the Army general support warehouse at
           Camp Arifjan.
			  
^25Node management and deployable depot is a Defense Logistics Agency
initiative to develop a small-scale, rapidly deployable distribution
center that has the capability to provide consolidated shipping,
receiving, cross-docking, storage, communication, and order processing.
Joint regional inventory and material management, identified as one of the
10 initiatives in the plan, was discussed earlier in this statement.
Theater consolidation and shipping points is an effort by the Defense
Logistics Agency, in coordination with the Army and combatant commands, to
improve the efficiency and interoperability of materiel consolidation and
shipping activities.

           Finally, various options have emerged for improving the ability of
           a joint force commander to exercise command and control over joint
           theater logistics functions. U.S. Joint Forces Command is
           coordinating the joint experimental deployment and support
           initiative, whose objective is to experiment with a range of
           command and control options that can provide logistics
           coordination, integration, and synchronization to meet the
           combatant commander's priorities. The initiative builds upon DOD's
           joint deployment distribution operations center concept and
           progresses along a continuum to include more robust organizational
           options. However, the military services have raised concerns about
           how their own roles and responsibilities for providing logistics
           support might be affected and have opposed expansion of the most
           robust command and control option that has emerged--known as the
           joint force support component command.

           Our discussions with officials from the combatant commands and the
           military services indicated that there are unresolved issues
           related to exercising joint command and control over logistics
           functions in a theater of operations. A number of officials had
           concerns about how organizations such as the joint force support
           component command would be staffed and what roles and authorities
           it would have. Specifically, they mentioned statutory requirements
           for logistics support, directive authority for logistics, and
           operational and financial considerations. The services expressed
           concerns about mandating that they provide staff to the joint
           force support component command, while also fulfilling their Title
           10 responsibilities to man, train, and equip their forces.^26
           Officials from military service components in the geographic
           combatant commands raised the issue of having a service component
           take direction from a separate component command at the same
           level, rather than from a higher-level command, and they were
           resistant to losing personnel to such an organization because the
           service component commands still have tactical logistics
           responsibilities to fulfill. Some military service officials
           raised questions about the effectiveness of a joint force support
           component command that lacked an ability to exercise directive
           authority for logistics. This authority gives the combatant
           commander the ability to shift logistics resources within the
           theater in order to accomplish a mission.^27 Officials we
           interviewed did not believe this authority could be delegated
           below the level of a joint force commander or service component
           commander^28 to an entity such as the joint force support
           component command. Thus, they questioned how the joint force
           support component command differs from other logistics command and
           control organizations if the organization can make recommendations
           to the joint force commander but not actually direct the transfer
           of assets across the service components, known as cross-leveling.
           Readiness and financial considerations related to exercising
           directive authority for logistics include the military operational
           risks and trade-offs associated with cross-leveling. Assets
           diverted from one unit to support another unit may affect the
           giving organization's ability to conduct a future operation, and
           officials raised concerns that logisticians in a separate
           logistics command may not fully understand the impact of
           cross-leveling on the next military mission. Additionally, because
           the services obtain funding for their own assets, several
           officials told us that some form of financial reconciliation must
           be considered when exercising directive authority for logistics.
			  
^26Various provisions of Title 10, U.S. Code establish responsibilities
and authorities for supplying and equipping the armed forces. See 10
U.S.C. SS 3013, 3062, 5013, 5062, 5063, 8013, and 8062.

           Transforming and Improving Defense Business Operations Are Integral
			  to Resolving Supply Chain Management Problems

           DOD spends billions of dollars to sustain key business operations
           intended to support the warfighter, including systems and
           processes related to the supply chain and other business areas. We
           have reported on inefficiencies in DOD's business operations, such
           as the lack of sustained leadership and a comprehensive,
           integrated, and enterprisewide business plan. Moreover, at a time
           of increasing military operations and growing fiscal constraints,
           billions of dollars have been wasted annually because of the lack
           of adequate transparency and appropriate accountability across
           DOD's business areas.

           As we have previously stated, progress in DOD's overall approach
           to business transformation is needed to confront problems in other
           high-risk areas, including supply chain management.^29 Because of
           the complexity and long-term nature of business transformation, we
           have stated that DOD needs a Chief Management Officer with
           significant authority, experience, and a term that would provide
           sustained leadership and the time to integrate DOD's overall
           business transformation efforts. Without formally designating
           responsibility and accountability for results, reconciling
           competing priorities among various organizations and prioritizing
           investments will be difficult and could impede the department's
           progress in addressing deficiencies in key business areas. Based
           on our long-standing body of work, pending legislative language,
           and the results of studies completed by the Defense Business Board
           and the Institute for Defense Analysis, there is a clear consensus
           that the department needs a Chief Management Officer and that the
           status quo is no longer acceptable.
			  
^27Under 10 U.S.C. S164, unless otherwise directed by the President or the
Secretary of Defense, the authority, direction, and control of the
commander of a combatant command with respect to the commands and forces
assigned to that command include giving authoritative direction to
subordinate commands and forces necessary to carry out missions assigned
to the command, including authoritative direction over all aspects of
military operations, joint training, and logistics.

^28Joint Chiefs of Staff, Joint Publication 4-0, Doctrine for Logistic
Support of Joint Operations (Apr. 6, 2000), p. I-3.			  

           The two other DOD high-risk areas that are most closely linked
           with supply chain management are modernizing business systems and
           improving financial management. Successful resolution of supply
           chain management problems will require investment in needed
           information technology. The DOD systems environment that supports
           these operations is overly complex and error prone, and is
           characterized by little standardization across the department,
           multiple systems performing the same tasks, the same data stored
           in multiple systems, and the need for data to be entered manually
           into multiple systems. Modernized business systems are essential
           to the department's effort to address its supply chain management
           issues. In its plan, DOD recognizes that achieving success in
           supply chain management depends on developing interoperable
           systems that can share critical supply data. One of the
           initiatives included in the plan is business system modernization,
           an effort that is being led by DOD's Business Transformation
           Agency and that includes achieving materiel visibility through
           systems modernization as an enterprisewide priority.

           Regarding financial management, we have repeatedly reported that
           weaknesses in business management systems, processes, and internal
           controls not only adversely affect the reliability of reported
           financial data, but also the management of DOD operations. Such
           weaknesses have adversely affected the ability of DOD to control
           costs, ensure basic accountability, anticipate future costs and
           claims on the budget, measure performance, maintain funds control,
           and prevent fraud. In 2005, DOD issued its Financial Improvement
           and Audit Readiness Plan, which is intended to provide DOD
           components with a road map for resolving problems affecting the
           accuracy, reliability, and timelines of financial information and
           obtaining clean financial statement audit opinions. However,
           tangible evidence of improvements in financial management remains
           limited, and DOD recognizes that it will take several years to
           implement the systems, processes, and other improvements needed to
           address its financial management challenges.
			  
^29The other high-risk areas under DOD's approach to business
transformation are business systems modernization, the personnel security
clearance program, support infrastructure management, financial
management, and weapon systems acquisition.

           Improving Supply Chain Management May Involve Reexamining
			  Fundamental Aspects of DOD's Logistics Governance and Strategy

           Our recent review of joint theater logistics raises concerns about
           whether DOD can effectively implement this initiative without
           reexamining fundamental aspects of the department's logistics
           governance and strategy. In this respect, joint theater logistics
           may serve as a microcosm of some of the challenges DOD faces in
           resolving supply chain management problems. We found that DOD has
           not developed a coordinated and comprehensive management approach
           to guide and oversee implementation of joint theater logistics
           across the department. Efforts to develop and implement joint
           theater logistics initiatives have been fragmented among various
           DOD components largely because of a lack of specific goals and
           strategies, accountability for achieving results, and
           outcome-oriented performance measures--key principles of sound
           management. While DOD has broadly defined joint theater logistics
           as an adaptive ability to anticipate and respond to emerging
           theater logistics and support requirements, it has not developed
           specific goals and strategies linked to this vision. In addition,
           DOD has not assigned accountability for achieving results under
           joint theater logistics and has not developed outcome-oriented
           performance measures that would enable the department to know
           whether its efforts are fully and effectively achieving a joint
           theater logistics capability. Without a coordinated and
           comprehensive approach to managing joint theater logistics, DOD
           lacks assurance that it is on the right path toward achieving this
           capability or that individual initiatives will collectively
           address gaps in logistics capabilities. Further, DOD will have
           difficulty achieving the desired improvements in distribution and
           asset visibility associated with joint theater logistics as
           portrayed in the plan.

           Based on our review, we recommended that DOD develop and implement
           a coordinated and comprehensive management approach to guide and
           oversee efforts across the department to improve distribution and
           supply support for the U.S. forces in a joint theater. This
           approach should encompass sound management principles, including
           developing specific strategies and goals, assigning accountability
           for achieving results, and using outcome-oriented performance
           measures. Moreover, in that report we recommended that DOD align
           its approach to joint theater logistics with ongoing actions the
           department is taking to reform its logistics governance and
           strategy, which are discussed below. In considering options for
           implementing this recommendation, we stated that DOD should
           determine whether any changes should be made to DOD's
           organizational structure and control of resources for joint
           logistics support, and identify the steps needed to make these
           changes, including changes to existing laws, such as Title 10. DOD
           concurred with our recommendation.

           Regarding logistics governance, DOD has been testing a new
           approach to managing joint capabilities as a portfolio.^30 In
           September 2006, the Deputy Secretary of Defense selected joint
           logistics as one of four capability areas for testing capabilities
           portfolio management.^31 These experiments were initiated in
           response to the 2006 Quadrennial Defense Review, which emphasized
           DOD's need to build on capabilities-based planning and management.
           According to DOD officials, the purpose of this test is to
           determine if DOD can make better leadership decisions by managing
           a portfolio of capabilities instead of managing systems and
           capabilities individually. Thus, this portfolio test is intended
           to enable senior leaders to consider trade-offs across previously
           stovepiped areas and to better understand the implications of
           investment decisions across competing priorities. Specifically in
           the joint logistics area, the portfolio includes all capabilities
           required to project and sustain joint force operations, including
           supply chain operations. While DOD officials told us the initial
           results of the test have been completed and have shown that
           portfolio management is an effective means for managing
           capabilities, they said that decisions had not yet been made on
           how to implement this new governance approach.

           The decisions DOD makes on capabilities portfolio management will
           also influence the development of its logistics strategy. In our
           prior work, we have noted that DOD has undertaken various efforts
           over the years to identify, and plan for, future logistics needs,
           but it has lacked an overarching, consistent logistics strategy.
           Last year, the department began to develop a "to be" road map to
           guide future logistics programs and initiatives. DOD officials
           described the "to be" road map as portraying where the department
           is headed in the logistics area and how it will get there;
           monitoring progress toward achieving its objectives; and
           institutionalizing a continuous assessment process that links
           ongoing capability development, program reviews, and budgeting.
           According to DOD officials, the initiatives in the plan will be
           incorporated into the "to be" road map. At this time last year,
           the first edition of the "to be" road map was scheduled for
           completion in February 2007, in conjunction with the submission of
           the President's Budget for Fiscal Year 2008, with annual updates
           planned. However, DOD subsequently put the "to be" road map on
           hold pending the completion of the capabilities portfolio
           management test. DOD officials have told us that the "to be" road
           map is now scheduled to be completed in summer 2008. In
           January,^32 we recommended that DOD improve its ability to guide
           logistics programs and initiatives across the department and to
           demonstrate the effectiveness, efficiency, and impact of its
           efforts to resolve supply chain management problems by completing
           the development of a comprehensive, integrated logistics strategy
           that is aligned with other defense business transformation
           efforts. DOD concurred with our recommendation.
			  
^30DOD has identified other actions in addition to portfolio management
for improving DOD governance. For example, DOD is studying ways to
establish better strategic direction and exploring options for DOD capital
resource allocation and funding stability.

^31The other three test cases are joint command and control, joint
net-centric operations, and battlespace awareness.

           In reviewing DOD's approach to developing and implementing joint
           theater logistics initiatives, we found that the diffused
           organization of DOD's logistics operations, including separate
           funding and management of resources and systems, complicates DOD's
           ability to adopt a coordinated and comprehensive approach. Several
           recent studies of DOD logistics system have reached similar
           conclusions. Since 2003, a number of studies have recommended
           changes to DOD's organizational structure for providing joint
           logistics and supply support to military operations.^33 Some of
           these organizations have noted that control over resources is a
           critical issue to be addressed. For example, the Defense Science
           Board recommended creation of a joint logistics command that would
           combine the missions of U.S. Transportation Command, the Defense
           Logistics Agency, and service logistics commands. The Center for
           Strategic and International Studies also suggested the creation of
           a departmentwide logistics command responsible for end-to-end
           supply chain operations. Regarding resource allocation, this study
           further stated that resources should be organized, managed, and
           budgeted largely along military service lines, but in those
           instances where joint capability needs are not being met by the
           services, the Secretary must turn to joint processes and entities.
           The Lexington Institute, which also recommended creation of a U.S.
           logistics command at the four-star level, concluded that Title 10
           may need to be amended in order to create this command. The
           Lexington Institute also concluded that existing funding
           mechanisms act as disincentives for joint logistics transformation
           and interoperability. The Defense Business Practice Implementation
           Board, while not agreeing with the idea of combining U.S.
           Transportation Command and the Defense Logistics Agency,
           recommended that DOD elevate leadership for supply chain
           integration by designating a new under secretary of defense who
           would have authority to direct integration activities, including
           control over budget decisions affecting these two components and
           the military services. While we noted that transformational
           changes such as those proposed by these organizations may not be
           possible without amending existing laws, the scope of our joint
           theater logistics review did not include an assessment of these
           proposals or what changes, if any, would require congressional
           action.
			  
^32 [32]GAO-07-234 .

^33For a listing of these studies and their recommendations, see
[33]GAO-07-234 .			  

           Also contributing to coordination problems in the area of supply
           chain management have been difficulties in clearly defining the
           responsibilities and authorities of defense components that have a
           role in supply chain operations. For example, although the
           Secretary of Defense in 2003 designated the Commander, U.S.
           Transportation Command, as DOD's distribution process owner--with
           responsibilities for overseeing the overall effectiveness,
           efficiency, and alignment of DOD-wide distribution activities--DOD
           has yet to issue a directive defining the process owner's
           authority, accountability, resources, and responsibility.^34 We
           have recommended that DOD enhance its ability to take a more
           coordinated approach to improving the supply distribution system
           by, among other things, clarifying the scope of responsibilities,
           accountability, and authority between the distribution process
           owner and other organizations.^35 Although DOD did not concur with
           this recommendation at the time we issued our report in 2005, DOD
           officials have recently told us they plan to issue a directive
           aimed at more clearly defining the role of the distribution
           process owner. Until this directive is issued, the
           responsibilities and authorities of the distribution process owner
           remain unclear. Echoing this theme, the Defense Business Board in
           April 2007 recommended that DOD take steps to clearly identify
           decision-making authority regarding supply chain integration.
           Specifically, the Defense Business Board recommended that DOD
           define and communicate enterprise goals in order to align
           initiatives; clearly define responsibilities and authorities of
           all players in the supply and distribution processes; and allocate
           responsibility and authority to set direction and oversee
           progress, and make necessary decisions to carry out DOD's
           agreed-upon supply chain management strategy and achieve
           enterprise goals.
			  
^34In May 2006, the Deputy Secretary of Defense redesignated the
Commander, U.S. Transportation Command as DOD's distribution process
owner. Under this redesignation, the mission of the distribution process
owner is to oversee the overall effectiveness, efficiency, and alignment
of DOD-wide distribution activities and to establish concepts and
operational frameworks relating to the planning and execution of DOD
transportation operations.

           DOD, like much of the federal government, will face critical
           challenges during the 21st century that will test fundamental
           notions about how agencies and departments should be organized and
           aligned to carry out their missions. For example, the department
           faces challenges in accomplishing its transformation goals and
           making improvements in key business areas such as supply chain
           management. We have suggested that decision makers may need to
           reexamine fundamental aspects of DOD's programs by considering
           issues such as whether current organizations are aligned and
           empowered to meet the demands of the new security environment as
           efficiently as possible and what kinds of economies of scale and
           improvements in delivery of support services would result from
           combining, realigning, or otherwise changing selected support
           functions, including logistics. ^36
			  
^35 [34]GAO-05-775 .

^36GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, [35]GAO-05-325SP (Washington, D.C.: February 2005).
			  
			  Concluding Observations
			  
			  Between now and the next update of our high-risk series in 2009,
           we plan to continue to assess DOD's progress in resolving supply
           chain management problems against the criteria we have established
           for removing a high-risk designation. In addition to monitoring
           the progress of DOD's plan, we plan to conduct audits related to
           specific aspects of supply chain management. As I indicated
           earlier, a priority for the department as it moves forward should
           be to track and assess the outcomes achieved through its
           initiatives and the progress made in resolving supply chain
           management problems in the three focus areas of asset visibility,
           requirements forecasting, and materiel distribution. We will also
           consider progress made in defense business transformation,
           business system modernization, and financial management because of
           the close linkage between these efforts and DOD's success in
           improving its supply chain management. We look forward to working
           with the department to provide an accurate appraisal of progress
           toward the goal of successfully resolving problems that have
           hindered effective and efficient supply chain management.

           Mr. Chairman, this concludes my prepared remarks. I would be happy
           to answer any questions you or other Members of the Subcommittee
           may have.
			  
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           Gosling, Assistant Director; Karyn Angulo; Larry Junek; and Marie
           Mak.
			  
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(351058)

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[36]www.gao.gov/cgi-bin/getrpt?GAO-07-1064T .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact William Solis at (202) 512-8365 or
[email protected].

Highlights of [37]GAO-07-1064T , a testimony before the Subcommittee on
Oversight of Government Management, the Federal Workforce, and the
District of Columbia, Committee on Homeland Security and Governmental
Affairs, U.S. Senate

July 10, 2007

DOD'S HIGH-RISK AREAS

Efforts to Improve Supply Chain Can Be Enhanced by Linkage to Outcomes,
Progress in Transforming Business Operations, and Reexamination of
Logistics Governance and Strategy

The availability of spare parts and other critical items provided through
the Department of Defense's (DOD) supply chains affects the readiness and
capabilities of U.S. military forces. Since 1990, GAO has designated DOD
supply chain management as a high-risk area. In 2005, DOD developed a plan
aimed at addressing supply chain problems and having GAO remove this
high-risk designation. DOD's plan focuses on three areas: requirements
forecasting, asset visibility, and materiel distribution.

GAO was asked to provide its views on (1) DOD's progress in developing and
implementing the initiatives in its plan, (2) the results of recent work
relating to the three focus areas covered by the plan, and (3) the
integration of supply chain management with efforts to improve defense
business operations. GAO also addressed broader issues of logistics
governance and strategic planning.

This testimony is based on prior GAO reports and analysis.

To determine whether to retain the high-risk designation for supply chain
management, GAO considers factors such as whether DOD makes substantial
progress implementing improvement initiatives; establishes a program to
validate the effectiveness of the initiatives; and completes a
comprehensive, integrated strategy.

The most recent update toDOD'splanshows that DOD has made progress
developing and implementing its supply chain management improvement
initiatives. DOD is generally staying on track for implementing its
initiatives, although there have been delays in meeting certain
milestones. However, the long-term time frames for many of these
initiatives present challenges to the department in sustaining progress
toward substantially completing their implementation. The plan also lacks
outcome-focused performance measures for many individual initiatives and
the three focus areas, limiting DOD's ability to fully demonstrate the
results achieved through its plan. Increasing DOD's focus on outcomes will
enable stakeholders to track the interim and long-term success of its
initiatives and help DOD determine if it is meeting its goals of more
effective and efficient supply chain management.

GAO's recent work has identified problems related to the three focus areas
in DOD's plan. In the requirements area, the military services are
experiencing difficulties estimating acquisition lead times to acquire
spare parts for equipment and weapon systems, hindering their ability to
efficiently and effectively maintain spare parts inventories for military
equipment. Challenges in the asset visibility area include lack of
interoperability among information technology systems, problems with
container management, and inconsistent application of radio frequency
identification technology, which make it difficult to obtain timely and
accurate information on assets in theater. In the materiel distribution
area, challenges remain in coordinating and consolidating distribution and
supply support within a theater.

Improving defense business operations is integral to resolving supply
chain management problems. Progress in DOD's overall approach to business
transformation is needed to confront problems in other high-risk areas,
including supply chain management. Because of the complexity of business
transformation, GAO has stated that DOD needs a Chief Management Officer
with significant authority, experience, and a term that would provide
sustained leadership and the time to integrate DOD's overall business
transformation efforts. GAO's work, pending legislation, and other recent
studies indicate a consensus that the status quo is no longer acceptable.

GAO's recent review of joint theater logistics raises concerns about
whether DOD can effectively implement this initiative without reexamining
fundamental aspects of the department's logistics governance and strategy.
In this respect, joint theater logistics may serve as a microcosm of some
of the challenges DOD faces in resolving supply chain management problems.
Moreover, GAO recommended in that report that DOD align its approach to
joint theater logistics with ongoing actions the department is taking to
reform its logistics governance and develop its logistics strategy.
Several recent studies of DOD logistics systems have recommended changes
to DOD's organizational structure for providing joint logistics and supply
support to military operations.

References

Visible links
  13. http://www.gao.gov/cgi-bin/getrpt?GAO-06-113T
  14. http://www.gao.gov/cgi-bin/getrpt?GAO-06-983T
  15. http://www.gao.gov/cgi-bin/getrpt?GAO-07-310
  16. http://www.gao.gov/cgi-bin/getrpt?GAO-07-807
  17. mailto:[email protected]
  18. http://www.gao.gov/
  19. http://www.gao.gov/
  20. http://www.gao.gov/fraudnet/fraudnet.htm
  21. mailto:[email protected]
  22. mailto:[email protected]
  23. mailto:[email protected]
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-01-159SP
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-07-675R
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-234
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-07-281
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-07-232
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-07-144
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-05-775
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-04-305r
  32. http://www.gao.gov/cgi-bin/getrpt?GAO-07-234
  33. http://www.gao.gov/cgi-bin/getrpt?GAO-07-234
  34. http://www.gao.gov/cgi-bin/getrpt?GAO-05-775
  35. http://www.gao.gov/cgi-bin/getrpt?GAO-05-325SP
  36. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1064T
  37. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1064T
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