Defense Inventory: Opportunities Exist to Improve the Management
of DOD's Acquisition Lead Times for Spare Parts (02-MAR-07,
GAO-07-281).
GAO has identified the Department of Defense's (DOD) management
of its inventory as a high-risk area since 1990 due to
ineffective and inefficient inventory systems and practices.
Management of inventory acquisition lead times is important in
maintaining cost-effective inventories, budgeting, and having
material available when needed, as lead times are DOD's best
estimate of when an item will be received. Under the Comptroller
General's authority to conduct evaluations on his own initiative,
GAO analyzed the extent to which (1) DOD's estimated lead times
varied from actual lead times, and (2) current management actions
and initiatives have reduced lead times as compared to past
years. To address these objectives, GAO computed the difference
between the components' actual and estimated lead times, and
compared component initiatives to reduce lead times for 1994-2002
to 2002-2005.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-281
ACCNO: A66404
TITLE: Defense Inventory: Opportunities Exist to Improve the
Management of DOD's Acquisition Lead Times for Spare Parts
DATE: 03/02/2007
SUBJECT: Comparative analysis
Data integrity
Defense cost control
Defense procurement
Inventory control
Military forces
Military inventories
Military materiel
Procurement practices
Spare parts
Strategic planning
Supply chain management
Schedule slippages
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GAO-07-281
* [1]Results in Brief
* [2]Background
* [3]Actual Lead Times Varied Considerably from Estimated Lead Ti
* [4]Acquisition Lead Time Estimates for All Components Rarely Ap
* [5]Army Tended to Underestimate Lead Time Estimates
* [6]DLA Tended to Overestimate Lead Time Estimates
* [7]Air Force Tended to Underestimate and Overestimate Lead Time
* [8]Navy Tended to Underestimate and Overestimate Lead Time Esti
* [9]Management Actions and Initiatives to Reduce Lead Times from
* [10]Slower Rate of Reductions in Lead Times from 2002-2005 than
* [11]Military Components Pursued Various Initiatives to Reduce Le
* [12]Initiatives to Streamline Administrative Processes Implement
* [13]USD (AT&L) No Longer Provided Oversight and Guidance on Lead
* [14]Initiatives to Develop Relationships with Suppliers Implemen
* [15]More Aggressive Lead Time Reductions Could Have Resulted in
* [16]Conclusions
* [17]Recommendations for Executive Action
* [18]Agency Comments and Our Evaluation
* [19]Appendix I: Scope and Methodology
* [20]Appendix II: Comments from the Department of Defense
* [21]Appendix III: GAO Contact and Staff Acknowledgments
* [22]GAO Contact
* [23]Acknowledgments
* [24]Order by Mail or Phone
Report to Congressional Committees
United States Government Accountability Office
GAO
March 2007
DEFENSE INVENTORY
Opportunities Exist to Improve the Management of DOD's Acquisition Lead
Times for Spare Parts
GAO-07-281
Contents
Letter 1
Results in Brief 4
Background 7
Actual Lead Times Varied Considerably from Estimated Lead Times for All
Components 9
Management Actions and Initiatives to Reduce Lead Times from 2002 to 2005
Less Effective than Previous Initiatives from 1994 to 2002 17
Conclusions 27
Recommendations for Executive Action 28
Agency Comments and Our Evaluation 29
Appendix I Scope and Methodology 33
Appendix II Comments from the Department of Defense 36
Appendix III GAO Contact and Staff Acknowledgments 41
Tables
Table 1: Primary Logistics Agencies and Their Inventory Management Centers
9
Table 2: DOD-Wide Difference in Actual and Estimated Acquisition Lead
Times 10
Table 3: Army Differences between Actual and Estimated Acquisition Lead
Times 11
Table 4: DLA Differences between Actual and Estimated Acquisition Lead
Times 14
Table 5: Air Force Differences between Actual and Estimated Acquisition
Lead Times 15
Table 6: Navy Differences between Actual and Estimated Acquisition Lead
Times 16
Table 7: Lead Time Reductions from 2002 to 2005 Compared to Lead Time
Reductions from 1994 to 2002 18
Table 8: Component Initiatives and Management Actions to Reduce
Acquisition Lead Times from 1994 to 2005 19
Figure
Figure 1: Potential Impact of Reduced Lead Time Inventory Requirements 26
Abbreviations
DLA Defense Logistics Agency DOD Department of Defense USD (AT&L) Under
Secretary of Defense for Acquisition, Technology, and Logistics TACOM
Tank-Automotive and Armaments Command
This is a work of the U.S. government and is not subject to copyright
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separately.
United States Government Accountability Office
Washington, DC 20548
March 2, 2007
The Honorable Carl Levin
Chairman
The Honorable John McCain
Ranking Minority Member
Committee on Armed Services
United States Senate
The Honorable Ike Skelton
Chairman
The Honorable Duncan L. Hunter
Ranking Minority Member
Committee on Armed Services
House of Representatives
The Department of Defense (DOD) maintains a military force with diverse
capabilities but continues to confront a pervasive, decades-old supply
chain management problem that relates to retaining the appropriate amount
of inventory. The fundamental premise of supply chain management is the
operation of a continuous, unbroken, comprehensive, and all-inclusive
logistics process, from initial customer order for materiel or services to
the ultimate satisfaction of the customer's requirements. Supply chain
management in DOD consists of processes and activities to purchase,
produce, and deliver materiel to a force that is highly dispersed and
mobile. Supply support to the warfighter affects readiness and military
operations. In fact, the supply chain can be the critical link in
determining whether our frontline military forces win or lose on the
battlefield. Given the high demand for goods and services to support
ongoing U.S. military operations, the investment of resources in the
supply chain is substantial. DOD reported that, as of September 30,
2005,^1 it owned about $80 billion of secondary inventory of spare
parts.^2 This represents a $17 billion, or 27 percent, increase since
fiscal year 2001, when the department reported about $63 billion in
inventory.
^1 This was the most up-to-date information available during our review.
^2 DOD's secondary inventory consists of a wide variety of parts that
includes communication and detection equipment; electrical and electronic
equipment components; engines, turbines, and their components; aircraft
components and accessories; instruments and laboratory equipment; aircraft
and airframe structural components; fire control equipment; guided
missiles; electric wire and power and distribution equipment; medical
supplies; and clothing and textiles.
Critically important to maintaining cost-effective inventories, budgeting,
and having materiel available when it is needed is the development of
successful processes that identify and manage acquisition lead times for
the purchase of parts for equipment and weapon systems. Acquisition lead
time, also known as procurement lead time,^3 measures the length of time
between the initiation of a procurement action and the receipt of items
into the supply system. DOD's management of its acquisition lead times
affects whether DOD and its military components^4 have the right
quantities of the right items at the right locations at the right time to
meet customer needs. Generating lead time estimates is a protracted and
complex process that requires DOD inventory managers to project, in some
cases, parts usages over several years, which can decrease forecast
accuracy and reduce DOD's flexibility to react to changes in demand.
Additionally, long-standing data problems, internal control weaknesses,
and noninteroperable business systems within DOD further complicate the
process of generating accurate acquisition lead time estimates.
Since 1990, we have reported on weaknesses in DOD's supply chain
management in our high-risk reports. In 1994, we reported^5 that DOD had
made only limited progress in reducing acquisition lead times because its
initiatives had been unevenly implemented by the military components. We
recommended that DOD renew emphasis on implementing lead time reduction
initiatives, review and update certain lead time data, and give
consideration to buying items directly from the manufacturers instead of
from contractors. DOD partially concurred with each of our findings and
recommendations. In addition to our review, a 1998 DOD Inspector General
report^6 reviewed initiatives underway at that time to improve acquisition
lead times. The report concluded that the military components had made
progress in reducing acquisition lead times and pointed out that reducing
acquisition lead times decreases inventory levels and associated inventory
holding costs, thus freeing up funds for other uses. The DOD Inspector
General report contained no recommendations.
^3 Hereafter, we will refer to the term as acquisition lead time.
^4 For purposes of this report, DOD's military components are defined as
the Army, Navy, Air Force, and the Defense Logistics Agency (DLA).
^5 GAO, Defense Supply: Acquisition Leadtime Requirements Can Be
Significantly Reduced, [25]GAO/NSIAD-95-2 (Washington, D.C.: Dec. 20,
1994).
^6 Department of Defense Inspector General, Initiatives to Improve
Acquisition Lead Time, Report Number 99-037 (Nov. 23, 1998).
Because of the potential effects of DOD's management of acquisition lead
times on readiness and inventory expenditures and because of the continued
weaknesses in DOD's supply chain management that we had identified, we
performed this engagement under the Comptroller General's authority to
conduct evaluations on his own initiative. We are providing this report to
you because of your committee's oversight responsibilities. Our objectives
were to determine the extent to which (1) DOD's estimated lead times
varied from the actual lead times experienced, and (2) current management
actions and initiatives have reduced lead times as compared to past years.
To compare and analyze the estimated to actual lead times, we (1) obtained
and reviewed the military components' regulations and directives on the
policies, procedures, and processes used in computing and maintaining
acquisition lead times and interviewed relevant officials; (2) obtained
from each of the military components the estimated and actual acquisition
lead time values for all of the more than one million orders valued at
almost $19 billion of spare parts that they received during fiscal year
2005; and (3) computed the differences between the estimated and actual
lead time for each order. Each order's variance was then categorized
according to how closely the estimate approximated the actual lead time,
ranging from no variance to more than 90 days off as we believe this
interval was an appropriate measure to use in our analyses. We then
calculated overall statistics to show the extent to which the military
components accurately estimated the actual lead times. We also calculated
the effect in dollars for spare parts where the estimates were longer or
shorter than the actual lead times. We assessed the reliability of DOD's
acquisition lead time data by obtaining information from the components'
management of their data reliability procedures. We determined that the
data obtained from DOD's automated systems were sufficiently reliable for
the purposes of this report. Further, to compare the management actions
and initiatives to reduce lead times, we reviewed relevant documents
regarding efforts, policies, and initiatives to reduce lead times and
interviewed officials from the Office of the Under Secretary of Defense
for Acquisition, Technology, and Logistics (USD (AT&L)) and each of the
military components. We conducted our review from November 2005 through
November 2006 in accordance with generally accepted government auditing
standards. For more detailed information on our scope and methodology, see
appendix I.
Results in Brief
The military components' estimated lead times to acquire spare parts
varied considerably from the actual lead times they experienced. DOD's
Supply Chain Materiel Management Regulation^7 provides guidance for
developing materiel requirements based on customer expectations while
minimizing the investment in inventories. Further, accurate lead time
estimates are critically important in enabling the military components to
have the proper amount of inventory on hand. However, rarely (5 percent)
did the components' acquisition lead time estimates come within a week of
the actual lead times, while about 44 percent of the lead time estimates
varied either earlier or later than the actual lead times by at least 90
days. The combined effect of the understated lead time estimates for all
the components was slightly over $12 billion in spare parts arriving more
than 90 days later than anticipated, which has the potential for
negatively affecting readiness rates because units may not have the
necessary inventory to support and sustain ongoing military operations. If
orders had been placed and funds obligated earlier, in some instances
readiness rates could potentially have been improved. Further, the
combined effect of the overstated lead time estimates for all the
components resulted in them obligating almost $2 billion more than 90 days
earlier than necessary, although spare parts that come in early could
potentially improve readiness.
o Of the 9,380 Army deliveries we reviewed, we found that 58
percent (valued at $10.6 billion) had actual lead times longer
than estimated by at least 90 days due to such problems as
miscoding of late deliveries as not representative of future
deliveries, lack of lead time data in one of its computer systems,
and data input errors that caused the Army to underestimate lead
times and receive items later than expected.
o Conversely, we found that almost 40 percent of the estimated
lead times for the 1,031,779 DLA deliveries we reviewed^8 (valued
at $568.8 million) were overstated by at least 90 days and did not
accurately reflect the improvements made in actual lead times
because the methodology DLA used for computing lead times had not
been reviewed or revised to reflect recent improvements due to the
use of long-term contracts.
o Of the 18,335 Air Force deliveries we reviewed, we found that
more than 42 percent (valued at $155.2 million) had actual lead
times longer and about 24 percent had actual lead times shorter
than estimated by at least 90 days due, in part, to the use of
standard default data instead of other data that may have been
obtainable, such as data from the suppliers.
o Additionally, of the 19,304 Navy deliveries we reviewed, we
found that about 28 percent had actual lead times longer and
almost 40 percent (valued at $164.9 million) had actual lead times
shorter than estimated by at least 90 days due to such problems as
data input errors.
Absent actions by the military components to address these
problems and institute corrective procedures, DOD's acquisition
lead time estimates will continue to vary greatly from the actual
lead times and will contribute to inefficient use of funds and
potential inventory shortages or excesses.
USD (AT&L) and the military components' management actions and
initiatives to reduce acquisition lead times from 2002 to 2005
were less effective overall than previous actions and initiatives
from 1994 to 2002. DOD regulations state that the components
should aggressively pursue the lowest possible acquisition lead
times. However, from 2002 to 2005, DOD-wide lead times were
reduced by an average of 0.9 percent annually as compared to an
average reduction of 5.6 percent annually from 1994 to 2002. The
USD (AT&L) and the components' management actions and initiatives
were more effective from 1994 to 2002 than they were from 2002 to
2005 because they placed greater emphasis on three areas that
contributed to the higher rate of lead time reduction:
streamlining internal administrative processes, improving
oversight, and developing strategic relationships with suppliers.
First, from 1994 to 2002, each of the military components began
new initiatives to streamline administrative processes. While all
components continued these initiatives from 2002 to 2005, the Army
and the Navy reduced focus on these initiatives and were less
aggressive than the DLA and the Air Force in implementing new
initiatives to reduce lead times. For example, DLA and the Air
Force reduced their lead times by an average of 3.3 and 4.1
percent annually, respectively, while the Army's average lead
times increased and the Navy's were unchanged. Second, in 1994,
USD (AT&L) began providing enhanced oversight to acquisition lead
times, but by 2002 it was no longer providing active oversight.
For example, from 2002 to 2005, USD (AT&L) did not establish lead
time reduction goals, require reporting of metrics to measure
reductions in lead times, collect data to report the impact and
costs of specific initiatives on lead times, or measure and
provide estimates of the financial impact of reduced lead times,
as had been done previously. USD (AT&L) officials stated that they
no longer provided oversight because management focus shifted from
reducing lead times to improving performance on broader metrics,
such as backorders. Component officials stated that because USD
(AT&L) placed less emphasis on lead times from 2002 to 2005, their
organizations also placed less emphasis on lead time reductions.
Officials suggested that renewed emphasis on lead time reduction
by USD (AT&L) could increase the components' management focus on
reducing lead times. Third, all military components were able to
reduce lead times from 1994 to 2002 by implementing initiatives
that developed relationships with suppliers, such as using
long-term contracts and other innovative practices. However,
unlike the Air Force and the DLA, the Army and the Navy have not
begun any new initiatives to improve strategic relationships with
suppliers to help reduce lead times from 2002 to 2005. The
military components could have decreased inventory requirements
and potentially saved hundreds of millions of dollars if more
aggressive lead time reductions had been realized from 2002 to
2005, as they had from 1994 to 2002. As a result of the reduced
rate of lead time reduction from 2002 to 2005, lead time
requirements are up to $2.7 billion higher than they would have
been if the lead time reduction rate had remained constant, thus
tying up money that could have been obligated for other needs.
Until USD (AT&L) and the components take steps to renew their
focus on reducing lead times by aggressively continuing prior
initiatives and implementing successful new initiatives, the
components may continue to experience spare parts shortages and
may spend significantly more money to purchase additional
inventory.
To improve the accuracy in setting acquisition lead time values,
we are recommending that the Army take steps to determine when
lead time values are representative and should be updated, and
update and maintain automated lead time data in computer systems;
the Army and Navy review and validate lead time data to detect and
correct errors; DLA review and update the methodology used for
updating lead times; and the Air Force evaluate sources of lead
time values. To strengthen management of lead times, we are
recommending that USD (AT&L) establish lead time reduction goals,
develop metrics to measure progress in meeting lead time reduction
goals, develop an estimate of the financial impact of lead time
reductions, direct the military components to measure and report
to it on the results and costs of individual initiatives to reduce
overall lead times, and work closely with the Army and Navy to
develop joint strategic relationships with suppliers that would be
beneficial in reducing lead times.
In written comments on a draft of this report, DOD generally
concurred with 9 of our 11 recommendations. DOD identified actions
that it is taking or plans to take to implement these
recommendations, and, for most of them, we agree that its actions
are responsive and reasonably address our findings. However, DOD
did not concur with 2 of our 11 recommendations, the first being
our recommendation for DLA to review and revise the methodology
used to update lead times. The department stated that we used data
from DLA's legacy computer system in our review, which did not
have the benefit of DLA's newly implemented computer system. We
believe that our recommendation remains valid because the basic
methodology for calculating lead times remains the same between
DLA's old and new computer systems. Therefore, improvements in the
accuracy of DLA's lead time estimates seem unlikely to result from
the use of the old methodology in the new computer system. DOD
also did not concur with our recommendation for USD (AT&L) to work
closely with the Army and Navy to develop joint strategic
relationships with suppliers that would be beneficial in reducing
lead times, stating that it is actively pursuing a joint strategy
to develop strategic relationships and that to instruct the
services to develop strategic relationships separately would lead
to a duplication of effort. We believe that DOD may have
misinterpreted our recommendation as having these services
independently pursue strategic supplier relationships without USD
(AT&L) oversight. However, our recommendation was not for the Army
and Navy to develop strategic relationships separately but for USD
(AT&L) to work closely with them to develop these relationships.
Therefore, we believe that this recommendation remains valid. The
department's comments are reprinted in appendix II, and our
response to its comments appears at the end of this report.
Background
The basic challenge of inventory management is having the proper
amount of items on hand when required--neither too much nor too
little. If inventory levels are too low, DOD and its components
may experience supply shortages and be unable to satisfy customer
demands. This could result in DOD undertaking costly and often
wasteful efforts to recover from being out of stock. If inventory
levels are too high, money is invested on items that may never be
used. Additionally, a series of unnecessary expenditures is
incurred for more warehouses, transportation, and personnel;
storage and distribution facilities become more crowded;
maintenance workloads may increase; and inventory excesses are
generated which eventually may have to be disposed of, perhaps at
a severe financial loss.
Inventory levels are influenced by the amount of time between the
initiation of a procurement action and the receipt of the item
into the supply system. This time frame is known as acquisition
lead time, and it consists of two parts: administrative and
production lead times. Administrative lead time is the time
interval from the initiation of a procurement action to the
contract award, while the production lead time is the interval
from the contract award to delivery of the items. Since
acquisition lead times are the components' estimates as to when an
item will arrive, varying from that expectation results in
consequences when items arrive too early or too late.
To promote accuracy and completeness in the management of
acquisition lead times, having appropriate policies, procedures,
and instructions is an important component of an agency's internal
control framework. As discussed in GAO's Internal Control
Standards guidance, we identified that other important activities
related to information processing systems, performance measures
and indicators, and the recording and classification of
transactions and events are also necessary.^9 Inventory management
and oversight is the shared responsibility between the USD (AT&L)
and the military components. USD (AT&L) has overall responsibility
for the development of acquisition policies for monitoring the
overall effectiveness and efficiency of the DOD acquisition
system. The components are responsible for implementing the
materiel management policies and activities. The DOD Supply Chain
Materiel Management Regulation states that the military components
should aggressively pursue the lowest possible acquisition lead
times, and in coming up with lead time estimates, they may use
contractor information, historical information from representative
procurements, technical documentation, or the best judgment of
acquisition personnel. It also establishes for the military
components overarching guiding principles, assigns responsibility,
defines, and provides guidelines for developing acquisition lead
time, and states that they should identify and track deviations
from normal historical or projected patterns in such areas as
demand, stock levels, and lead times.
The military components have an inventory management agency that
purchases and delivers items and services to the warfighter. The
primary inventory agencies that provide this support to the
warfighter are (1) the U.S. Air Force Materiel Command, (2) the
U.S. Army Materiel Command, (3) the Defense Logistics Agency, and
(4) the Naval Inventory Control Point. Table 1 shows the primary
logistics agencies and their inventory management centers.
Table 1: Primary Logistics Agencies and Their Inventory Management
Centers
Source: DOD.
To implement DOD's acquisition lead time policy, each of the
military components developed their own procedures for managing
acquisition lead times, and as such, each used slightly different
methodologies to calculate their estimated administrative lead
time and production lead time values.
Actual Lead Times Varied Considerably from Estimated Lead Times
for All Components
The military components' acquisition lead time estimates to
acquire spare and repair parts varied considerably from the actual
lead times experienced. More specifically, estimated lead times
for all of the components rarely approximated actual lead times,
with only 5 percent of the deliveries we reviewed having actual
acquisition lead times that were within 1 week of the estimated
lead time. While each of the military components had instances of
both underestimated and overestimated lead times, the Army's
acquisition lead time estimates were generally understated, while
DLA's estimates were generally overstated. The Air Force's and the
Navy's estimates were both overstated and understated.
Acquisition Lead Time Estimates for All Components Rarely
Approximated Actual Lead Times
For the more than one million spare part deliveries we reviewed,
the military components' estimated acquisition lead times rarely
approximated the actual lead times and were generally either
understated or overstated. DOD's Supply Chain Materiel Management
Regulation provides guidance for developing materiel requirements
based on customer expectations while minimizing the investment in
inventories. In addition, accurate lead time estimates are
critically important in enabling the military components to have
the proper amount of inventory on hand. However, as table 2 shows,
5 percent of the deliveries, totaling about $700 million, had
actual acquisition lead times that were within a week of the
estimate. The combined value of the lead time underestimates for
all the components resulted in slightly over $12 billion in spare
and repair parts arriving more than 90 days later than expected,
which may have negatively affected equipment readiness and overall
rates because units may not have had the necessary inventory to
support and sustain ongoing military operations. If lead time
estimates had been more accurate, orders could have been placed
and funds obligated earlier, and in some instances readiness rates
could potentially have been improved. Further, the combined value
of the lead time overestimates resulted in the military components
obligating almost $2 billion more than 90 days earlier than
necessary, which could add to excess on-hand inventories, although
spare parts that come in early could potentially improve
readiness.
^7 Office of the Deputy Under Secretary of Defense for Logistics and
Materiel Readiness, Department of Defense Supply Chain Materiel Management
Regulation, DOD 4140.1-R (May 2003).
^8 The majority of the items we reviewed belonged to DLA, which manages
more than 5 million items. These items tend to be smaller, less expensive
consumable products as compared to the items managed by the military
components.
^9 GAO, Internal Control Management and Evaluation Tool, [26]GAO-01-1008G
(Washington, D.C.: August 2001).
Table 2: DOD-Wide Difference in Actual and Estimated Acquisition Lead
Times
Source: GAO analysis of delivery order information provided by each of the
military components.
We reviewed the two parts of acquisition lead time, administrative lead
time and production lead time, and found that each of the military
components more accurately estimated the administrative portion than the
production portion. However, for administrative lead time, the military
components' estimates fell within the 1-week range only about 20 percent
of the time while production lead time estimates matched the actual
production lead times within the 1-week range just over 10 percent of the
time. Officials explained that the accuracy of their administrative lead
time estimates was better than their production lead time estimates
because they have more management control over their internal processes
than over external contractor practices. Officials stated that variability
always exists when generating lead time estimates, but they agreed that
improved and more reliable lead time estimates can contribute to lower
levels of inventory. They also stated that understated lead time estimates
can result in backorders or part shortages which may impact a unit's
readiness if the needed spare parts are not available when expected, and
overstated estimates result in prematurely obligating funds that could
have been used for other military needs and can unnecessarily increase
inventory levels and associated costs.
Army Tended to Underestimate Lead Time Estimates
The Army tended to underestimate their acquisition lead times and receive
items later than expected. Of the 9,380 Army deliveries we reviewed, more
than 58 percent of their actual acquisition lead times were more than 90
days longer than their estimated lead times. This represented about $10.6
billion worth of inventory arriving later than expected. Additionally,
almost 12 percent had actual acquisition lead times that were more than 90
days shorter than their estimated lead times and that resulted in about
$900 million of premature obligations, as shown in table 3.
Table 3: Army Differences between Actual and Estimated Acquisition Lead
Times
Source: GAO analysis of delivery order information provided by Army
Materiel Command.
The variances between the Army's actual and estimated lead times occurred,
in part, because of miscoding of late deliveries as not representative of
future delivery times, lack of accurate lead time data in one of its
computer systems, and data input errors. Of the data we examined, most of
the underestimates occurred within the Army Aviation and Missile Life
Cycle Management Command within the Army Materiel Command. This command
develops, acquires, fields, and sustains aviation, missile, and unmanned
vehicle systems. When this command cannot obtain items, such as landing
gear, helicopter blades, and aircraft access doors in accordance with
expectations, it can have immediate and serious ramifications on the
operational readiness of many units. We found production lead times in
3,863 orders, for items valued at $10.3 billion of the $10.6 billion we
analyzed, where the actual lead times were more than 90 days later than
the estimated lead times. According to our analyses of the command's
deliveries received in fiscal year 2005, nearly 63 percent arrived more
than 90 days later than expected. Army officials stated that some of the
variances between actual and estimated lead times occurred because some
actual lead times were miscoded as nonrepresentative by the command's
acquisition personnel, who initially believed that certain delivery delays
would be short-lived and were not representative of future deliveries.
Once Army officials realized the delays were not short-lived, they said
that item managers made some adjustments for particular affected items.
Army guidance states that lead times should be computed using the most
recent representative procurement.^10 However, it does not give clear
guidance on when to decide if continuing late contractor deliveries should
be considered representative, and any adjustments made to particular
affected items would not prevent similar situations from occurring in the
future. As a result, actual lead times can be miscoded and excluded from
lead time updates, which makes subsequent estimates inaccurate.
Army officials acknowledged that this command has experienced a problem in
meeting supply demands for several years, especially after Operation Iraqi
Freedom began, because of the surge in demand for their items. The high
demand depleted much of the Army's on-hand supply of inventory more
quickly than anticipated and replacing the items was difficult since many
aviation-related items had long lead times for replacement. At the same
time, the Army was unable to order some items as quickly as needed because
it lacked sufficient available funds to obligate and process orders.
However, Army officials stated that many manufacturers were operating at
their highest capacity and placing orders more quickly would not have
resulted in the companies actually producing the additional items any
faster.
^10 Army Regulation 710-1, Centralized Inventory Management of the Army
Supply System (Sept. 6, 2005).
Officials from the U.S. Army TACOM Life Cycle Management Command in
Warren, Michigan made similar statements to explain the lateness of some
of their deliveries. They agreed that they had experienced delays in
getting items from certain contractors due to the high level of demand.
They also acknowledged budgetary constraints during the years of our
sample that resulted in hiring freezes and other personnel challenges that
added to their workload and hindered their ability to process contracts
and orders and to periodically review, validate, and make corrections to
any inaccurately recorded lead time estimates.
Army officials also attributed inaccuracies in lead times to input errors
that item managers were unable to detect and correct. At the Army's
Communications-Electronics Life Cycle Management Command, lead time data
are not automatically maintained or updated in the Logistics Modernization
Program, which was designed to improve Army maintenance logistical and
financial operations, and officials had to manually input the data from
the command's older computer system. However, according to Army officials,
the heavy workloads of item managers have not allowed them to validate
these data to detect and correct any lead time data input errors.
Absent actions by the Army, across each of its Life Cycle Management
Commands, to determine when deliveries are representative and should be
used to update lead time values, maintain and update lead time data in its
new computer system, and validate data input to detect and correct errors,
late deliveries and parts shortages will likely continue.
DLA Tended to Overestimate Lead Time Estimates
DLA tended to overestimate its acquisition lead times and receive items
sooner than expected. Of the 1,031,779 DLA deliveries we reviewed, almost
40 percent had actual acquisition lead times that were more than 90 days
shorter than their estimated lead times. This resulted in about $568
million being obligated earlier than necessary and inventory arriving
earlier than expected. Conversely, only about 3 percent of DLA's
deliveries had actual acquisition lead times that were more than 90 days
longer than their estimated lead times, totaling approximately $319
million, as shown in table 4.
Table 4: DLA Differences between Actual and Estimated Acquisition Lead
Times
Source: GAO analysis of delivery order information provided by DLA.
DLA manages almost every consumable item the military services need to
operate, and according to officials, many of these items have been placed
on long-term contracts, thus allowing faster order processing. Since the
deliveries from the contractors were also faster, there have been reduced
overall acquisition lead times. Even though DLA uses a methodology for
computing and maintaining lead time estimates that is more heavily
weighted toward the recent actual lead times than the existing ones on
file, the process did not compute revised estimates that accurately
reflected the rapid improvements being made through their lead time
initiatives. Additionally, DLA officials stated that they emphasized
business practices that encouraged earlier deliveries as opposed to later
ones. They went on to state that the storage and handling costs were
minimal, although we were unable to confirm this statement, and being able
to meet customers' needs by having the necessary items on hand was most
important to them. With the emphasis on meeting or beating the estimated
lead times, there is reduced incentive for DLA to adjust its lead times to
more precisely reflect actual lead times experienced. Absent actions by
DLA to review and revise the methodology and inputs it uses in calculating
lead time estimates so that the estimates more precisely reflect its
actual experiences, DLA will continue to obligate funds earlier than
necessary and have early delivery of items.
Air Force Tended to Underestimate and Overestimate Lead Time Estimates
The Air Force tended to both underestimate and overestimate its
acquisition lead times, receiving a significant amount of items both
sooner and later than expected. Of the 18,335 Air Force deliveries we
reviewed, more than 42 percent had actual acquisition lead times that were
more than 90 days longer than estimated. This resulted in about $528
million worth of inventory that arrived later than estimated. At the same
time, about 24 percent had actual acquisition lead times that were more
than 90 days shorter than estimated, which resulted in about $272 million
of premature obligations, as shown in table 5.
Table 5: Air Force Differences between Actual and Estimated Acquisition
Lead Times
Source: GAO analysis of delivery order information provided by the Air
Force Materiel Command.
A sample of 30 Air Force deliveries selected from the ones with the
greatest variances between actual and estimated lead times provided an
explanation for some of these variances. In over half of the sampled late
deliveries, the item managers at the air logistics centers had used their
standard default lead time values for the estimates. It is the Air Force's
standard procedure to use the standard default administrative lead time
value for spare parts that have not been bought in more than 5 years, but
Air Force guidance does not direct the use of default production lead
times for spare parts that have not been purchased for more than 5
years.^11 However, many items we reviewed used the standard default
production lead time value because, according to officials, it was an easy
estimate for item managers to use given their workload. In these cases,
the default values greatly understated the actual lead times and resulted
in later arrivals of deliveries to the air logistics centers, which may
have negatively impacted their operational units' mission readiness if
those items had not been available when needed. Officials said that these
default values may not be the best information available, and there might
be other information obtained or generated for use in place of the default
values. One possibility might be contacting the supplier to determine the
current lead time. They noted that the use of these default values could
also be an explanation for the overstated lead times as well as the
understated lead times. Absent actions by the Air Force to review and
validate its default lead time estimates and consider other options for
better lead time data, mostly for infrequent buys, parts shortages or
early obligation of funds will likely continue.
^11 Air Force Materiel Command Manual 23-1, Requirement for Secondary
Items (D200A, D200N) (Jan. 5, 2007).
Navy Tended to Underestimate and Overestimate Lead Time Estimates
The Navy tended to both underestimate and overestimate its acquisition
lead times, receiving a significant amount of items both sooner and later
than expected. Of the 19,304 Navy deliveries we reviewed, just over 39
percent had actual acquisition lead times that were more than 90 days
shorter than estimated. As a result, about $165 million worth of inventory
arrived earlier than expected and the funds for this inventory were
obligated prematurely. In addition, about 28 percent had actual lead times
that exceeded their estimates by more than 90 days, which resulted in
almost $561 million of items arriving later than anticipated, as shown in
table 6.
Table 6: Navy Differences between Actual and Estimated Acquisition Lead
Times
Source: GAO analysis of delivery order information provided by Naval
Inventory Control Points at Mechanicsburg and Philadelphia.
Navy officials stated that they believe these variances are acceptable and
reasonable due to the variability in generating lead times, especially for
ship parts that are bought infrequently. They said that updating the lead
time estimates more often would not make the forecasts more accurate
because there are not enough observations per item to update more often.
We did not evaluate whether more frequent updating of the lead time
estimates would improve their accuracy. However, some of the variances
between the Navy's actual and estimated lead times occurred because of
data input errors. We found input errors in a sample of 30 Navy deliveries
selected from the ones with the greatest variances between the estimated
and actual lead times that affected the estimates' accuracy. For example,
in two cases, the lead time estimates were incorrectly loaded into the
ordering system used by the inventory control points at 10 times longer
than what the correct estimates should have been, and the error was not
detected. Also, many of the excessive estimated lead times of the sample
items we reviewed could not be explained by Navy officials, who stated
there were conflicting lead time data within their records. Until the Navy
addresses these concerns by reviewing and validating its lead time data
and correcting errors, either parts shortages or early obligation of funds
are likely to continue.
Management Actions and Initiatives to Reduce Lead Times from 2002 to 2005 Less
Effective than Previous Initiatives from 1994 to 2002
USD (AT&L) and the military components' management actions and initiatives
to reduce lead times from 2002 to 2005 were less effective overall than
previous initiatives from 1994 to 2002. Progress in reducing lead times
varied greatly by service from 2002 to 2005, with DLA and the Air Force
reducing their lead times by about 3.3 and 4.1 percent annually
respectively, while the Navy's lead times remained the same, and the Army
experienced an increase in lead times by 0.3 percent annually. Of the
various management actions and initiatives taken by the services from 2002
to 2005, some were new and some were continuations of previous
initiatives, with each service pursuing varying combinations of
initiatives. For example, initiatives to streamline administrative
processes were implemented by all military components from 1994 to 2002
and from 2002 to 2005, with DLA and the Air Force more aggressively
implementing new initiatives from 2002 to 2005 than did the Army and Navy.
In addition, from 1994 to 2002, enhanced USD (AT&L) oversight contributed
to the rapid pace of lead time reduction; however, from 2002 to 2005, USD
(AT&L) no longer continued to monitor progress made by the components in
reducing lead times, and all components experienced reduced management
oversight. Moreover, while new initiatives to improve contracting
practices were implemented by all military components from 1994 to 2002
and were continued by all components from 2002 to 2005, from 2002 to 2005
DLA and the Air Force began new initiatives to strategically manage
relationships with suppliers, while the Army and Navy did not. The
military components could have decreased inventory requirements and saved
money if more aggressive lead time reductions had been realized from 2002
to 2005 as they had been from 1994 to 2002.
Slower Rate of Reductions in Lead Times from 2002-2005 than from 1994-2002
USD (AT&L) and the components' management actions and initiatives to
reduce lead times from 2002 to 2005 resulted in a slower rate of reduction
in DOD-wide lead times of an average of 0.9 percent annually as compared
to an average reduction of 5.6 percent annually from 1994 to 2002. The DOD
Supply Chain Materiel Management Regulation gives general guidance stating
that the military components should aggressively pursue the lowest
possible acquisition lead times. As shown in table 7, progress in reducing
lead times varied by military component from 2002 to 2005. The Army
experienced an average annual lead time increase of 0.3 percent per year
from 2002 to 2005, as compared to an average yearly reduction of 9.7
percent from 1994 to 2002, in part due to higher demands and supplier
capacity issues. The Navy's lead times were unchanged from 2002 to 2005,
after decreasing by 2.8 percent from 1994 to 2002. The Air Force reduced
its lead times from 2002 to 2005, but at a lower rate than it did from
1994 to 2002. The Air Force reduced its acquisition lead times by an
average of 4.1 percent per year from 2002 to 2005, compared to an average
yearly reduction of 4.5 percent from 1994 to 2002. Similarly, DLA's
acquisition lead times also decreased at a lower rate from 2002 to 2005
than from 1994 to 2002, being reduced by an average of 3.3 percent per
year in the former as compared to 6.2 percent per year in the latter.
Table 7: Lead Time Reductions from 2002 to 2005 Compared to Lead Time
Reductions from 1994 to 2002
Source: GAO analysis of DOD budget stratification data.
aDOD total was collectively determined by averaging all lead times and
reductions for the individual items from the military components.
Military Components Pursued Various Initiatives to Reduce Lead Times with
Varying Results
Each of the military components pursued various initiatives to reduce
acquisition lead times during both the 1994-2002 and 2002-2005 time
periods with varying results. The progress of the military components in
reducing lead times varied because each pursued different combinations of
new and continued initiatives and management actions. These initiatives
and actions generally fell into three areas of focus: streamlining
internal administrative processes, improving oversight, and developing
relationships with suppliers, as shown in table 8.
Table 8: Component Initiatives and Management Actions to Reduce
Acquisition Lead Times from 1994 to 2005
Source: GAO analysis of information from DLA, Air Force, Army, and Navy.
Legend: SQRT = initiative or action underway; -- = initiative or action
not undertaken.
aInitiative or action underway for part of component and/or is not being
fully implemented.
bInitiative or action already institutionalized and will not generate
additional lead time reductions.
cInitiative or action planned.
DLA began a number of new initiatives and took several management actions
from 2002 to 2005 that have helped it reduce lead times, and it also
continued several initiatives that it had instituted from 1994 to 2002.
This combination of continued and new initiatives enabled DLA to reduce
its average lead time to 159 days. The Air Force also began a number of
new initiatives and took several management actions to reduce lead times
from 2002 to 2005, while continuing several initiatives that it had
instituted from 1994 to 2002. This combination of continued and new
initiatives enabled the Air Force to reduce its average lead time from 430
to 379 days from 2002 to 2005. Conversely, although individual Army
components began some new initiatives to reduce lead times, the Army began
no new componentwide initiatives to reduce lead times from 2002 to 2005.
Furthermore, the Army has placed less effort in continuing new
initiatives, which, combined with higher demands and supplier capacity
issues, has resulted in the Army's average lead time increasing from 305
to 308 days from 2002 to 2005. Likewise, the Navy also did not begin any
new componentwide initiatives to reduce lead times from 2002 to 2005,
resulting in lead times holding steady at 416 days from 2002 to 2005.
Initiatives to Streamline Administrative Processes Implemented by All
Components
Initiatives to streamline administrative processes were implemented or
continued by all military components from 1994 to 2002 and from 2002 to
2005, with DLA and the Air Force more aggressively implementing new
initiatives from 2002 to 2005 than did the Army and Navy. All components
are working to design new information technology systems that could
potentially improve administrative lead times. For example, DLA has just
transitioned to its newly implemented information technology system, which
officials said will help reduce process times for a number of
transactions, shaving days off of administrative lead time. The components
are also working on noninformation technology solutions. For example, Air
Force officials recently said that they completed an initiative to reduce
clutter on work desks, which involved redesigning all workspaces so that
if an employee is absent, another employee can find any needed document in
the absent employee's desk within 5 minutes. They attributed this
initiative to preventing bottlenecks that could occur if employees had to
search for needed documents and information, potentially delaying the
acquisition of items. The Army's information technology initiative has
only been implemented at one of its Life Cycle Management Commands and the
Navy's is still in the planning stages.
One particular initiative that officials cited as having been effective in
reducing administrative lead times for the Air Force and Army over the
last decade has been the entering of technical data into the inventory
control computer systems for items in stock before a need arises to order
them again. According to officials, from 1994 to 2002, the Army in
particular made significant progress in reducing lead times because of the
entering of technical specification data. Before technical data for items
were entered into computers, engineers often had to delay the acquisition
process while they prepared technical drawings and wrote technical
specifications. These delays ranged from days to several months. By
determining technical specifications before there was a need for an item
and saving these data in the computer system, officials were able to
greatly reduce administrative lead times. They said that already having
them in the system helped reduce lead times even when the technical
specifications subsequently needed changing; however, they added that they
have not completed entering technical specifications for all items.
Although Army engineers have reduced workloads during certain periods of
time when they have fewer orders to process, there are no efforts underway
to enter technical specification data during these periods. An Army
official indicated they were not entering technical specifications for
items where the lead time savings would typically be fewer than 2 weeks,
because such savings are not considered significant by Army officials.
Army officials, however, made this determination without using any metrics
or measures to determine the actual savings or cost of entering technical
specifications for items with savings of fewer than 2 weeks.
USD (AT&L) No Longer Provided Oversight and Guidance on Lead Times from 2002 to
2005
From 1994 to 2002, enhanced USD (AT&L) oversight and guidance contributed
to the rapid pace of lead time reduction; however, from 2002 to 2005, USD
(AT&L) no longer continued to monitor progress made by the components in
reducing lead times, and all components experienced reduced management
oversight. In 1994, we reported that USD (AT&L) was unaware of the lack of
progress made in reducing lead times from 1990 to 1994 because of the
absence of adequate oversight information.^12 We also indicated that the
data reported by military components did not include historical trends to
indicate changes in lead time days before and after the lead time
reduction initiatives were begun. Likewise, we reported that the
statistics at that time were not comprehensive enough to tie specific
initiatives to the lead time reductions experienced for individual
initiatives. At the time, however, USD (AT&L) was able to provide a
general estimate of the financial benefit of lead time reductions,
determining that for each day that the DOD-wide average lead time is
reduced, a procurement savings of $10 million can be realized. If the
financial benefits of lead time reductions are the same in 2005 as they
were in 1994, the value of the savings in 2005 dollars would be $12.5
million per day.
On November 23, 1994, USD (AT&L) issued a memorandum to its components
emphasizing the importance of fully implementing its guidance on reducing
acquisition lead times. On March 8, 1995, according to DOD officials,
components were challenged to reduce business process cycle times by at
least 50 percent over the next 5 years (from 1995 to 2000). According to
DOD officials, guidance and oversight were then applied to acquisition
lead times through the budget process. However, by 2002, USD (AT&L)
officials said they no longer provided active oversight on acquisition
lead time or monitored the progress made by the components in reducing
lead times, because management focus shifted from reducing lead times to
improving performance on more broad metrics such as backorders. They added
that they continued to monitor other broad metrics from 2002 to 2005 and
did not establish lead time reduction goals or require standardized
reporting of metrics designed to measure reductions in lead times. In
addition, with the exception of DLA's Strategic Material Sourcing
initiative, USD (AT&L) and component officials said they did not collect
data, establish metrics, or measure and report the impact and costs of any
specific initiative on lead times. Without this information, USD (AT&L)
and the components were unable to provide effective oversight on lead time
reduction efforts. Furthermore, from 2002 to 2005, USD (AT&L) officials
said they no longer measured the financial impact of lead time reductions
on inventories. USD (AT&L) and the components thus have been unable to
determine the relative value of pursuing lead time reductions when
determining the best use of their resources. The inability to determine
the financial impact on inventories of lead time reductions and the
projected time saved from the proposed initiatives impedes the ability of
decision makers to make informed choices as to which initiatives to
implement.
^12 [27]GAO/NSIAD-95-2 .
According to officials, without active USD (AT&L) oversight, all
components experienced reduced management oversight from 2002 to 2005.
Officials from the military components indicated that, because less
emphasis was placed on lead times by USD (AT&L), less emphasis was placed
on lead times at the component level. These officials said that component
managers tend to place enhanced management focus on what they are held
accountable for by USD (AT&L). Component officials suggested that renewed
emphasis on lead time reduction by USD (AT&L), including the setting of
lead time reduction goals, could increase the components' management focus
on reducing lead times. Until USD (AT&L) takes steps to exercise oversight
as it did from 1994 to 2002, such as reemphasizing guidance, establishing
lead time reduction goals, collecting data and establishing metrics to
measure progress toward meeting lead time reduction goals, measuring and
reporting on the results of individual initiatives, and measuring the
financial impact of lead time reductions, the components and USD (AT&L)
will not have available the information needed to effectively manage and
provide oversight of lead times, hampering their ability to reduce lead
times. Further, without this information, USD (AT&L) and the components
will not be able to prioritize or reevaluate lead time reduction
initiatives, determine the relative importance of lead time reduction when
making contracting decisions, or determine the cost-effectiveness of lead
time reduction efforts.
Subsequent to September 2005, Air Force and DLA officials said they began
planning and implementing new efforts to improve oversight, including
setting lead time reduction goals, holding managers accountable for lead
times, tracking lead times to ensure that goals were met, and regularly
reporting lead times to managers. In addition, a new metric is also
currently under development by DLA, called attainment to plan, which
measures the ability of item supply planners to have material available
when needed. DLA officials stated that they anticipate increased focus on
lead times will improve performance of this metric. Moreover, USD (AT&L)
officials stated they were working with the military components to define
a DOD-wide lead time metric. They also stated in August 2006 that they
were in the process of awarding a contract to a private company to
evaluate if USD (AT&L) oversight of lead times would be worthwhile and
stated that they currently were providing no oversight. USD (AT&L)
officials indicated that increases in lead times could lead to increases
in backorders, and said that they provide oversight on backorders.^13
Initiatives to Develop Relationships with Suppliers Implemented by
Components
Initiatives to develop relationships with suppliers were implemented by
all of the military components from 1994 to 2002. All military components
implemented initiatives to improve contracting practices from 1994 to 2002
and continued them from 2002 to 2005. For example, each component used
initiatives to increase use of long-term contracts to reduce lead times.
According to Navy officials, one example of a successful initiative begun
in the late 1990s was the Navy's practice of considering lead times as
criteria in contract awards for spare parts. Whenever issuing a new
contract for spare parts, they said that the Navy sets as a criterion for
the bid a 25 percent reduction in the item's production lead time, and by
adding this as a factor, the Navy is able to encourage suppliers to reduce
lead times.
^13 Backorders are orders that are held in an unfilled status pending
receipt of additional parts or equipment through procurement or repair.
DOD's supply chain management improvement plan specifies annual
performance targets for backorders for each of the components and DOD
overall.
In addition to continuing these prior initiatives, from 2002 to 2005 the
DLA and the Air Force began new initiatives to strategically develop
relationships with suppliers. According to DLA and Air Force officials,
these new initiatives not only helped reduce lead times by allowing for
streamlined and simplified purchasing of items on long-term contracts, but
also (1) allow for increased information sharing with suppliers, (2)
enable components to leverage their buying power, and (3) empower
components to strategically target key items to ensure their availability.
For example, according to DLA officials, their Strategic Material Sourcing
initiative is intended to improve procurement for 3.6 million items
designated as critical. Items are designated as critical based on a series
of factors, then are grouped into categories, with different acquisition
strategies being used for different categories of items. Of the 3.6
million items marked as critical, 390,000 were identified for placement on
contracts strategically designed to leverage DLA's market power to improve
sourcing for these items. By forming alliances with producers of these
items, DLA officials told us they have been able to reduce lead times by
taking advantage of DLA's buying power and by negotiating contracts that
ensure supply availability in otherwise volatile markets. As of August
2006, one-half of these targeted items were already on strategic long-term
contracts. According to officials, this initiative has thus far generated
$247 million in gross savings with over $64 million generated in 2005
alone, while costing only $5.6 million to implement. These savings do not
include savings from reduced storage costs, nor do they include the future
savings expected as the program continues. This initiative is also unique
in that DLA officials said they are using metrics to measure and report
the effectiveness of the initiative, thereby improving accountability. An
example identified by Air Force officials is the purchase supply chain
management initiative. One of many parts of this initiative aimed at
reducing lead times is the use of Commodity Councils to help improve
acquisition of select items. Commodity Councils are groups of experts in
particular commodity groupings who work together to improve acquisition of
these items. They do so through commodity management, which is the process
of developing a systematic approach to the entire usage cycle for a group
of items. In addition, USD (AT&L) is in the process of implementing a new
initiative to improve commodity management DOD-wide. This new initiative
seeks to emulate the successes of commodity management programs run by DLA
and the Air Force across DOD.
In contrast, the Army and the Navy, while continuing old initiatives, have
not developed new initiatives to develop strategic relationships with
suppliers for critical items. Army and Navy officials indicated that they
are content with the lead time reductions experienced and stated that new
initiatives were not undertaken because of a lack of USD (AT&L) focus and
oversight on lead time reduction. Officials cited ongoing military
operations as one of the primary factors diverting attention away from
reducing lead times. While the Army and Navy continue to benefit from the
lead time reductions generated from past initiatives, until these two
components begin initiatives to develop strategic relationships with
suppliers, they may be unable to realize the potential benefits from
improved supplier relationships and may continue to experience lower rates
of lead time reductions than DLA and the Air Force.
More Aggressive Lead Time Reductions Could Have Resulted in Decreases in
Inventory Requirements and Monetary Savings
The military components could have decreased inventory requirements and
saved money if more aggressive lead time reductions had been realized from
2002 to 2005, as they had from 1994 to 2002. DOD budget documents indicate
that inventory requirements to cover lead times increased from $15.6
billion in 2002 to $19.9 billion in 2005. According to officials, the
primary reason for the increase in inventory has been increased demand due
to recent military operations. As a result, even as lead times were
reduced by an average of 0.9 percent a year from 2002 to 2005,
requirements to cover lead times rose. If the military components had been
able to continue reducing lead times by an average of 5.6 percent a year,
as they did from 1994 to 2002, the military components' lead time
inventory requirements would only have risen to $17.2 billion, rather than
to $19.9 billion, as shown in figure 1. The additional lead time
requirements potentially tied up $2.7 billion that could have been
obligated for other needs.
Figure 1: Potential Impact of Reduced Lead Time Inventory Requirements
In addition to the potential savings associated with decreased inventory
requirements, if the military components had been able to continue
reducing their lead times at 5.6 percent per year, it would have led to a
significant savings from a reduced need to maintain "safety" inventory,^14
which is the amount of inventory the military components maintain on-hand
to cover supply and demand fluctuations. This level is determined by a
formula that includes a number of factors, including lead times.
Reductions in lead times can significantly impact safety inventories
needed. Due to reduced USD (AT&L) oversight of lead times, we were unable
to determine how reducing lead times would financially impact procurement
costs for safety inventories. However, in 1994 we reported that if the
components could reduce their overall lead times by 25 percent by 2000, it
would lead to a procurement savings of about $910 million. Until USD
(AT&L) and the components take steps to renew their focus on reducing lead
times by aggressively continuing prior initiatives and implementing
successful new initiatives, the components may continue to experience
spare parts shortages and may spend significantly more money to purchase
additional inventory.
^14 Safety level inventory is the quantity of materiel required to be on
hand to permit continued operation in the event of a minor interruption of
normal replenishment or fluctuation in demand.
Conclusions
Acquisition lead times are the military components' estimates as to when
items will arrive, and varying from that expectation increases the
likelihood that the right supplies will not be at the right place at the
right time. When the components understate their lead time estimates,
material shortages and reduced readiness can occur. Without more accurate
lead time estimates, the components will not place orders and obligate
funds as early as necessary, and they may miss opportunities to
potentially improve readiness rates. Conversely, overstated and lengthy
acquisition lead time estimates can cause early obligation of funds as
well as increases in on-hand inventories, although spare parts that come
in early could potentially improve readiness. Until the Army reviews and
evaluates when deliveries are representative and should be used to update
lead time values, maintains lead time data in each of its computer
systems, and validates data input, later than expected deliveries and
potential parts shortages will likely occur. In addition, absent actions
by DLA to review and revise the methodology and inputs it uses to compute
lead time estimates, DLA will continue to obligate funds earlier than
necessary and have early delivery of items. Moreover, without taking steps
to review and validate default lead time estimates and consider other
options for obtaining better lead time data, the Air Force will continue
to experience early obligation of funds and potential parts shortages.
Finally, until the Navy reviews and validates its lead time data and
corrects errors, parts shortages and early obligation of funds are likely
to continue. Absent actions by all of the military components to address
these problems and institute corrective procedures, their acquisition lead
time estimates will continue to vary greatly from their actual lead times.
The military components have also slowed their efforts to reduce
acquisition lead times as compared to earlier years. Their current lead
time reduction rate may not be significant enough to offset the costs of
growing requirements. Until USD (AT&L) and the military components take
steps to renew their focus on reducing lead times by continuing prior
initiatives and implementing successful new initiatives to streamline
administrative processes, improve oversight, and develop strategic
relationships with suppliers, they will be unable to significantly reduce
lead times as they were able to do in the past. As a result, the military
components may potentially spend hundreds of millions of dollars to
purchase additional inventory. Increased emphasis on improved lead time
estimates and overall lead time reductions will improve the military
components' ability to efficiently use available resources.
Recommendations for Executive Action
To improve the military components' accuracy in setting acquisition lead
time values, we recommend that the Secretary of Defense take the following
six actions.
1. Direct the Secretary of the Army to have the Commanding
General, Army Materiel Command, direct the Aviation and Missile
Life Cycle Management Command to establish clear guidelines for
item managers to know when to review and how to determine whether
deliveries should be considered representative and thus used to
update lead times.
2. Direct the Secretary of the Army to have the Commanding
General, Army Materiel Command, direct the Life Cycle Management
Commands to reemphasize the importance of periodically reviewing
and validating their recorded lead time data to detect and correct
data input errors and other inaccurate information.
3. Direct the Secretary of the Army to have the Commanding
General, Army Materiel Command, direct Communications-Electronics
Life Cycle Management Command to maintain and update automated
lead time data within its Logistics Modernization Program computer
system.
4. Direct the Director of DLA to have its supply centers review
the methodology and inputs used to compute its lead time estimates
and revise them to incorporate recent improvements in DLA actual
lead times.
5. Direct the Secretary of the Air Force to have the Commander,
Air Force Materiel Command, direct its air logistic centers to use
better sources of lead time information, such as supplier
estimates, if available, rather than default values for items that
have not been ordered in the last 5 years.
6. Direct the Secretary of the Navy to direct the Commander, Naval
Inventory Control Point, to reemphasize the importance of having
its inventory control points periodically review and validate
their recorded lead time data to detect and correct data input
errors or other inaccurate information.
To strengthen DOD's and the military components' management of acquisition
lead times, we recommend that the Secretary of Defense direct the Under
Secretary of Defense for Acquisition, Technology, and Logistics to take
the following five actions.
1. Establish component lead time reduction goals over a 5-year
period from October 2007-2012.
2. Develop metrics to measure components' progress toward meeting
lead time reduction goals and require the periodic reporting of
these metrics.
3. Develop a general estimate of the financial impact of lead time
reductions, and use that as a metric to help components weigh the
importance of lead time reductions.
4. Direct the components to collect data, establish metrics, and
measure and report the impact of individual lead time reduction
initiatives, to include the cost of each initiative and its
estimated cost savings.
5. Work closely with the Army and Navy to develop joint strategic
relationships with suppliers that would be beneficial in reducing
lead times.
Agency Comments and Our Evaluation
In written comments on a draft of this report, DOD concurred with eight,
partially concurred with one, and did not concur with two of our
recommendations. For the eight recommendations with which DOD concurred,
the department identified actions and plans that are being taken to
implement these recommendations. We agree that most of the identified
actions are responsive and reasonable to address our concerns, although in
several cases the final actions may not be completely implemented for
several years. However, some of the department's comments did not appear
to address our concerns. More specifically, for one of the recommendations
with which DOD concurred, we do not believe that its comments address our
recommendation that the Army maintain and update automated lead time data
within its Logistics Modernization Program computer system. In its
comments, DOD said that this computer system does not provide automatic
updates of data for calculation but it does have information needed to
make decisions for manual implementation. As stated in our report, manual
input errors have contributed to inaccuracies in lead times, and we
believe these inaccuracies will continue if the department relies on
manual implementation. We continue to believe that automated updates and
maintenance of lead time data are needed to improve the accuracy of lead
time estimates. Further, DOD stated in its comments that it already had
actions underway to address our recommendation to develop metrics to
measure progress toward meeting lead time reduction goals. However, the
contract for reviewing lead times is not to be awarded until later in
fiscal year 2007. Since this effort was not underway at the time of our
review, we believe that it is important to recommend that this effort be
pursued until fully implemented.
DOD partially concurred with our recommendation that the Under Secretary
of Defense for Acquisition, Technology, and Logistics develop a general
estimate of the financial impact of lead time reductions, and use that as
a metric to help components weigh the importance of lead time reductions.
DOD stated that to the extent that financial impact can be estimated, it
will be one of the elements considered in a review DOD expects to conclude
in 2008. DOD further stated that the challenge in estimating the financial
impact of lead time reductions was that there are many other variables,
and the effect of individual variables on lead time estimates cannot be
separately identified. We recognize that the Office of the Under Secretary
of Defense for Acquisition, Technology, and Logistics has concerns about
its ability to estimate the financial impact of lead time reductions, but
note that it was able to provide an estimate of $10 million in financial
impact for each day that lead time was reduced when we published our 1994
report. Moreover, during our review, TACOM officials informed us that they
have the ability to simulate the impact of reductions in lead times using
their requirements determination process system on an item-by-item basis.
The potential savings generated from the simulations could be helpful in
estimating the savings from lead time reduction initiatives. We further
note that the inability to determine the financial impact of lead time
reductions does not provide the needed incentives for the components to
reduce lead times and impedes the ability of decision makers to make
informed choices as to which initiatives to implement. Therefore, we
continue to believe that the recommendation to the Under Secretary of
Defense for Acquisition, Technology, and Logistics is valid.
In addition, DOD did not concur with our recommendation to DLA to have the
supply centers review the methodology and inputs used to compute its lead
time estimates and revise them to incorporate recent improvements in DLA
actual lead times. DOD stated that our review used data primarily from
DLA's legacy system from 2002 to 2005, which was prior to DLA's
implementation of its new computer system called Business Systems
Modernization, and stated that consequently the benefits of this new
system and processes were not taken into account in our review. While we
agree that the implementation of this new computer system should provide
DLA with more tools to manage acquisition lead times, according to DLA's
Cross-Process Policy Memorandum 06-001 dated June 1, 2006, the basic
methodology for automatic adjustments to both administrative and
production lead times remains the same in the new system as under the
legacy system (i.e., each is calculated as a weighted average based on
one-third of the existing lead time of record and two-thirds of the actual
or new lead time for the current award). Calculating the lead times in the
same manner but recording the values in a newly implemented computer
system will not improve the accuracy of the lead time estimates.
Therefore, we continue to believe that the recommendation to DLA is valid.
Moreover, DOD did not concur with our recommendation that the Under
Secretary of Defense for Acquisition, Technology, and Logistics work
closely with the Army and Navy to develop joint strategic relationships
with suppliers that would be beneficial in reducing lead times. The
department stated that it is actively pursuing a joint strategy to develop
strategic relationships, and that to instruct the services to develop
strategic relationships separately with these suppliers would lead to a
duplication of effort and dissipate the department's leverage. We believe
that DOD misunderstood our recommendation. The joint strategy initiative
that DOD is actively pursuing, according to documentation provided by DOD,
is focused on commodity management, not on developing strategic
relationships to reduce lead times. Our recommendation calls for the Under
Secretary of Defense for Acquisition, Technology, and Logistics to work
closely with the Army and Navy to move beyond simply managing the
acquisition of individual parts, and to form strategic partnerships with
key suppliers for ranges of items in situations where it would be possible
to leverage these relationships to reduce lead times. Documentation from
DOD further states that DOD's commodity management plan acknowledges that
service initiatives will produce improvements, and that it respects those
initiatives. Our recommendation, for the Under Secretary of Defense for
Acquisition, Technology, and Logistics to work closely with the Army and
Navy to develop similar initiatives to those already underway by DLA and
the Air Force, is not duplicative of ongoing efforts, but would complement
them. Until the Army and the Navy begin initiatives to develop strategic
relationships with suppliers, they may be unable to realize the potential
benefits from improved supplier relationships and may continue to
experience lower rates of lead time reductions than DLA and the Air Force.
Therefore, we continue to believe that the recommendation to the Under
Secretary of Defense for Acquisition, Technology, and Logistics is valid.
The department's comments are reprinted in appendix II.
We are sending copies of this report to the Chairmen and Ranking Minority
Members of the Senate Committee on Armed Services; the Subcommittee on
Readiness and Management Support, Senate Committee on Armed Services; the
Subcommittee on Defense, Senate Committee on Appropriations; the House
Committee on Armed Services; the Subcommittee on Readiness, House
Committee on Armed Services; and the Ranking Minority Member, Subcommittee
on Defense, House Committee on Appropriations. We are also sending copies
to the Secretary of Defense; the Secretaries of the Army, Navy, and Air
Force; the Director of DLA; and the Under Secretary of Defense for
Acquisition, Technology, and Logistics. Copies will be made available to
others upon request. Should you or your staff have any questions
concerning this report, please contact William M. Solis, Director, at
(202) 512-8365 or [email protected] . Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Key contributors to this report are listed in appendix
III.
Sincerely yours,
William M. Solis
Director, Defense Capabilities and Management
Appendix I: Scope and Methodology
To address our objectives, we reviewed relevant documents, guidance,
reports, and other information, as available, which related to acquisition
lead times for class IX spare parts and any initiatives the Department of
Defense (DOD) or the military components were undertaking in this area. We
also interviewed cognizant officials within the Office of the Under
Secretary of Defense (Acquisition, Technology, and Logistics); the Defense
Logistics Agency Headquarters; the Army Materiel Command Headquarters;
Headquarters Air Force, the Deputy Chief of Staff, Installations, and
Logistics, Inventory Management and Stockage Branch; and the Naval Supply
Systems Command, Naval Inventory Control Point-Mechanicsburg,
Pennsylvania. We also performed additional work at the Air Force Materiel
Command Headquarters at Wright-Patterson Air Force Base, Ohio, had
discussions with officials at the U.S. Army Tank Automotive and Armaments
(TACOM) Life Cycle Management Command in Warren, Michigan, and obtained
data from U.S. Army Communications-Electronics Life Cycle Management
Command, U.S. Army Aviation and Missile Life Cycle Management Command, and
the Naval Inventory Control Point-Philadelphia, Pennsylvania.
To examine the extent to which the military components' estimated lead
times varied from actual lead times, we obtained and reviewed information
from each military component concerning any relevant policies, procedures,
regulations, instructions, or memorandums about acquisition lead time
development, maintenance, or management. We also obtained information
regarding the processes used by the military components in generating
their acquisition lead times from discussions with cognizant officials. To
test the accuracy of the military components in estimating the acquisition
lead times and the related actual arrival of items ordered, we requested
that each military component provide us with a data file that contained
the following information for class IX spare parts they each received
between October 1, 2004, and September 30, 2005:
o item name,
o item NSN,
o date ordered,
o ordered from what company,
o quantity ordered,
o date delivered,
o quantity delivered,
o where delivered,
o purchase order number or some other financial related reference,
o cost per item,
o total cost of order,
o forecasted/on-file administrative lead time for item at time of
order,
o forecasted/on-file production lead time for item at time of
order, and
o overall acquisition lead time for item.
For DLA and the Air Force, we obtained data that covered deliveries to all
three of their supply centers and Air Logistic Centers, respectively. In
regard to the Army, we obtained data from three Life Cycle Management
Commands: TACOM, Communications-Electronic, and Aviation and Missile. We
also obtained data from the Naval Inventory Control Points that are
located in Mechanicsburg, Pennsylvania and Philadelphia, Pennsylvania. We
compared the forecasted/on-file estimated lead times for each delivery
with the actual lead times experienced, and then grouped the variances
into five different categories. The categories were the actual lead time
(1) was within plus or minus 1 week from the estimated lead time, (2) was
greater than 1 week to less than 90 days earlier than the estimated lead
time, (3) was 90 or more days earlier than the estimated lead time, (4)
was greater than 1 week to less than 90 days later than the estimated lead
time; and, (5) was 90 or more days later the estimated lead time. For all
of the records in each category, we calculated the percent of records in
each category as compared to the total number of records reviewed and also
calculated their dollar value. We took steps to ensure the reliability of
the data we used in our review. We provided a list of specific data
elements to the Army, Navy, Air Force, and DLA officials. The military
components returned the requested information to us. To assess the
reliability of these data, we reviewed the data for obvious inconsistency
and completeness errors. In addition, we worked with agency officials to
identify any data problems. When we found discrepancies (such as
nonpopulated fields or data discrepancies), we brought them to the
officials' attention and worked with them to correct the errors. In
addition, we sent an electronic questionnaire with questions regarding our
use of the data and followed up on issues we believed were pertinent
regarding the reliability of the data. Based on these efforts, we
determined that the data were sufficiently reliable for the purposes of
our report.
To examine the extent to which military components' current management
actions, initiatives, and other programs have reduced lead times and
affected inventory and budget requirements, we obtained and reviewed
information from each military component concerning any relevant policies,
procedures, regulations, instructions, or memorandums regarding efforts,
policies, actions, or initiatives to reduce lead times. We also
interviewed officials within the Office of the Under Secretary of Defense
(Acquisition, Technology, and Logistics); the Defense Logistics Agency
Headquarters; the Army Materiel Command Headquarters; Headquarters Air
Force, The Deputy Chief of Staff, Installations, and Logistics, Inventory
Management and Stockage Branch; and Naval Supply Systems Command, Naval
Inventory Control Point-Mechanicsburg, Pennsylvania. We also performed
additional work at the Air Force Materiel Command Headquarters at
Wright-Patterson Air Force Base, Ohio and had discussions with officials
at the U.S. Army TACOM Life Cycle Management Command in Warren, Michigan.
We further examined budget stratification data from the Army, Navy, Air
Force, and the Defense Logistics Agency. Using that budget stratification
data, we reviewed all items present in the September 30 budget
stratification reports for both 2002 and 2005 to determine the changes in
average acquisition lead time for those items. We were unable to obtain
budget stratification data for the components for 1994, and thus simply
reported the results of our 1994 GAO report evaluating overall lead times
for each component. Additionally, we requested and analyzed the summary
budget stratification reports for all components for September 2002
through September 2005 to determine any changes in average acquisition
lead time and budget requirements from 2002 to 2005. Based on our efforts,
we determined that the data were sufficiently reliable for the purposes of
our report.
We conducted our work from November 2005 through November 2006 in
accordance with generally accepted government auditing standards.
Appendix II: Comments from the Department of Defense
Appendix III: GAO Contact and Staff Acknowledgments
GAO Contact
William M. Solis, (202) 512-8365
Acknowledgments
In addition to the contact listed above, Lawson Gist, Jr., Assistant
Director, Rebecca Beale, Christopher Miller, Terry Richardson, Grant
Mallie, Catherine Hurley, Minette Richardson, Nancy Hess, Art James, Renee
Brown, Gayle Fischer, Kenneth Patton, and Nicole Harms made key
contributions to this report.
(350760)
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www.gao.gov/cgi-bin/getrpt?GAO-07-281 .
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For more information, contact William M. Solis at (202) 512-8365 or
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Highlights of [36]GAO-07-281 , a report to congressional committees
March 2007
DEFENSE INVENTORY
Opportunities Exist to Improve the Management of DOD's Acquisition Lead
Times for Spare Parts
GAO has identified the Department of Defense's (DOD) management of its
inventory as a high-risk area since 1990 due to ineffective and
inefficient inventory systems and practices. Management of inventory
acquisition lead times is important in maintaining cost-effective
inventories, budgeting, and having material available when needed, as lead
times are DOD's best estimate of when an item will be received. Under the
Comptroller General's authority to conduct evaluations on his own
initiative, GAO analyzed the extent to which (1) DOD's estimated lead
times varied from actual lead times, and (2) current management actions
and initiatives have reduced lead times as compared to past years. To
address these objectives, GAO computed the difference between the
components' actual and estimated lead times, and compared component
initiatives to reduce lead times for 1994-2002 to 2002-2005.
[37]What GAO Recommends
GAO recommends that DOD take actions to improve the accuracy and
strengthen its management of lead times, such as review lead time data to
detect and correct errors, review and revise the methodology used for
setting lead times, set lead time reduction goals, and direct the
components to measure and report the impact of initiatives to reduce
overall lead times within each of the military components. In its
comments, DOD generally concurred with nine and nonconcurred with two of
our recommendations.
The military components' estimated lead times to acquire spare parts
varied considerably from the actual lead times experienced. The effect of
the lead time underestimates was almost $12 billion in spare parts
arriving more than 90 days later than anticipated, which could negatively
affect readiness rates because units may not have needed inventory. If
orders had been placed earlier, readiness rates could potentially have
been improved. While having spare parts arrive earlier than estimated
could potentially improve readiness, the effect of lead time overestimates
resulted in obligating almost $2 billion more than 90 days earlier than
necessary. As the table shows, the Army underestimated lead times, DLA
overestimated lead times, and the Air Force and Navy both overestimated
and underestimated lead times.
Acquisition Lead Time Difference for FY 2005 Deliveries (in percentages)
Source: GAO analysis of components' delivery order information.
The variances were due to problems such as miscoding late deliveries as
not representative of future delivery times, lack of recorded lead time
data, data input errors, estimates that did not reflect improvements made
in actual lead times, and the use of standard default data instead of
other data that may have been obtainable. Absent actions to address these
problems, lead time estimates will continue to vary from actual lead times
and will contribute to inefficient use of funds and potential shortages or
excesses.
The Under Secretary of Defense for Acquisition, Technology, and Logistics
(USD (AT&L)) and the components' actions and initiatives to reduce lead
times from 2002 to 2005 were less effective overall than previous efforts
from 1994 to 2002. From 2002 to 2005, DOD-wide lead times were reduced by
an average of 0.9 percent annually as compared to an average reduction of
5.6 percent annually from 1994 to 2002, potentially leading to an
additional $2.7 billion in lead time requirements, tying up money that
could have been obligated for other needs. The higher rate of reduction
from 1994 to 2002 can be attributed to three areas of focus: streamlining
internal administrative processes, oversight from USD (AT&L), and
developing strategic relationships with suppliers. However, from 2002 to
2005, USD (AT&L) no longer provided active oversight such as establishing
lead time reduction goals, reporting metrics, reporting the impact of
specific initiatives, or estimating the financial impact of reduced lead
times, as had been done previously. Until steps are taken to renew
management focus on reducing lead times, the components may continue to
experience spare parts shortages and increased inventory levels to cover
lead times.
References
Visible links
25. http://www.gao.gov/cgi-bin/getrpt?GAO/NSIAD-95-2
26. http://www.gao.gov/cgi-bin/getrpt?GAO-01-1008G
27. http://www.gao.gov/cgi-bin/getrpt?GAO/NSIAD-95-2
36. http://www.gao.gov/cgi-bin/getrpt?GAO-07-281
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