Defense Inventory: Actions Needed to Evaluate Supply Purchase Options for
Facilities Maintenance (Letter Report, 08/23/2000, GAO/NSIAD-00-194).

GAO provided information on the Department of Defense's (DOD) efforts to
implement the maintenance, repair, and operations prime vendor program,
focusing on: (1) how much the program is being used and how selected
installations are using the program; and (2) whether DOD has a mechanism
for evaluating the program's effectiveness relative to other procurement
alternatives and for identifying and addressing implementation
obstacles.

GAO noted that: (1) DOD has begun implementing the Defense Logistics
Agency's (DLA) maintenance, repair, and operations prime vendor program,
but in fiscal year (FY) 1999, it covered only a small portion of
business operations; (2) DLA has awarded prime vendor contracts to
support military installations nationwide and at some overseas
locations, and over 100 customers placed orders with these vendors in FY
1999; (3) these orders represented about $59 million, or less than 10
percent of the estimated $670 million DOD spent on facility maintenance
supplies during that year; (4) use of the program varied widely among
the installations; (5) at 7 of the 11 installations GAO examined, base
personnel ordered, on average, about 55 percent of facilities
maintenance supplies from the prime vendor during FY 1999; (6) of the
other four installations, three did not use the program in FY 1999 and
one could not quantify the extent to which the prime vendor was used;
(7) DOD does not have a mechanism to evaluate the extent to which the
prime vendor program has been used to streamline logistics operations or
increase overall logistics system effectiveness; (8) in addition, DOD
has not determined how the program should be used in conjunction with
the other procurement methods to provide installations with the most
efficient and effective supply system; (9) furthermore, DLA and the
military departments have encountered significant issues while
implementing the program that should be addressed for the program to
operate as intended; (10) for example, at some installations,
ineffective working relationships among DLA, the prime vendors, and the
installations have limited the program's use; and (11) another issue
raised by installation officials was that the prime vendors' prices for
facilities maintenance supplies were often higher than the price the
installation would pay if the items were purchased directly from a local
merchant.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-194
     TITLE:  Defense Inventory: Actions Needed to Evaluate Supply
	     Purchase Options for Facilities Maintenance
      DATE:  08/23/2000
   SUBJECT:  Military inventories
	     Inventory control systems
	     Private sector practices
	     Prices and pricing
	     Defense cost control
	     Defense procurement
	     Logistics
IDENTIFIER:  DOD Defense Reform Initiative
	     DLA Maintenance, Repair, and Operations Prime Vendor
	     Program

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GAO/NSIAD-00-194

Appendix I: Comments From the Department of Defense

24

Appendix II: GAO Contacts and Staff Acknowledgments

26

Table 1: Installation Use of Prime Vendor Program 11

Table 2: Military Services' Program Monitoring Efforts 15

Figure 1: Ten Geographic Regions Served by DLA's Maintenance,
Repair, and Operations Prime Vendor Program 8

DLA Defense Logistics Agency

DOD Department of Defense

National Security and
International Affairs Division

B-285571

August 23, 2000

The Honorable William S. Cohen
The Secretary of Defense

Dear Mr. Secretary:

Since 1990, we have identified Department of Defense (DOD) inventory
management as a high-risk area because levels of inventory were too high and
management systems and procedures were ineffective.1 We reported that
adopting best business practices in inventory management and improving the
reliability of financial management information are key steps toward solving
these problems. Congress has also taken actions to encourage the Department
to adopt best commercial practices to improve inventory management.
Specifically, the National Defense Authorization Acts for Fiscal Years 1998
and 1999 required the Director of the Defense Logistics Agency and the
secretary of each military department to submit schedules for implementing
best commercial practices for the acquisition and distribution of selected
inventory items.

For several years, DOD has been working to adopt best practices to improve
the efficiency and effectiveness of its operations and its ability to
respond to the war fighter's requirements. In 1997 and again in 1999, the
Defense Reform Initiative report2 highlighted the Defense Logistics Agency's
maintenance, repair, and operations prime vendor program as one of the
Department's success stories in adopting commercial best practices. Under
the program, the Agency has contracted with prime vendors to provide
facility maintenance supplies directly to military installations, as an
alternative to using the traditional Defense supply system or direct
purchases.

This report assesses the Department's efforts to implement the maintenance,
repair, and operations prime vendor program. Specifically, we determined (1)
how much the program is being used and how selected installations are using
the program and (2) whether DOD has a mechanism for evaluating the program's
effectiveness relative to other procurement alternatives and for identifying
and addressing implementation obstacles. We examined the implementation of
the prime vendor program at 11 military installations, and although the
results of this analysis cannot be extrapolated to the entire program, they
provide first-hand accounts that illustrate the actual impact of the program
and highlight accomplishments and opportunities for improvement.

The Department of Defense has begun implementing the Defense Logistics
Agency's maintenance, repair, and operations prime vendor program, but in
fiscal year 1999, it covered only a small portion of business operations.
The Agency has awarded prime vendor contracts to support military
installations nationwide and at some overseas locations, and over 100
customers placed orders with these vendors in fiscal year 1999. These orders
represented about $59 million, or less than 10 percent of the estimated $670
million the Department spent on facility maintenance supplies during that
year. Use of the program varied widely among the installations. At 7 of the
11 installations we examined, base personnel ordered, on average, about 55
percent of facilities maintenance supplies from the prime vendor during
fiscal year 1999. Of the other four installations, three did not use the
program in fiscal year 1999 and one could not quantify the extent to which
the prime vendor was used.

DOD does not have a mechanism to evaluate the extent to which the prime
vendor program has been used to streamline logistics operations or increase
overall logistics system effectiveness. In addition, DOD has not determined
how the program should be used in conjunction with the other procurement
methods to provide installations with the most efficient and effective
supply system. Furthermore, the Defense Logistics Agency and the military
departments have encountered significant issues while implementing the
program that should be addressed for the program to operate as intended. For
example, at some installations, ineffective working relationships among the
Agency, the prime vendors, and the installations have limited the program's
use. Another issue raised by installation officials was that the prime
vendors' prices for facilities maintenance supplies were often higher than
the price the installation would pay if the items were purchased directly
from a local merchant.

We are recommending that the Secretary of Defense develop an approach to
obtain the information that is needed to evaluate the use and effectiveness
of the prime vendor program and identify and address implementation
obstacles. The Department agreed with the contents of this report and its
recommendations.

DOD uses a variety of inventory items such as hardware, electrical and
plumbing supplies, paint, small tools, and building materials to repair
buildings and facilities at military installations around the world. These
materials are commonly referred to as maintenance, repair, and operations
supplies or facilities maintenance supplies. In fiscal year 1999, the
Defense Logistics Agency (DLA) estimated that DOD installations worldwide
spent about $670 million for facilities maintenance supplies. In recent
years, DOD has implemented two initiatives, a prime vendor program and
government purchase cards, that provide military installations new
alternatives to obtaining facilities maintenance supplies.3

First, in 1997, following implementation of prime vendor programs to improve
the management of medical and food inventories, DLA established a prime
vendor program for facilities maintenance supplies. Although prime vendors
can be used in different ways, the basic concept requires a prime vendor to
obtain supplies from a variety of suppliers and deliver the supplies
directly to the customer within hours or days after receiving an order. In
August 1998, recognizing the potential benefits that could be derived from
using the prime vendor program, the Deputy Secretary of Defense directed the
military services to designate points of contact to oversee implementation
of the program, identify sites that should thoroughly evaluate program
participation, and assist DLA in implementation.4 The Deputy Secretary of
Defense also directed DLA to work with the military departments in
evaluating potential sites and developing implementation plans for target
locations. In its 1999 Defense Reform Update, DOD projected that the prime
vendor program would steadily expand over the next few years, with sales
through the prime vendors increasing from about $18 million in fiscal year
1998 to $29 million in fiscal year 1999 and up to $56 million in fiscal year
2000.

Under the second initiative, military installations obtain facilities
maintenance supplies primarily from local merchants and pay for those
supplies using government purchase cards5 for orders of $2,500 or less.
Purchase cards are currently the more commonly used method by which military
installations obtain facilities maintenance supplies. For orders that exceed
$2,500 (the micropurchase threshold), installation contracting offices
generally contract with suppliers to provide the required items using a
competitive selection process. Supply operations at an installation can
involve a few to more than 20 military and civilian personnel and require
facilities, vehicles, and other resources to order, purchase, transport,
store, and distribute inventory.

The National Defense Authorization Act for Fiscal Year 1998 required that at
least 90 percent of DOD's purchases under the micropurchase threshold be
made with the purchase card by October 1, 2000. More recently, in the 1999
Defense Reform Update, the Secretary of Defense established a goal of using
purchase cards for at least 90 percent of all Defense purchases of $2,500 or
less by January 2000. DOD met its goal, reporting that over
91 percent of micropurchases in fiscal year 1999 were made with purchase
cards.

DLA has awarded prime vendor contracts to provide facilities maintenance
supplies to military installations nationwide and at some overseas
locations. As of the end of fiscal year 1999, about 40 percent of the
potential customers identified by DLA had begun placing orders with the
prime vendors. Overall, those customers' purchases amounted to less than
10 percent of the total estimated facilities maintenance supplies purchased
throughout DOD for that year. At the 11 installations we examined, each
installation used the prime vendor program to different degrees. Base
personnel at seven installations that used the program in fiscal year 1999
and were able to provide us with usage data, ordered, on average, about
55 percent of facilities maintenance supplies from the prime vendor. For
example, at Camp Lejeune, North Carolina, installation personnel purchased
about 21 percent of facilities maintenance supplies from the prime vendor,
the remainder of these items were purchased from local merchants using
government purchase cards or from other sources. In contrast, personnel at
Parris Island Recruit Depot, South Carolina, obtained 84 percent of all
facilities maintenance supplies through the prime vendor in fiscal year
1999. The differences in how each installation used the prime vendor program
were attributable primarily to decisions made by installation commanders,
which were based on prime vendor capabilities, local vendor support, and
openness to using new business practices.

As of August 1999, DLA had awarded contracts to five prime vendors to
provide facilities maintenance supplies to military installations
nationwide, as well as to customers in Japan (including Okinawa) and South
Korea. The 1-year contracts between DLA and the vendors include four 1-year
renewal options and require the prime vendors to support military
installations within 10 geographic regions. The Southeast, Southwest,
Northeast, South Central, and Hawaii regions are each served by two of the
five vendors, with each one supporting specific military installations
within a region. The other four regions (Alaska, Northwest, North Central,
and Pacific) are each supported by one vendor per region. Prime vendor
contracts for installations in Europe are pending. (See fig. 1.)

Source: Defense Logistics Agency.

DLA has contracted with the prime vendors to provide military customers with
a single source of supply to meet all of their facilities maintenance
inventory requirements. The prime vendor is required to provide an
electronic ordering system, electronic catalogues that have been tailored to
each customer's needs, 72-hour delivery of inventory that is in-stock,
24-hour delivery of inventory for emergency repairs, and direct delivery of
inventory to multiple locations. According to DLA, using the prime vendor
for these services can reduce an installation's inventory levels as well as
storage, contracting, and administrative costs and provide installation
personnel greater flexibility in selecting products. Both DLA and the prime
vendors apply surcharges on each purchase an installation makes through the
program. These surcharges are included in the price the installations pay
for each item purchased. DLA applies a 3.9-percent surcharge, while the
prime vendors' surcharges range from 10 to 30 percent on each item
purchased.6

In contrast to the requirements of DLA's program, the relationship between
some private sector companies and the prime vendors has been expanded to
include all aspects of inventory management. For example, one private sector
company we visited has completely integrated its prime vendor into
day-to-day operations. Prime vendor employees are responsible for all
aspects of facilities maintenance inventory management from ordering
supplies, storing inventory, and delivering supplies to the customer's end
users. The prime vendor also provides the customer with management reports,
inventory usage information, and consolidated billing that reduces the
administrative burdens on the customer. Much of the savings the company has
achieved by using the prime vendor as an integrated supplier have resulted
from reducing administrative costs associated with purchasing, receiving,
stocking, and delivering supplies; and preparing purchase orders and
processing invoices and eliminating the need for investments in inventory.

Although DLA had contracted for prime vendor services nationwide and in some
overseas locations, overall, the extent to which military installations were
using the prime vendors varied. As of the end of fiscal year 1999, DLA had
identified 278 potential customers for the prime vendor program.7 Of these
customers, 110 (about 40 percent) had placed at least one order with the
prime vendor during fiscal year 1999. These orders amounted to about $59
million in purchases in fiscal year 1999, which was about twice the
$29 million in sales that the Department projected for that year. Overall,
the 1999 prime vendor sales represented less than 10 percent of the
estimated $670 million DOD had budgeted for facilities maintenance supplies.

Also, each installation we examined used the prime vendor program to
different degrees and installation officials viewed the prime vendor as one
of several alternative sources of facilities maintenance supplies. For
example, at Camp Lejeune, installation personnel purchased about
21 percent of their facilities maintenance supplies from the prime vendor in
fiscal year 1999. The remainder of their purchases were made through local
merchants using the government purchase card (about 53 percent) or another
alternative method (about 26 percent). At Fort Stewart, Georgia,
installation personnel purchased about 33 percent of facilities maintenance
supplies through the prime vendors, purchasing the majority of their
supplies using their purchase cards. In contrast, four other installations
we examined (Kadena Air Force Base, Okinawa; Port Hueneme, California; and
Marine Corps installations at Barstow, California; and Parris Island, South
Carolina) used the prime vendor as the source for over 50 percent of
facilities maintenance supplies in fiscal year 1999. To encourage use of the
prime vendor program, the commander of the Marine Corps Logistics Base in
Barstow has directed that the prime vendor will be the primary source for
purchasing facilities maintenance supplies and that government purchase
cards will only be used for purchasing such supplies in emergency
situations, when the prime vendor cannot meet compressed time constraints.
Table 1 summarizes the extent to which the prime vendor has been used at the
11 installations.

           Installation            Extent to which prime vendor program is
                                                    used
 Air Force
                                  This installation obtained about 57
                                  percent of facilities maintenance
                                  supplies through the prime vendor in
 Kadena Air Force Base, Okinawa   fiscal year 1999. Installation officials
                                  expect to increase reliance on the prime
                                  vendor to obtain about 95 percent of
                                  facilities maintenance supplies in fiscal
                                  year 2000.

 Shaw Air Force Base, South       This installation did not use the prime
 Carolina                         vendor program in fiscal year 1999. It
                                  began using the program in October 1999
                                  and as of May 2000 had obtained about 20
                                  percent of facilities maintenance
                                  supplies through the prime vendor.
 Army
                                  This installation did not use the program
                                  in fiscal year 1999. It began using the
                                  program in December 1999 and as of April
                                  2000 had obtained about 12 percent of
                                  facilities maintenance supplies from the
 Fort Hood, Texas                 prime vendor for this fiscal year.

                                  This installation did not use the program
                                  in fiscal year 1999 or 2000. This
                                  installation piloted the prime vendor
                                  program for the Army, but it withdrew
 Fort Jackson, South Carolina     from the program in April 1998, after
                                  12 months, because of concerns about item
                                  prices and customer service. DLA offered
                                  Fort Jackson the opportunity to rejoin
                                  the program with a different prime
                                  vendor, but installation officials
                                  declined to participate. Instead, in
                                  November 1999, Fort Jackson established
                                  its own prime vendor contracts with four
                                  local vendors covering about 400 items.

                                  This installation obtained about 31
 Fort McCoy, Wisconsin            percent of all facilities maintenance
                                  supplies through the prime vendor
                                  (primarily for large dollar value items
                                  over $2,500) during fiscal year 1999, and
                                  increased usage to 57 percent as of April
                                  2000.

 Fort Stewart, Georgia
                                  This installation obtained about 33
                                  percent of all facilities maintenance
                                  supplies through the prime vendor in
                                  fiscal year 1999; officials expect to
                                  expand use of the program this year.
 Marine Corps
                                  This installation obtained about 21
                                  percent of all facilities maintenance
                                  supplies through the prime vendor in
                                  fiscal year 1999 (primarily for large
 Camp Lejeune, North Carolina     dollar value items over $2,500). It
                                  recently switched to another prime
                                  vendor, and officials expect to increase
                                  usage for fiscal year 2000.

                                  This base obtained about 63 percent of
 Logistics Base, Barstow,         all facilities maintenance supplies
 California                       through the prime vendor in fiscal year
                                  1999.

                                  The depot obtained about 84 percent of
 Recruit Depot, Parris Island,    all facilities maintenance supplies
 South Carolina                   through the prime vendor in fiscal year
                                  1999.

 Air Ground Combat Center,
 Twentynine Palms, California     Installation officials were unable to
                                  quantify the extent to which the prime
                                  vendor program was used in fiscal years
                                  1999 and 2000. This installation joined
                                  the program in May 1998 and switched to a
                                  new prime vendor in June 1999.
 Navy
                                  This base obtained 100 percent of
                                  supplies needed for construction projects
 Naval Base Ventura County, Port  that require that the materials be
 Hueneme, California              accumulated and stored off-site for
                                  just-in-time delivery to the construction
                                  site through the prime vendor in fiscal
                                  year 1999.

Source: GAO's analysis of installation information.

At most of the installations we visited, officials stated that they believed
that the prime vendor program had not resulted in significant cost
reductions associated with reducing inventory, personnel, or infrastructure.
When inventory and personnel reductions occurred, the reductions were the
result of reengineering business processes and
DOD-wide downsizing efforts and, for the most part, the reductions took
place before the installations joined the prime vendor program. Installation
officials were unable to quantify the extent to which these reductions have
occurred because historical records were not retained. Some installation
officials stated that using the program had enabled them to more easily cope
with previous personnel reductions but had not resulted in additional
downsizing of base supply staff.

Several factors play a significant role in determining the extent to which
each installation uses the prime vendor program. The military services have
delegated to each installation commander the authority to decide whether the
installation will order supplies from the prime vendor and the role the
prime vendor will play at that installation. The services also encourage, or
in some cases discourage, the installations' participation in the program.
For example, the Marine Corps, in an October 1998 memorandum, "strongly
encouraged" installation commanders to take advantage of the program. The
Army's Training and Doctrine Command, however, issued a memorandum in April
1998 that terminated Fort Jackson's participation in the program and stated
that such a program is not "a cost-effective method for this command in
today's environment."8

Officials from each military department stated that they believe the
installation commanders are in the best position to make these
determinations and should be allowed maximum flexibility in determining the
methods their installations use to obtain facilities maintenance supplies.
Several factors, such as (1) the prime vendor's capabilities, (2) the
availability of local supply sources, and (3) the willingness of
installation personnel to accept and use this new business practice,
influences installation decisions on how much the prime vendor program is
used.

One factor that influences the degree to which the program is used by
individual installations is the prime vendor's capabilities. Officials at
several of the installations we visited told us that they would like the
prime vendor to manage their facilities maintenance inventory. Some prime
vendors have extensive experience in integrated supplier relationships and
are well equipped to purchase, store, and distribute facilities maintenance
supplies for their military customers. Other prime vendors do not have the
facilities or the experience to perform such functions. In the past year,
DLA has allowed installations to switch prime vendors to improve customer
satisfaction by allowing installations to work with prime vendors that can
better meet the installations' needs. For example, the Marine Corps Air
Ground Combat Center at Twentynine Palms switched to a new prime vendor in
June 1999, after about a year in the program, because the first vendor was
repeatedly unable to meet delivery dates and did not provide the level of
customer service expected. DLA recently allowed two more Marine Corps
installations to switch prime vendors for similar reasons.

A second factor that influences the extent to which the prime vendor is used
is an installation's geographic location. Of 11 installations we examined,
those located in overseas or remote areas--such as Kadena Air Force Base and
the Marine Corps Recruit Depot at Parris Island--were likely to use the
prime vendor more extensively than those in larger areas. Installations in
larger, metropolitan areas--such as Shaw Air Force Base, located near
Columbia, South Carolina, and Fort Stewart, located near Savannah,
Georgia--were more likely to rely on local merchants to obtain facilities
maintenance supplies. Installations located in metropolitan areas generally
had more options in the surrounding area, including local merchants and
national chains, from which to obtain facilities maintenance supplies.

A third factor that influences how much the program is used is the
willingness of supply personnel at each location to accept and use new
business practices. To ease the transition to a prime vendor program,
officials at one private sector firm we contacted told us that they
implemented their own facilities maintenance prime vendor program on a
unit-by-unit basis and that joining the program was always voluntary. The
officials also emphasized that educating end users about the program before
beginning implementation is critical to success. In addition, these
officials commented that the program must be tailored to meet the specific
needs of the customer and that customer feedback must be continuously
encouraged and promptly addressed.

Remain

DOD does not monitor the extent to which the program is being used to
streamline logistics operations or measure the program's impact on the
overall supply system. Neither DOD nor the military departments are
collecting the information necessary to evaluate the program's effectiveness
or to determine how the prime vendor should be used in conjunction with the
purchase card or other procurement methods to provide the installations with
the most efficient and effective supply system. Further, DLA and the
military departments have encountered several issues while implementing the
prime vendor program that should be addressed for the program to operate as
intended.

Management information that would enable DOD to evaluate the prime vendor
program's effectiveness and determine how the program should be used in
conjunction with other programs is not available. Specifically, DOD has not
collected the information needed to evaluate and compare the estimated costs
and benefits of using the program to other procurement methods--primarily
the government purchase cards. While DLA performs some limited monitoring of
usage of the prime vendor program, it is not sufficient to measure actual
savings realized from using the program at the installation level. For
example, DLA officials monitor the number of installations using the program
and the volume of prime vendor sales made to each installation. They also
monitor various customer service aspects of the program, such as orders
filled and on-time delivery, to provide a basis for future contracting
decisions. However, DLA does not collect, on a broad scale, information on
the costs associated with operating the program at the installations or the
savings, if any, associated with using the prime vendor program (such as
inventory or infrastructure reductions) rather than using other procurement
methods to obtain facilities maintenance supplies. Likewise, the military
departments have not developed mechanisms to capture and evaluate the costs
and benefits of participating in the program. As shown in table 2, efforts
to monitor the prime vendor program vary by military department.

 Military service Monitoring efforts
                  Collects program data (such as items purchased, item
                  prices, length of time required to obtain a quote from
 Air Force        the vendor, and delivery dates) from its Civil
                  Engineering Material Acquisition System to monitor Air
                  Force installations' use of the facilities maintenance
                  prime vendor program.
                  Formed a working group to collect program data similar to
 Army             that collected by DLA (i.e., installations using the
                  program and sales volume); the working group also shares
                  its data with DLA program officials.
                  Relies heavily on DLA program data and monitors
 Marine Corps     installation satisfaction through regular contact with
                  installation personnel and program review sessions with
                  installations, DLA, and prime vendors.

 Navy             Does not actively monitor installation participation in
                  the program.

Source: GAO's analysis.

In addition to limited information on the cost and effectiveness of the
prime vendor program, DOD does not have complete information on the
estimated cost of operations using the purchase card program. Our work on
DOD's purchase card program has shown that actual savings estimates
associated with the program are unavailable.9 The Army Audit Agency has
estimated savings of $92 per transaction when supplies or services are
purchased using government purchase cards compared to using the traditional
procurement methods. However, comparable data for other DOD components are
not available. In its Annual Performance Report for Fiscal Year 2000, DOD
reports that using the purchase card has resulted in sizable
manpower-related savings but does not provide specific savings estimates.

DLA and the military departments have encountered several obstacles while
implementing the prime vendor program that provide lessons learned for
future implementation. For example, in some cases, DLA, the vendors, and the
customers did not work together effectively to implement the program. Other
implementation obstacles, such as high item prices and information
technology, have frustrated program participants and may have deterred
potential customers from using the program. DOD plans to use its Logistics
Reform Senior Steering Group as a forum to address such implementation
obstacles.

Working Relationship Issues

The working relationship among installation personnel, DLA officials, and
prime vendor representatives is a critical factor directly related to the
program's success at any given installation. As discussed earlier, once DLA
awards the prime vendor contracts, installation commanders determine the
extent to which each installation will use the initiative in its operations.
The willingness of DLA and the prime vendor to respond to installation
personnel's concerns, personalities, and even cultural differences may
affect program effectiveness at a particular installation. Overall, at the
installations we visited such relationships have been fairly productive.
However, when this is not the case, it has led to the program failing at
that particular installation. All three parties must work together to make
the program successful.

At installations we visited where the relationship was one of cooperation
and partnership, the program had flourished. For example, at the Marine
Corps Logistics Base at Barstow, DLA, prime vendor, and installation
personnel have developed a cooperative working relationship and the program
has been successful. As discussed earlier in this report, the base commander
has directed that the prime vendor will be the primary source for purchasing
facilities maintenance supplies.

Without such cooperation, the program is likely to fall short of
expectations. For example, officials at Fort Jackson, one of the pilot test
sites, stated that they did not believe DLA and the prime vendor were
responsive enough to their concerns regarding slow delivery times, the lack
of a useful electronic catalog, and other prime vendor performance issues.
The officials also noted that they believed that DLA representatives took
their complaints as attempts to undermine the program. As a result, during
the 12-month pilot period, these problems were never satisfactorily
resolved, leading to the installation's withdrawal from the program.

Item Pricing Issues

At most of the installations we visited, officials expressed concerns that
the prime vendors' prices for facilities maintenance supplies were too high.
The prime vendors price for individual facilities maintenance items, with
added vendor and DLA surcharges, can be higher than the price the
installation would pay if it purchased the same items directly from a local
merchant. For the installations we visited, we found that the prime vendor
often purchased facilities maintenance supplies for a particular
installation from the same local merchants the installation used prior to
joining the program. This was due, in part, to the installation personnel's
requests that the vendor obtain the specific brand or type of items they had
used in the past from the same local merchants. Installation supply
personnel have stated they are reluctant to sever long-standing
relationships with local merchants and encourage prime vendors to continue
patronizing local businesses. Such emphasis on purchasing supplies from
local merchants tends to preclude the prime vendors from leveraging their
buying power and using economies of scale to obtain the most favorable price
from larger, national businesses.

DLA has not performed a nationwide pricing review to determine whether the
prime vendors' prices are typically higher, lower, or about the same as the
prices charged by local merchants; however, it has reviewed prices at some
individual installations. The reviews have determined that on many items the
prime vendor's price is lower than the local price available. For example,
at one location, DLA reviewed the prices of 40 selected items and found that
the prime vendor's price was lower than the local merchant's price on over
30 of the items. However, according to the DLA program manager, when
reviewing the results of the comparison, supply personnel tended to focus on
the six or seven items that were more expensive when purchased from the
prime vendor.

According to DLA officials, concern over item price increases is a major
obstacle when a prime vendor program is first introduced to potential
military customers. DLA officials admit that the program may increase the
unit price of some items. However, they noted that this increase should be
offset by (1) a larger, but less visible, reduction in total DOD costs due
to lower administrative, overhead, and infrastructure expenses; (2) better
product quality; and (3) improved customer service due to greater
availability of parts and faster deliveries to the customer. A comprehensive
evaluation of unit price increases that would consider these total system
costs, product quality, and customer service is characterized as a "best
value" analysis.

Getting the customer to shift from a unit price to a best value focus is
difficult. One DLA approach has been to conduct baseline cost comparisons at
specific implementation sites to show the customer how the total cost under
the new program is lower than the total cost under the traditional supply
system. However, it may be difficult, if not impossible, to develop similar
baseline comparisons on a broader scale because of significant weaknesses in
the reliability of reported DOD inventory data and cost information.
Consequently, the Department uses obligation data

or other estimates of actual cost.10 According to DLA officials, many
installations are reluctant to participate in baseline analyses.

Information Technology Issues

Another obstacle affecting program implementation centers on the difficulty
installations face when ordering items from the prime vendors. DLA's
contracts with the prime vendors require that the vendors provide an
electronic ordering system. However, at several of the installations we
visited, electronic ordering capability is not yet available because the
prime vendor has not yet developed an electronic catalog of frequently used
items for that particular installation. As a result, installation personnel
must place orders with the prime vendor via telephone or fax machine. At
other installations, the prime vendor has provided electronic ordering
capability using the Internet. However, according to installation personnel,
placing orders with the prime vendor via the Internet can be a slow and
tedious process, sometimes taking hours to complete one order, due to
security firewalls and access restrictions.

In addition, incompatibility between DOD's and the vendor's information
systems sometimes presents problems, requiring installation personnel to
record each order twice--once in the prime vendor's system and once in the
service's system. For example, in early 1998, Shaw Air Force Base was the
first Air Force installation to participate in a test of the prime vendor
program. During the test, incompatibility between the vendor's information
system and the Air Force's Civil Engineering Material Acquisition System11
required each order to be entered twice--once to order from the vendor and
the second time to input the order information into the Air Force system.
The Air Force customers deemed this process too time-consuming and chose to
delay participation in the program until an interface with the prime
vendor's system could be developed. After a yearlong test of the interface,
Air Force installations began joining the program in September 1999. To
date, DLA and the Air Force have developed an information system link with
three of the four prime vendors. DLA has also worked with the Army to create
an interface between the Army's Supply 2000 system12 and the Defense Supply
Center in Philadelphia, Pennsylvania, which manages the prime vendor
program. This interface eliminates the need for dual transaction entry and
should be available to all Army installations by the end of this fiscal
year. The Navy, the Marine Corps and DLA, however, have not yet developed
solutions to this problem.

Logistics Reform Senior Steering Group Provides a Forum to Address
Implementation Obstacles

In response to our January 2000 report on DLA's best practice initiatives,
DOD stated that it will use its Logistics Reform Senior Steering Group,
which is comprised of senior-level logistics officials from each military
department, as a forum to address obstacles to implementing DLA's best
practice initiatives.13 According to DOD, this group will promote
participation by DOD activities in those initiatives to the extent they
provide the combination of quality, timeliness, and cost that best meet
DOD's requirements. This group will also highlight the benefits of
participating in the initiatives, consider appropriate outcome measures, and
share lessons learned. DOD further stated that DLA would take the lead in
presenting these issues to the group.

While DOD has developed initiatives to improve the acquisition of facilities
maintenance supplies, it has not collected information that is needed to
determine if the prime vendor, the purchase card, or some combination of
these and other methods would provide DOD with the most cost-effective and
efficient way of buying facilities maintenance supplies. Nor is the
Department collecting information on implementation issues such as
relationships among the Defense Logistics Agency, vendors, and military
installations; concerns over unit price; and information technology issues.
Further, the Department's continuing problems in developing reliable cost
information limit broad scale cost comparisons. If DOD is to continue
implementing the prime vendor program, it must have information on the costs
associated with operating the program and the savings associated with using
the prime vendor at the installation. Without this information, it is
uncertain what procurement method should be pursued, opportunities to reduce
logistics costs and improve customer service may be lost, and the program
may not operate in its most efficient and effective manner.

To assist military installations in choosing the most efficient and
effective methods of obtaining facilities maintenance supplies, we recommend
that the Secretary of Defense direct the Director, Defense Logistics Agency,
and the secretary of each military department to undertake a cooperative
effort to determine how the prime vendor program best fits within DOD's
operations in conjunction with other procurement methods, particularly the
government purchase card. This effort should include

ï¿½ developing a mechanism to monitor and measure the cost and benefits of
using the facilities maintenance prime vendor program when compared to other
procurement methods and to identify implementation obstacles as they are
encountered at each military installation and

ï¿½ establishing an analysis model that considers the estimated total cost,
product quality, and customer satisfaction and that installation commanders
can use to determine the appropriate mix of prime vendor, purchase card, and
other procurement methods for procuring facilities maintenance supplies at
each installation.

DOD agreed with our recommendation and stated that the Defense Logistics
Agency will take the lead in working with the military departments to
develop a mechanism to monitor the costs and benefits of using the
facilities maintenance prime vendor program and identify implementation
obstacles. DOD further stated that the Defense Logistics Agency will also
take the lead in working with the military departments to develop an
analysis model that installation commanders can use to determine the
appropriate degree to which to use the program. DOD expects completion of
these efforts by March 2001. DOD's comments are reprinted in their entirety
as appendix I.

To determine the extent to which the prime vendor program was being used, we
met with officials from DLA headquarters, Washington, D.C., and DLA's prime
vendor program manager located at the Defense Supply Center, Philadelphia,
Pennsylvania. In addition, we analyzed information on the overall status of
program implementation in terms of (1) contracts awarded to prime vendors,
(2) potential customers identified by DLA and number of installations
participating, and (3) total prime vendor program sales data for fiscal year
1999.

To determine how the program was being implemented at selected installations
and identify opportunities for improving program implementation, we visited
or obtained information from 11 installations. To select the installations,
we asked DLA officials to identify locations where the program was being
used and provide information on the volume of purchases made through the
prime vendors. From information provided by the officials, we judgmentally
selected 11 installations to visit or obtain information from. To ensure
that we obtained a variety of views, we selected installations representing
each military service and served by each of the five prime vendors, as well
as installations that are frequent users of the program and installations
that do not use the program as much. We visited Fort Hood, Texas; Fort
Jackson, South Carolina; Fort Stewart, Georgia; Shaw Air Force Base, South
Carolina; Parris Island Marine Corps Recruit Depot, South Carolina; Marine
Corps Logistics Base, Barstow, California; Marine Corps Air and Ground
Combat Center, Twentynine Palms, California; Camp Lejeune Marine Corps Base,
North Carolina; and Naval Base Ventura County, Port Hueneme, California. At
each installation, we met with logistics personnel and end users involved
with the prime vendor program to obtain information on implementation
experiences, customer satisfaction, and lessons learned from implementing
the program at their installation. We also contacted officials at Fort
McCoy, Wisconsin, and Kadena Air Force Base, Okinawa, by telephone and
electronic mail to obtain their views on implementing the program and
lessons learned.

To obtain the prime vendors' perspective on the program and discuss
implementation experiences and lessons learned, we met with representatives
of Cameron and Barkley at its Charleston, South Carolina, facility and
Graybar Incorporated at its Dallas, Texas, facility. We selected Cameron and
Barkley because it was located near several of the military installations we
visited. We selected Graybar Incorporated because it also supplied one of
the private sector companies we contacted.

To provide a private sector perspective on best practices for managing
facilities maintenance inventory, we visited or contacted several private
sector companies who had adopted leading-edge business practices to manage
facilities maintenance inventories. Specifically, we visited Texas
Instruments in Dallas, Texas, to obtain information on its long-standing
facilities maintenance prime vendor program. While at Texas Instruments, we
met with company officials, as well as Graybar representatives, to discuss
their experiences and lessons learned from implementing a facilities
maintenance prime vendor program. We also obtained similar information from
officials of Coors Brewing Company, in Elkton, Virginia, and the Saturn
Corporation, in Springhill, Tennessee.

We conducted our review from October 1999 through June 2000 in accordance
with generally accepted government auditing standards.

This report contains recommendations to you. The head of a federal agency is
required under 31 U.S.C. 720 to submit a written statement on actions taken
on our recommendations to the Senate Committee on Governmental Affairs and
the House Committee on Government Reform not later than
60 days after the date of the report and to the Senate and House Committees
on Appropriations with the agency's first request for appropriations made
more than 60 days after the date of this report.

We are sending copies of this report to the appropriate congressional
committees. We are also sending copies to Lieutenant General Henry T.
Glisson, Director, Defense Logistics Agency; the Honorable Louis Caldera,
Secretary of the Army; the Honorable Richard Danzig, Secretary of the Navy;
the Honorable F. Whitten Peters, Secretary of the Air Force; General James
L. Jones, Commandant of the Marine Corps; and the Honorable Jacob Lew,
Director, Office of Management and Budget. We will make copies available to
others upon request.

If you or your staff have any questions concerning this report or wish to
discuss the matter further, please contact me at (202) 512-8412. Key
contributors to this report are acknowledged in appendix II.

Sincerely yours,

David R. Warren,Director
Defense Management Issues

Comments From the Department of Defense

GAO Contacts and Staff Acknowledgments

Charles Patton (202) 512-4412
Robert Repasky (202) 512-9868

In addition to those named above, Penney Harwell, Robert Malpass, and Adam
Vodraska made key contributions to this report.

(709442)

Table 1: Installation Use of Prime Vendor Program 11

Table 2: Military Services' Program Monitoring Efforts 15

Figure 1: Ten Geographic Regions Served by DLA's Maintenance,
Repair, and Operations Prime Vendor Program 8
  

1. In 1990, we began a special effort to review and report on the federal
program areas that we identified as high risk because of vulnerabilities to
waste, fraud, abuse, and mismanagement. This effort, which was supported by
the Senate Committee on Government Affairs and the House Committee on
Government Reform, brought a
much-needed focus to problems that were costing the government billions of
dollars.

2. The Defense Reform Initiative was established in November 1997 to
increase funding for weapon system modernization programs by reducing
infrastructure costs and streamlining business processes.

3. Facilities maintenance supplies may also be obtained from the General
Services Administration and the DOD Electronic Mall, and through other
procurement methods.

4. Department of Defense Reform Initiative Directive #45 − Prime
Vendor Contracting Program for Facility Maintenance Supplies (Aug. 24,
1998).

5. Purchase cards are commercial credit cards--either MasterCard or VISA
cards--that are issued to authorized DOD military and civilian users to
acquire and pay for low-cost supplies and services.

6. Prime vendor surcharges vary by vendor, region, installation, and
commodity. Under the prime vendor contracts, each vendor has the flexibility
to adjust the surcharge applied to each item, within the 10- to 30-percent
range, as long as the surcharge is below the prescribed 30-percent ceiling.

7. This does not equate to 278 installations, as there may be more than one
"customer" at an installation. For example, at the Naval Base Ventura
County, Port Hueneme, California, five separate organizations participate in
the prime vendor program.

8. DLA officials have reviewed the prime vendor's performance at Fort
Jackson and disagree with the Training and Doctrine Command's assessment.

9. Defense Management: Electronic Commerce Implementation Strategy Can Be
Improved (GAO/NSIAD-00-108 , July 18, 2000).

10. Department of Defense: Progress in Financial Management Reform
(GAO/T-AIMD/NSIAD-00-163 , May 9, 2000).

11. This system is an Air Force legacy system that installations use to
track inventory usage and account for expenditures by building number.

12. Supply 2000 is a software application supporting facility maintenance
activities.

13. Defense Inventory: Opportunities Exist to Expand the Use of Defense
Logistics Agency Best Practices (GAO/NSIAD-00-30 , Jan. 26, 2000).
*** End of document. ***