Inventory Management: DOD Can Build on Progress in Using Best Practices
to Achieve Substantial Savings (Chapter Report, 08/04/95,
GAO/NSIAD-95-142).

Pursuant to a congressional request, GAO reviewed the Department of
Defense's (DOD) efforts to adopt best inventory management practices,
focusing on: (1) whether DOD has adopted the specific practices
recommended for consumable items; (2) the savings and benefits being
achieved through the use of these practices; and (3) DOD overall
progress in improving consumable item management.

GAO found that: (1) the Defense Logistics Agency (DLA) has taken steps
to improve its logistics practices and reduce consumable inventories,
although it could make further improvements with items such as bolts,
valves, and fuses that cost millions of dollars to manage and store; (2)
DLA inventories are expected to decrease only 20 percent by 1997, but
these inventories could last over 2 years; (3) DLA has not tested the
most innovative commercial practices of using supplier parks and other
techniques that give established distribution networks the
responsibility to manage, store, and distribute inventory on a frequent
basis directly to end users; (4) DLA use of best inventory practices is
exemplified for personnel items where prime vendors are used to supply
personnel items directly to military facilities; (5) DLA expects to
reduce the 1992 personnel item inventory by 53 percent in 1997; and (6)
DOD hospitals still hold larger inventories than those civilian
hospitals that have reduced inventories through effective partnering
arrangements with prime vendors.

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

 REPORTNUM:  NSIAD-95-142
     TITLE:  Inventory Management: DOD Can Build on Progress in Using 
             Best Practices to Achieve Substantial Savings
      DATE:  08/04/95
   SUBJECT:  Logistics
             Military inventories
             Inventory control systems
             Defense cost control
             Non-government enterprises
             Internal controls
             Comparative analysis
             Federal supply systems
             Federal property management
IDENTIFIER:  DOD Prime Vendor Program
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Subcommittee on Oversight of
Government Management and the District of Columbia, Committee on
Governmental Affairs, U.S.  Senate

August 1995

INVENTORY MANAGEMENT - DOD CAN
BUILD ON PROGRESS IN USING BEST
PRACTICES TO ACHIEVE SUBSTANTIAL
SAVINGS

GAO/NSIAD-95-142

Inventory Management


Abbreviations
=============================================================== ABBREV

  DLA - Defense Logistics Agency
  DOD - Department of Defense
  OSD - Office of the Secretary of Defense

Letter
=============================================================== LETTER


B-261155

August 4, 1995

The Honorable Carl Levin
Ranking Minority Member,
Subcommittee on Oversight of
 Government Management and the
 District of Columbia
Committee on Governmental Affairs
United States Senate

Dear Senator Levin: 

This report was prepared in response to your request that we continue
to compare commercial logistics practices with similar Department of
Defense (DOD) operations.  It summarizes DOD's progress in adopting
the practices recommended in our prior reports in which we compared
DOD's logistics practices with those of the private sector.  These
practices were discussed in five reports that identified ways that
DOD could incorporate modern logistics practices to better manage its
$22 billion inventory of consumable items such as medical, food,
clothing, and hardware supplies.  This report addresses (1) the
extent to which DOD has adopted the specific practices we recommended
for consumable items, (2) the savings and benefits being achieved
through the use of these practices, and (3) DOD's overall progress in
improving consumable item management. 

We are sending copies of this report to appropriate congressional
committees; the Secretaries of Defense, the Air Force, the Army, and
the Navy; the Director, Office of Management and Budget; and other
interested parties.  We will also make copies available to others on
request. 

If you have any questions, please call me on (202) 512-8412.  Major
contributors are listed in appendix II. 

Sincerely yours,

David R.  Warren
Director, Defense Management and
 NASA Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

In December 1993, the former Chairman (now ranking minority member),
Subcommittee on Oversight of Government Management and the District
of Columbia, Senate Committee on Governmental Affairs, asked GAO to
review the Department of Defense's (DOD) efforts to adopt best
inventory management practices, specifically those practices
highlighted in past GAO reports on that subject.  These practices
were discussed in five reports that have identified ways that DOD
could incorporate modern logistics practices to better manage its $22
billion inventory of consumable items such as food, clothing, and
industrial supplies.  As of September 30, 1994, consumable items
accounted for only 29 percent of DOD's $74 billion secondary
inventory value, but for 88 percent of the total items.  This report
addresses (1) the extent to which DOD has adopted the specific
practices GAO recommended for consumable items, (2) the savings and
benefits being achieved through the use of these practices, and (3)
DOD's overall progress in improving consumable item management. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

DOD operates a worldwide logistics system to buy, store, and
distribute inventory items.  Through this system, DOD manages over 4
million types of consumable items, of which 3.6 million are managed
by the Defense Logistics Agency (DLA).  Traditionally, DLA buys
consumable items (such as food, clothing, and hardware supplies) in
large quantities, stores them in wholesale distribution depots until
they are requested by the military services, and then ships them to
the appropriate service facility where the items are used.  To
accomplish this role, DLA uses over 1,400 warehouses at 27
distribution depots and other storage locations.  The depots held DLA
consumable inventory valued at $10.2 billion as of June 1994.  Like
DOD, the private sector uses similar consumable supplies in its
day-to-day operations.  Faced with increasing costs associated with
acquiring supplies and increasing competitive pressure, some private
sector companies have developed new inventory management practices to
eliminate the need to buy, store, and distribute large quantities of
supplies.  For this reason, GAO has focused this report on the
consumable items managed and distributed to the services by DLA. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

While DLA has taken steps to improve its logistics practices and
reduce consumable inventories, it could do more to achieve
substantial savings.  DLA can make the most improvements with
hardware items because it continues to store large amounts of items,
such as bolts, valves, and fuses, that cost millions of dollars to
manage and store.  DLA inventories of hardware items existing in 1992
are expected to decrease only 20 percent by 1997.  Even then,
hardware inventories could last for more than 2 years.  In contrast,
private sector companies, such as PPG Industries and Bethlehem Steel,
have reduced similar inventories by as much as
80 percent and saved millions in associated costs by using "supplier
parks" and other techniques that give established commercial
distribution networks the responsibility to manage, store, and
distribute inventory on a frequent and regular basis directly to
end-users.  To date, DLA has not tested the most innovative
commercial practices GAO has seen used by companies to reduce
inventories and costs.  If DLA were able to adopt these practices,
hardware inventories and related management costs could be
significantly reduced. 

DLA's use of best inventory practices is best exemplified for
personnel (medical, food, and clothing) items.  Since 1993, DLA has
taken steps that use prime vendors to supply personnel items directly
to military facilities.  By 1997, with the expanded use of prime
vendors and by eliminating obsolete and unnecessary items, DLA
expects to reduce personnel item inventories 53 percent from 1992
levels.  DLA's most successful program to date uses prime vendors at
approximately 150 military medical facilities, which has reduced
overall wholesale pharmaceutical inventories by $48.6 million and has
achieved inventory reductions and cost savings at medical facilities. 
However, DOD has not achieved the same level of reductions as some
civilian hospitals.  DOD hospitals still hold more layers and larger
inventories to meet patient needs than those civilian hospitals that
have reduced inventories through effective partnering arrangements
with prime vendors.  For example, one civilian hospital established a
close partnership with its prime vendors who deliver supplies in very
small quantities directly to the end-users within hours of its need. 
This partnership with the prime vendor allowed the hospital to reduce
inventories to only a minimal level while still providing quality
patient care at lower costs.  If DOD took similar steps with its
prime vendor program and consistently applied it within each service,
the current savings could be significantly increased. 



   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      OPPORTUNITIES FOR
      IMPROVEMENTS
-------------------------------------------------------- Chapter 0:4.1

GAO previously reported that DOD's large inventory levels reflected
the management practice of buying and storing supplies at both
wholesale and retail locations to ensure they were available to
customers--sometimes years in advance of when they were actually
needed.  DOD often stored inventories in as many as four different
layers between suppliers and end-users, which resulted in inventory
that turned over slowly, producing large amounts of obsolete and
excess items.  As of September 1992, DLA stored $11 billion worth of
consumable items in distribution depots and warehouses located
throughout the United States.  Distribution depots are DOD facilities
with several large warehouses that store a variety of supplies until
they are requisitioned by the military services.  GAO estimated, on
the basis of past demand, that this inventory could last DOD for an
average of
2 years or more.  The military services hold three different layers
of inventory near the locations where the items are used:  base
warehouses, central storerooms, and end-user locations.  Service
facilities GAO visited had retail stock on hand ranging from 1 month
to over 5 years of supply. 

The private sector provided a sharp contrast to DOD's methods of
managing and distributing consumable items.  GAO found that some
private sector companies avoided inventory management problems by
using modern business practices that shift responsibilities for
storing and managing inventory to suppliers.  In fact, some companies
no longer stored inventory in intermediate locations at all; their
suppliers deliver inventory to them only when they need it.  Some
companies achieved large savings for personnel items by standardizing
items being used, eliminating bulk storage locations, and most
importantly, relying on prime vendors to deliver small quantities
when and where needed.  For hardware items, these practices included
having suppliers located at a supplier park near industrial centers,
which allowed for the supplies to be delivered directly to the
end-users on a frequent and regular basis.  In past reports, GAO
recommended DOD test the use of prime vendors and supplier parks to
streamline its logistics operations. 


      DOD IS TAKING STEPS TO ADOPT
      BEST INVENTORY PRACTICES
-------------------------------------------------------- Chapter 0:4.2

DLA's efforts to adopt private sector inventory practices are most
advanced for personnel (medical, food, and clothing and textile)
items.  At present, DLA is in various stages of establishing prime
vendor programs for the personnel items it manages.  DLA's most
successful program to date uses prime vendors in 21 geographic
regions nationwide to buy, store, and distribute medical inventory to
approximately 150 military hospitals and clinics.  Since 1993, DLA,
by using prime vendor programs, has reduced overall wholesale
pharmaceutical inventories by $48.6 million and has achieved savings
at DOD medical facilities.  The Army, for example, reduced
inventories at the Walter Reed Medical Center by $3.8 million, and it
saves over $6 million, on an annual recurring basis, in related costs
by using the prime vendor system.  By using prime vendor concepts and
eliminating obsolete and unnecessary items, DLA expects to reduce
inventories of personnel items from $3 billion in 1992 to $1.4
billion in 1997, or
53 percent of its on-hand inventory.  As of June 1994, DLA's
personnel item inventories were valued at $2.3 billion. 

Although DLA has initiated several programs to adopt commercial
practices for hardware items, DLA's overall progress is slow and
results are limited.  The central focus of DLA's efforts has been to
expand the use of wholesale-level direct delivery programs.  However,
such programs do not eliminate unnecessary layers of inventory
management and storage and do not provide the quick response achieved
through innovative concepts such as supplier parks.  As a result, DLA
estimates hardware inventory levels of $8 billion in 1992 will
decrease to only $6.4 billion, or approximately 20 percent, by 1997. 
Even then, this 1997 inventory level will be unnecessarily large and
could last, on average, between 795 days and
1,381 days based on DLA's projected demands.  In comparison, private
sector firms that supply similar types of items often hold only 90
days of supply to meet their customers needs. 

In September 1994, DLA contracted for a study of the feasibility of
using supplier parks at three maintenance and repair facilities.  In
December 1994, the contractor reported that the concept of a supplier
park was feasible and strongly recommended that DLA give serious
consideration to using this concept at these facilities.  According
to DLA, it plans to continue studying the feasibility of using this
concept. 


      MORE AGGRESSIVE ACTIONS
      COULD FURTHER REDUCE
      INVENTORIES
-------------------------------------------------------- Chapter 0:4.3

DLA's prime vendor programs for personnel items provide a basis for
inventory reductions and cost savings, but DOD has not optimized
these programs by adopting the most aggressive practices being used
in industry.  Because each service has used the medical prime vendor
program differently, and some continue to retain unnecessary
inventory layers, DOD has not realized the same improvements that
civilian hospitals have achieved.  For example, DOD hospitals GAO
visited still held inventories that could last the hospitals an
average of 42 to 82 days.  In comparison, one civilian hospital GAO
visited, the Vanderbilt University Medical Center, reduced or
eliminated unnecessary inventory layers and decreased hospital
inventory levels to a 2- to 15-day supply by establishing a close
partnership with its prime vendors.  By establishing this
partnership, Vanderbilt arranged with the prime vendors to have
supplies delivered several times a day, in many cases, directly to
the point of use within the medical center.  If DOD medical
facilities were to consistently and aggressively apply the prime
vendor program enhancing partnerships between DOD medical facilities
and the prime vendors, they could further reduce their hospital
inventories, in some cases, by as much as 75 percent. 

Because DLA's adoption of best inventory management practices is
least advanced for hardware items, which represent 77 percent of
DLA's total inventory investment, it provides them the greatest
source for inventory reductions and cost savings.  Private sector
organizations GAO visited have reduced their hardware inventories by
as much as 80 percent using aggressive inventory management
techniques, such as supplier parks.  Although GAO recommended DOD
test the supplier park concept in its June 1993 report on maintenance
and repair supplies, DOD is still studying the feasibility of the
concept. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

To ensure that the medical prime vendor programs are more
consistently and aggressively applied, GAO recommends that the
Secretary of Defense direct the Secretaries of each of the military
services to use the prime vendor program in enhancing the partnership
between the DOD medical facilities and the prime vendors.  Actions
that would enhance such an arrangement include

  delivering supplies directly to the point of use in the hospital,

  integrating the vendor into the day-to-day supply operations,

  delivering supplies on a frequent basis (several times a day), and

  using the vendor's expertise to improve inventory management
     operations. 

These actions could further reduce inventory layers in the DOD system
and bring military medical facilities closer to the levels of success
achieved by progressive private sector hospitals. 

To encourage DLA and the services to establish supplier parks for
hardware items, GAO recommends that the Secretary of Defense direct
the secretaries of each of the military services and the Director of
DLA to initiate several actions that have been taken by private
sector companies when developing these concepts.  Specifically, each
service and DLA should work together to

  identify an Army, Navy, and Air Force site that will test the
     supplier park concept;

  identify specific items with high usage rates and low unit costs to
     use in a test program;

  negotiate with prospective suppliers to perform these inventory
     management functions during the test program;

  establish partnerships with the suppliers allowing them access to
     DOD inventory information and facilities, which will enable the
     suppliers to deliver items directly to the end-user;

  develop evaluation criteria that will measure the total costs of
     inventory delivered under the test program in order to compare
     costs and benefits to the total cost being incurred under the
     current system; and

  establish aggressive milestones for the initial phases of this test
     program to achieve early results. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

In commenting on a draft of this report, DOD generally agreed with
the findings, conclusions, and recommendations and stated that, while
significant gains have occurred, further progress can be made in
adopting best commercial practices in providing both personnel and
hardware items to the military services.  DOD also stated that
additional steps are underway, specifically in regard to the
application of the supplier park approach to hardware items. 


INTRODUCTION
============================================================ Chapter 1

The Department of Defense (DOD) operates a worldwide logistics system
to buy, store, and distribute inventory items.  Traditionally, the
Defense Logistics Agency (DLA) buys and stores consumable items (such
as food, clothing, and hardware supplies) in large quantities until
they are needed by the military services.  Faced with increasing
costs associated with acquiring supplies, and increasing competitive
pressures, some private sector companies have developed new inventory
management practices to reduce inventories and operating costs.  Over
the past 5 years, we have compared DOD's inventory practices for
these items to the practices of a number of progressive private
sector firms with similar operations. 


   DOD'S TRADITIONAL LOGISTICS
   SYSTEM
---------------------------------------------------------- Chapter 1:1

The Secretary of Defense created DLA in 1962 to be the wholesale
manager of "consumable supplies" commonly used by the military
services, other DOD components, and federal agencies.  Consumable
supplies are items discarded after use rather than repaired.  Through
its wholesale system, DLA manages 3.6 million of DOD's 4.4 million
consumable items.  For about 30 years, DLA has generally bought items
in large quantities, stored the items until the services requested
them, and then shipped them to the services' retail facilities.  To
receive, store, and issue these items and other inventories to the
military services and other DOD organizations throughout the world,
DLA maintains over 1,400 warehouses at 27 distribution depots, which
are DOD facilities with several large warehouses that store a variety
of supplies, and also uses other storage locations.  The locations of
the
27 distribution depots are shown in figure 1.1. 

   Figure 1.1:  DLA Distribution
   Depots

   (See figure in printed
   edition.)

   Note:  Four of these depots
   (Charleston, Pensacola,
   Oakland, and Tooele) have been
   designated for closure under
   the Base Closure and
   Realignment Act for 1993.  The
   total of 27 depots includes
   counting Tracy and Sharpe as
   one depot (San Joaquin) and New
   Cumberland and Mechanicsburg as
   one depot (Susquehanna).  This
   figure does not reflect
   decisions made under the Base
   Closure and Realignment Act for
   1995.

   (See figure in printed
   edition.)

   Source:  DLA.

   (See figure in printed
   edition.)

Consumable items are classified as hardware (construction,
electronics, general, and industrial) and personnel (clothing, food,
and medical) items.  As of June 1994, hardware items accounted for 77
percent of DLA's wholesale inventory, and personnel items accounted
for 23 percent (see fig.  1.2).  DLA reported that its June 1994
inventory of consumable items was about $10.2 billion. 

   Figure 1.2:  DLA's Consumable
   Item Inventory as of June 30,
   1994 (dollars in billions)

   (See figure in printed
   edition.)

During fiscal year 1994, DLA sold $5.6 billion of consumable items to
the services and other federal agencies.  The services use large
amounts of these items in their peacetime operations.  For example,
the services operate about 25 industrial centers where large amounts
of maintenance and repair supplies are used for regularly scheduled
maintenance of equipment and weapon systems.  The services operate 14
recruit induction centers and over 300 military exchange stores that
issue clothing items to military personnel.  In addition, large
quantities of medical supplies and food are consumed annually at U.S. 
military hospitals and troop dining halls.  The services at the
retail facilities usually store these items at different locations
until they are needed by service personnel, who are the ultimate
end-users. 


   PRIVATE SECTOR INITIATIVES
---------------------------------------------------------- Chapter 1:2

Like DOD, private sector companies use similar consumable supplies in
their day-to-day operations.  In addition, both DOD and the private
sector have a common requirement to control costs while meeting
customer needs.  During the 1980s, competition and increasing
inventory costs forced many private sector companies to assess
inventory management practices and to adopt new methods that reduced
inventories and associated operating costs.  Recognizing that
inventories can be reduced without affecting supply availability,
private sector companies began to change the way they buy, store, and
distribute large quantities of supplies.  The private sector has
tried new techniques on consumable items because these items are
generally standard and low unit cost, are commonly stocked by several
suppliers, and are used in large quantities. 

Many private sector facilities are analogous to the services'
facilities in DOD's supply system.  To identify ways for DOD to
reduce inventory costs, while maintaining quality service, over the
past 5 years we have compared DOD's logistics practices involving
DLA-managed consumable items with those of companies that have
adopted best practices for their logistics operations.  Best
practices are often defined as implementation of the most efficient
means of inventory management to improve cost savings for the
organization and enhance levels of service for the customer. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:3

On December 3, 1993, the former Chairman (now ranking minority
member), Subcommittee on Oversight of Government Management and the
District of Columbia, Senate Committee on Governmental Affairs, asked
us to review DOD's efforts to adopt best practices for consumable
items managed and distributed by DLA.  Specifically, the former
Chairman asked us to address DOD's progress in adopting the practices
recommended in our prior five reports in which we compared DOD's
logistics practices with those of the private sector.  This report
summarizes our past reviews and addresses (1) the extent to which DOD
has adopted the specific practices we recommended, (2) the savings
and benefits being achieved through the use of these practices, and
(3) DOD's overall progress in improving consumable item management. 

To obtain information on DOD's logistics practices, policies, and
procedures, we contacted officials from the following organizations: 

  Office of the Deputy Under Secretary of Defense, Logistics,
     Washington, D.C.;

  Office of the Assistant Secretary of Defense, Health Affairs,
     Washington, D.C.;

  Headquarters, Defense Logistics Agency, Alexandria, Virginia;

  Defense Construction Supply Center, Columbus, Ohio;

  Defense Industrial Supply Center, Philadelphia, Pennsylvania;

  Defense Personnel Supply Center, Philadelphia, Pennsylvania;

  Defense Electronics Supply Center, Dayton, Ohio; and

  Defense Distribution Depot Susquehanna, Pennsylvania. 

Our discussions focused on (1) the inventory management practices
that DOD is using for consumable items; (2) commercial practices,
programs, and tests underway or planned to improve DOD operations and
reduce costs; and (3) DOD officials' positions on the use of best
practices as alternatives to traditional DOD inventory practices.  We
reviewed and analyzed detailed information on past, present, and
future annual usage amounts; inventory levels; and other related
inventory factors, such as calculations of days of supply on hand. 
Days of supply is a measure of how efficiently a business manages its
inventory investment and is calculated by dividing the aggregate
inventory by the sales per day at cost. 

To determine the nature and extent of DOD's progress in adopting best
practices, we visited the following military organizations: 

  Walter Reed Army Medical Center, Washington, D.C.;

  Kenner Army Community Hospital, Fort Lee, Virginia;

  Blanchfield Army Community Hospital, Fort Campbell, Kentucky;

  Malcolm Grow Air Force Medical Center, Andrews Air Force Base,
     Maryland;

  Langley Air Force Hospital, Langley Air Force Base, Virginia;

  Portsmouth Naval Hospital, Portsmouth, Virginia;

  Director of Logistics, Fort Lee, Virginia; and

  Air Force Services, Langley Air Force Base, Virginia. 

These organizations are involved in initiatives that are to improve
DOD's logistics operations.  At these locations, we discussed with
logistics personnel and medical and food service end-users the
results of the initiatives and the impacts on supply operations and
customer satisfaction.  We also discussed with private sector
companies that act as prime vendors to these organizations the
initiatives, the impact on their operations, and the feasibility of
adopting these programs to encompass a greater part of DOD's
operations.  These companies included (1) McKesson Drug Company,
Landover, Maryland; (2) Owens & Minor Corporation, Savage, Maryland;
(3) Bergen Brunswig Corporation, Norfolk, Virginia; and (4) Sandler
Foods, Virginia Beach, Virginia.  In addition, we visited the
Vanderbilt University Medical Center, Nashville,
Tennessee--highlighted in our 1991 report because of its leadership
in hospital logistics management--to discuss the steps it has taken
to improve its logistics operations since 1991 and any planned
changes to adopt new and best inventory management practices. 

We conducted our review from January 1994 to December 1994 in
accordance with generally accepted government auditing standards. 


BEST PRACTICES CAN REDUCE
INVENTORY MANAGEMENT COSTS AND
PROVIDE QUALITY SERVICE
============================================================ Chapter 2

We previously reported that DOD's large inventory levels reflect
DOD's management practice of buying and storing supplies at both
wholesale and retail locations to ensure they are available to
customers--sometimes years in advance of when actually needed. 
Storing inventory at many different locations results in inventory
that often turns over slowly, thereby producing large amounts of old,
obsolete, and excess items.  In the private sector, many companies
avoid these types of problems by using inventory practices that shift
responsibilities for storing and managing inventory to suppliers.  In
fact, companies that are using the most aggressive practices no
longer store inventory in intermediate locations at all; their
suppliers deliver inventory only when needed.  As a result, we
recommended that DOD test the applicability of using similar types of
private sector practices as an alternative to its current
multilayered system.  DOD concurred with our recommendation, but
implementation progress and results have varied with the different
commodities.  Specific details on DOD's progress in adopting these
best practices are described in chapter 3. 


   DOD AND PRIVATE SECTOR MANAGE
   AND DISTRIBUTE INVENTORY
   DIFFERENTLY
---------------------------------------------------------- Chapter 2:1

At a time when many private sector companies were adopting practices
that reduced intermediate storage locations while improving service
levels, DOD continued to use a logistics system that stored
duplicative inventories between suppliers and end-users.  DOD often
stored inventories in as many as four different layers.  In 1992, at
the wholesale level, DLA stored $11 billion worth of consumable items
in distribution depots and warehouses located throughout the United
States.  Our analysis indicated that this inventory could last DOD an
average of over 2 years based on past demand.  At the retail level,
the services hold inventory at three different layers near the
locations where the items are used--base warehouses, central
storerooms, and end-user locations.  Service facilities we visited
had retail stock on hand sufficient to last from 1 month to over 5
years.  Several factors contribute to this multilayered system,
including DOD's philosophy of relying on large stock levels at
wholesale and retail locations to readily meet customer needs and the
long procurement lead times that require DOD to hold inventory to
ensure items are available until ordered supplies are received from
suppliers. 

The private sector provides a sharp contrast to DOD's methods of
managing and distributing consumable items.  Private sector companies
have modified their inventory practices to reflect an increasingly
competitive business environment.  Companies have reduced their
number of suppliers by establishing a close partnership with only a
few key ones that are often close to the end-users' facilities.\1
Typically, suppliers are contracted to manage and distribute a
company's supplies for a particular commodity or class of items.  By
using aggressive direct delivery arrangements with the suppliers,
companies bypass the need for intermediate storage and handling
locations.  Once end-users order supplies, the suppliers deliver the
items directly to the end-users' facilities close to the time the
items are needed, commonly called "just-in-time." This technique
allows companies to eliminate unnecessary inventory layers and reduce
on-hand inventories and operating costs.  Figure 2.1 compares DOD's
multilayered system with a just-in-time inventory system. 

   Figure 2.1:  Multilayered
   Inventory System Used by DOD
   and Just-in-Time System Used by
   Some Private Sector Companies

   (See figure in printed
   edition.)

Private sector companies that remain competitive in today's
marketplace are able to hold less inventory, fill orders more
quickly, turn stock over more frequently, and obtain replenishment
supplies significantly faster than DOD.  For example, figure 2.2
illustrates that for clothing stocks, DOD's multilayered system
results in added procurement and distribution time and increased
inventories at all levels. 

   Figure 2.2:  How DOD and Prime
   Vendors Provide Clothing Stocks
   to End-Users

   (See figure in printed
   edition.)


--------------------
\1 The benefits achieved from private sector partnerships and the
potential for benefits in DOD are discussed in our report
Partnerships:  Customer-Supplier Relationships Can Be Improved
Through Partnering (GAO/NSIAD-94-173, July 19, 1994). 


   PAST REPORTS HIGHLIGHT PROBLEMS
   AND IDENTIFY OPPORTUNITIES
---------------------------------------------------------- Chapter 2:2

Since 1991, we have issued five reports that compared commercial
logistics practices with similar DOD operations for consumable items. 
In these reports, we described various innovative private sector
inventory management practices and highlighted companies that had
successfully used the practices to streamline their operations.  Some
companies indicated that they had achieved large savings for
personnel items by standardizing items, eliminating bulk storage
locations, and most importantly, relying on prime vendors that
procured items from many sources, and then warehoused and distributed
these items to their clients when and where needed.  Other companies
adopted practices that located suppliers at a supplier park near
industrial centers, which allowed hardware items to be delivered
directly to end-users frequently and regularly.  As a result, we
recommended that DOD conduct tests to demonstrate the applicability
of using concepts such as prime vendors and supplier parks to better
manage inventories at DLA and military facilities.  Summarized below
are the key issues addressed in our reports on medical items, food,
clothing and textiles, maintenance and repair items, and electronics
items and the actions DOD has taken in response to our
recommendations. 


      MEDICAL INVENTORY
-------------------------------------------------------- Chapter 2:2.1

We reported that DOD's health care system could save millions of
dollars by increased use of inventory management practices pioneered
by leading civilian hospitals.\2 Military medical facilities and
warehouses we visited held multiple layers of supplies to satisfy
peacetime requirements and initial supplies for wartime requirements. 
The hospital warehouses we visited held inventory that would last for
approximately 1 to 3 months.  In addition, DLA, through its depot
system, stored another layer of supplies that would last
approximately 8 months.  Some items in this system were packed in the
1940s and 1950s.  Figure 2.3 shows the medical inventory in one
warehouse at the DLA depot near Mechanicsburg, Pennsylvania. 

   Figure 2.3:  Medical Supplies
   in DLA Warehouse at
   Mechanicsburg, Pennsylvania

   (See figure in printed
   edition.)

In contrast, very progressive civilian hospitals maintained much
smaller levels and fewer layers of supplies and had no depot system. 
These hospitals, through improved ordering systems, standardization
of supplies, and better communication with vendors, greatly reduced
inventories by having prime vendors deliver supplies where and when
needed.  One hospital, the Vanderbilt University Medical Center,
reduced inventory levels from $4.5 million to $2.8 million (38
percent) between 1986 and 1991 by taking an aggressive approach to
inventory management, including requiring its two prime vendors to
deliver supplies within 4 hours of ordering. 

Due to the significant opportunities for DOD to save millions of
dollars, we recommended in our December 1991 report on medical
supplies that DOD test the use of inventory management practices
pioneered by leading civilian hospitals such as using prime vendors
to deliver supplies directly to medical facilities.  DOD agreed with
our recommendation and has established prime vendor programs at about
150 military hospitals nationwide. 


--------------------
\2 DOD Medical Inventory:  Reductions Can Be Made Through the Use of
Commercial Practices (GAO/NSIAD-92-58, Dec.  5, 1991). 


      FOOD INVENTORY
-------------------------------------------------------- Chapter 2:2.2

We reported that, while making some limited use of prime vendors,
DOD's food system was generally outmoded and inefficient.\3 DOD
routinely stored large stocks of food throughout the military supply
system.  As of the end of fiscal year 1992, for example, DLA had, on
average, an 82-day supply of food for peacetime operations, valued at
more than $150 million.  Military base warehouses also held large
food inventories, worth about $200 million.  As a result, food items
often sat on shelves for months or even years before reaching
end-users.  When this occurs, food items can spoil and become unfit
for human consumption.  During visits to military installations, we
found numerous items that had an extended inspection date--the date
food producers stamp on their products to indicate when the first
signs of deteriorating food quality may be detected. 

The private sector avoided many of the problems experienced by the
military food supply system by relying on prime vendors to move food
from suppliers to end-users.  Because of heavy competition within the
food industry, prime vendors had a financial incentive to cut their
costs, keep their prices low, and provide quality service.  Prime
vendors deal with end-users (such as hospitals, restaurants, and
hotels) on a daily basis, including taking orders and making direct
deliveries.  By relying on the prime vendors, end-users do not incur
the direct costs of holding, handling, and transporting food.  As a
result, we believed many of the costs DOD incurred managing food
inventories were unnecessary because the commercial distribution
network could supply food to DOD much more efficiently. 

Because of the possible inventory reductions and cost savings that
could be achieved by using private sector techniques, we recommended
in our June 1993 report that DOD conduct a demonstration project of
an expanded use of prime vendors delivering food directly to military
dining facilities.  As we recommended, DOD is currently testing the
expanded use of food prime vendors to over 200 military dining
facilities in the southeastern part of the United States. 


--------------------
\3 DOD Food Inventory:  Using Private Sector Practices Can Reduce
Costs and Eliminate Problems (GAO/NSIAD-93-110, June 4, 1993). 


      CLOTHING AND TEXTILE
      INVENTORIES
-------------------------------------------------------- Chapter 2:2.3

At a time when private sector companies were cutting costs by
minimizing inventories, DOD continued to store redundant levels of
clothing and textile inventories at both wholesale and retail
locations and to hold such inventories for longer periods of time
than the private sector firms we visited.\4 As previously shown in
figure 2.2, private sector distributors maintain low inventories
because they depend on suppliers delivering goods when they are
needed. 

These inventory differences reflect contrasting approaches to meeting
customers' needs.  DOD's system attempts to satisfy customer needs by
having large clothing stocks readily available.  Commercial firms, on
the other hand, rely on prime vendors to manage their clothing
inventories.  Prime vendors use quick order and delivery systems to
satisfy customer demands, relieving the need for large inventories
and helping to avoid items deteriorating or becoming obsolete before
they are used.  One prime vendor we visited managed an agency's
employee uniform program through a central database, which enabled
order information to be transmitted directly to a distribution point
and issued to a customer in a few days.  The agency estimated it had
saved at least 15 percent of the amount it had allocated for clothing
items over the previous year. 

Because DOD's inventory practices for clothing items differed
significantly to best practices used in the private sector, we
recommended in our April 1994 report on clothing and textiles that
DOD conduct a pilot project to demonstrate whether a prime vendor
concept is beneficial in providing clothing items to military
installations, particularly recruit induction centers.  DOD agreed
with our recommendation to test the prime vendor concept, and it
expects to begin a demonstration project in January 1996. 


--------------------
\4 Commercial Practices:  Leading-Edge Practices Can Help DOD Better
Manage Clothing and Textile Stocks (GAO/NSIAD-94-64, Apr.  13, 1994). 


      MAINTENANCE AND REPAIR
      INVENTORIES
-------------------------------------------------------- Chapter 2:2.4

At both wholesale and retail locations, DOD stored duplicate
maintenance and repair inventories that could be reduced using
commercial practices.\5 For example, about $2 billion of DLA's $6.4
billion inventory of construction, general, and industrial supplies
was invested in consumable maintenance and repair items.  Some of the
items in this wholesale level inventory were duplicated at the
services' retail inventories, which were at or near each of their
industrial centers.  For three industrial centers, one from each
military service, we combined the number of days each center would
take to use the available DLA wholesale and service retail
inventories (see fig.  2.4). 

   Figure 2.4:  Combined Wholesale
   and Retail Inventory Available
   to Three Industrial Centers

   (See figure in printed
   edition.)

As figure 2.4 shows, the combined inventory could last as long as
7-1/2 years (2,696 days) at the Oklahoma Air Logistics Center. 

In contrast, two private sector companies we visited adopted unique
inventory management practices to reduce maintenance and repair
inventories and save operating expenses.  These companies do not use
a wholesale system to store and distribute items, as DOD does, but
instead rely on suppliers to deliver items directly to the end-users'
facilities.  One company we visited--PPG Industries -- established a
"supplier park," where 10 of its suppliers provided maintenance and
repair items as needed throughout each day.  This park is located in
a central location 600 yards from PPG's industrial center where the
items are used.  With the supplier park concept, PPG eliminated $4.5
million, or 80 percent, of its maintenance and repair inventory and
saved $600,000 annually in operating costs.  Another company, The
Timken Company, reduced inventory levels at one location by $4
million, or 33 percent, by using direct delivery programs and
customized agreements with suppliers.  Timken has set a goal to
reduce its inventory an additional 50 percent by establishing a
supplier park facility. 

In our June 1993 report on maintenance and repair inventories, we
recommended DOD test best practices at its military industrial
centers where large quantities of these same items are used. 
Specifically, we recommended that DOD test the use of supplier parks
to reduce the need to store supplies in the DLA depot system and
eliminate unnecessary retail inventories.  DOD concurred with our
recommendations and stated it planned to expand, where appropriate,
the use of commercial practices.  Also, DOD stated that it would
investigate the applicability of using supplier parks and would
determine whether a test was feasible by the second quarter of fiscal
year 1994.  As of July 1995, DLA had not completed its investigation
into the feasibility of testing this concept. 


--------------------
\5 Commercial Practices:  DOD Could Save Millions by Reducing
Maintenance and Repair Inventories (GAO/NSIAD-93-155, June 7, 1993). 


      ELECTRONICS INVENTORIES
-------------------------------------------------------- Chapter 2:2.5

We reported that DLA stored over $2 billion of wholesale electronics
supplies at distribution depots and other storage locations.\6 This
large inventory turns over slowly, about once every 4 years on
average, whereas, private sector suppliers often turn their stock
over 4 times a year.  The slow turnover of inventory costs DOD
millions of dollars.  Based on DLA's September 1993 electronics
inventory, we estimated DOD's annual inventory cost to be as much as
$330 million.  In addition, a significant amount of DLA inventory
exceeded DOD's needs.  As of September 1993, DLA categorized $231.4
million of its electronics, or 10.5 percent, as excess inventory. 

During the past decade, many private sector companies adopted modern
inventory management practices that significantly reduced electronics
inventories, decreased procurement lead times, and saved millions in
associated operating costs while improving the availability of stock. 
One company we visited, Bethlehem Steel Corporation, reduced its
maintenance and repair inventory, including electronics, by about $16
million, or 71 percent (see fig.  2.5), and estimated that it had
avoided over $47 million in inventory costs and related expenses
since 1984.  By establishing long-term agreements with 21 key
suppliers and giving them the responsibility to manage, deliver, and
stock items at over 60 end-user locations within its facility,
Bethlehem Steel (1) eliminated the need to store and distribute
supplies from a central warehouse, (2) increased its access to
suppliers' technical expertise, and (3) consolidated and standardized
the types of items used. 

   > Figure 2.5:  Bethlehem Steel
   Inventory Levels (1984- 92) (in
   millions of constant year 1992
   dollars)

   (See figure in printed
   edition.)

We believed that DOD could reduce electronics inventories by using
private sector techniques, but because DOD stated that it planned to
determine the feasibility of concepts like supplier parks for
maintenance and repair items, we did not make recommendations in our
1994 report on electronics inventories.  As discussed earlier,
however, DLA has not tested or implemented this concept. 


--------------------
\6 Commercial Practices:  DOD Could Reduce Electronics Inventories by
Using Private Sector Techniques (GAO/NSIAD-94-110, June 29, 1994). 


DOD HAS ADOPTED COMMERCIAL
INVENTORY PRACTICES, BUT CAN BUILD
ON PROGRESS
============================================================ Chapter 3

DOD has made progress in improving its logistics system by adopting
best practices, but further opportunities exist to achieve
significant savings.  For the personnel items it manages, which
account for 23 percent of DLA's inventory value, DLA has made the
most progress to adopt best inventory practices by establishing prime
vendor programs that have reduced inventories and improved service to
the customer.  As a result of its improvement efforts, DLA expects to
reduce its inventories and days of supply of personnel items by over
50 percent between 1992 and 1997. 

For the hardware items it manages, which account for 77 percent of
DLA's inventory value, DLA has made the least amount of progress in
using best practices.  To date, DLA has not tested the most
innovative just-in-time concepts we have seen used by private sector
companies to reduce inventories and costs.  DLA has focused its
efforts on direct delivery programs at the wholesale level, which do
not provide the same benefits as concepts like supplier parks.  As a
result, DLA estimates it will achieve about a 20-percent reduction in
inventory levels and days of supply of hardware items between 1992
and 1997.  Even then, hardware inventory in its depot system could
last for more than 2 years. 


   DOD GUIDANCE ENCOURAGES
   ADOPTION OF COMMERCIAL
   PRACTICES
---------------------------------------------------------- Chapter 3:1

During the past 2 years, the Office of the Secretary of Defense (OSD)
issued guidance to DLA and the services that emphasized the use of
alternatives to DOD's traditional logistics system to improve
operations.  In January 1993, OSD issued a policy stating that all
DOD components are to employ direct delivery from vendors to
end-users wherever it is cost-effective and responsive to the
end-users' requirements.  The policy also stated that the use of
existing commercial distribution systems shall be maximized, when
possible.  In 1994, OSD issued its logistics strategic plan, which
focused on achieving improvements in logistics system performance
while reducing associated infrastructure costs.  According to the
plan, an important aspect of achieving these improvements will
involve the identification and adoption of successful government and
commercial practices.  The plan, for example, specifically states
that DOD components should (1) implement commercial distribution of
food to DOD dining facilities by September 1996 and (2) use direct
delivery methods for supplying all routine medical and clothing needs
by September 1997.  The plan also states that DLA should determine
the feasibility of establishing supplier parks or other commercial
arrangements at one or more major defense installations by July 1994. 

To further its adoption of commercial practices, DLA established a
program called "Buy Response Vice Inventory" in December 1992.  This
program, intended to minimize operating and inventory costs,
encourages inventory managers to use commercial practices, such as
long-term contracts, electronic data interchange systems, direct
vendor delivery, and prime vendor programs.  DLA also established the
following goals for this program:  (1) 50 percent of sales will use
direct delivery and prime vendor programs by fiscal year 1997, (2) 80
percent of dollars obligated will be under long-term contracts by
fiscal year 1997, and (3) 70 percent of orders with suppliers will be
electronically transmitted by 1995. 


   DLA'S USE OF BEST PRACTICES ARE
   MOST ADVANCED FOR PERSONNEL
   ITEMS
---------------------------------------------------------- Chapter 3:2

DLA has made the most progress in adopting best practices for
personnel items.  Since 1993, DLA has taken steps that use prime
vendors to supply personnel items directly to military facilities. 
At present, DLA is establishing agreements with prime vendors to
manage, store, and distribute pharmaceutical products, medical
supplies, food, and clothing and textile items. 

DLA plans to have prime vendor programs to encompass a large portion
of its total logistics operations for personnel items by 1997.  As a
result, DLA expects the use of prime vendors and other inventory
concepts that eliminate obsolete and unnecessary items to
significantly decrease its wholesale personnel inventories.  By 1997,
DLA estimates its 1992 inventory level of these items will have
decreased from $3 billion to $1.4 billion, a 53-percent reduction. 
As of June 1994, DLA's personnel inventories were valued at $2.3
billion. 

Based on DLA's projected dollar-value sales for personnel items, we
believe this reduction in inventory will significantly decrease the
number of days of supplies on hand in DLA depots (see fig.  3.1). 

   Figure 3.1:  DLA Inventory
   Levels of Personnel Items

   (See figure in printed
   edition.)

\a War reserves and rations not included. 

As figure 3.1 illustrates, medical inventory levels are expected to
decrease from 176 days to 77 days of supply; food inventory levels
are expected to decrease from 82 days to 20 days of supply; and
clothing and textile inventories are expected to decrease from 725 to
365 days of supply. 


      MEDICAL PRIME VENDOR PROGRAM
-------------------------------------------------------- Chapter 3:2.1

In January 1993, DLA implemented a prime vendor program for
pharmaceutical products, followed in June 1993 by a program for
medical and surgical supplies.  By the end of 1995, about 150 DOD
medical facilities will be using these prime vendor programs in 21
geographic regions across the United States.  A prime vendor is a
distributor that has been awarded a contract to store and distribute
various medical products to individual military hospitals, which
reduces the need for DOD wholesale and retail systems.  Under this
concept, DLA negotiates prices for medical products directly with the
manufacturers or suppliers.  DLA then contracts with the prime vendor
to buy the products at these prices and distribute the products
directly to the military hospital within 24 hours of receiving an
order.  In most cases, the prime vendor charges a distribution fee
for these services.  Once the products are delivered to the
hospitals, DLA pays the prime vendor within 15 days. 

The use of this concept has allowed DOD to reduce stock levels at
both wholesale and retail locations.  During fiscal year 1994, DLA
reduced wholesale pharmaceutical inventory $48.6 million (49
percent), and it estimates it will reduce its total medical inventory
(which includes pharmaceutical, surgical, and dental supplies) by $97
million (37 percent) over the next 3 years. 

The prime vendor program also enables DOD hospitals to reduce retail
inventory levels and save millions in operating costs.  For example,
we compared the pharmaceutical inventory levels of three military
hospitals before and after the prime vendor program was started and
found that these hospitals had reduced their total pharmaceutical
inventory levels (see fig.  3.2).  Other DOD hospitals have achieved
similar reductions. 

   Figure 3.2:  Pharmaceutical
   Inventories at Selected
   Military Medical Facilities

   (See figure in printed
   edition.)

In addition to a 48-percent reduction in pharmaceutical inventories
($3.8 million), Walter Reed officials estimate it saves over $6
million a year in related inventory management expenses by using the
prime vendor system.  This savings involve (1) $2.2 million through
reduced paperwork and administrative costs, (2) over $2.9 million
because its products generally cost less, (3) $504,000 through the
reduction of 15 personnel positions previously required for inventory
management, and (4) $397,000 by reusing material handling equipment
and warehouse space previously needed for medical supplies.  Figure
3.3 shows a medical warehouse that has been converted into a training
facility for medical personnel. 

   Figure 3.3:  Medical Warehouse
   Converted Into a Training
   Facility

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

While DOD has achieved inventory reductions and cost savings, further
opportunities exist to build on this progress by adopting the most
aggressive practices being used in industry.  Because each service
uses this program differently, and some continue to retain
unnecessary inventory layers, DOD has not realized the same benefits
that civilian hospitals have achieved.  Military hospitals we visited
still held inventories that could last the hospitals an average of 42
to 82 days.  In comparison, the Vanderbilt University Medical Center
reduced or eliminated unnecessary inventory layers and decreased
hospital inventory levels to between 2 and 15 days of supply by
taking an aggressive approach to inventory management.  Vanderbilt,
by establishing a close partnership with its prime vendors, arranged
for supplies to be delivered several times a day, in many cases,
directly to the point of use within the medical center.  If DOD
hospitals were to use a similar system, they could reduce
inventories, in some cases, by as much as 75 percent. 


      FOOD PRIME VENDOR PROGRAM
-------------------------------------------------------- Chapter 3:2.2

During 1994, DLA initiated a prime vendor program that it estimated
would reduce the amount of food supplies stored in DLA depots by $69
million, or 74 percent of peacetime stocks, by 1998.  In March 1994,
DLA awarded a contract to a full-line food distributor to serve as a
prime vendor for delivering certain foods (semiperishable, chilled,
and frozen) to dining facilities at four military bases in the
Norfolk, Virginia, area.  DLA established this pilot project to
determine the feasibility of using prime vendors instead of the
traditional military supply system.  The project's goals were to
improve service and reduce costs and inventories.  Four months after
the project was started, two service facilities we visited--Fort Lee
Army Base and Langley Air Force Base--had realized inventory
reductions of over $165,520 (84 percent) and $66,005 (81 percent),
respectively, at their retail warehouses.  At one of these
facilities, service officials were able to vacate two warehouses that
previously were required to store food items.  Officials we spoke
with were more satisfied with the delivery service provided by the
prime vendor than that provided by the military food supply system. 
For example, the prime vendor can deliver food to the dining
facilities about 4 weeks faster than DOD can under its traditional
system. 

In January 1995, DLA and the services began a test project to expand
the food prime vendor program to over 200 military dining facilities
located in the southeastern part of the United States.  All four
services are participating in the 1-year project, which includes
military facilities located in metropolitan and rural areas as well
as Navy ships.  Through this project, military personnel
electronically order food items from a distributor who is required to
deliver the items to the dining facility within 48 hours.  As a part
of this test, DOD will measure the monetary cost and benefits,
customer satisfaction, and distributor performance by comparing the
traditional military food supply system to the prime vendor method. 
If this project is successful, DOD plans to expand the program to all
dining facilities in the continental United States and ships by the
end of fiscal year 1997. 


      CLOTHING AND TEXTILE PRIME
      VENDOR PROGRAM
-------------------------------------------------------- Chapter 3:2.3

Under a demonstration project that is expected to start in January
1996, a military service recruit induction center will test the prime
vendor concept for clothing items.  The project is DOD's first effort
to use a prime vendor to manage clothing and textile items.  DLA
plans to award a contract to a prime vendor that will be responsible
for the manufacture, quality, storage, and delivery of all clothing
items provided to the Air Force's recruit induction center at
Lackland Air Force Base, San Antonio, Texas.  Items are expected to
be delivered within 10 days after the orders are placed, with a
delivery goal of 3 days by the 10th month of the program.  If the
test proves successful, DOD plans to apply it to other service
locations. 


   DLA IS PURSUING COMMERCIAL
   PRACTICES FOR HARDWARE ITEMS,
   BUT PROGRESS IS SLOW
---------------------------------------------------------- Chapter 3:3

DLA's adoption of best practices is least advanced for hardware
items.  Although DLA is examining the potential application of some
commercial practices for hardware items, DLA's overall progress is
slow and results are limited. 

The central focus of DLA's efforts to improve management of hardware
items has been to expand the use of direct delivery programs at the
wholesale level.  By using long-term contracting agreements and
electronic data interchange systems, DLA makes arrangements with
manufacturers or suppliers to deliver items directly to the services'
retail facilities.  DLA expects the use of direct vendor delivery to
result in better service and reduced inventory levels and to
eliminate the cost of receiving, storing, and issuing these items
from wholesale depots.  In fiscal year 1994, DLA reported that 13
percent of its hardware dollar-value sales resulted from direct
delivery programs at this level.  According to DLA, it expects to
increase the use of direct delivery programs so that they account for
30 percent of all hardware dollar-value sales by 1997. 

These direct delivery programs, however, neither eliminate costs to
manage, store, and distribute items at a service's retail location
nor provide the same quick response achieved through best inventory
practices such as the supplier park concept.  With direct delivery
programs, requisitions are sent from the services to DLA, where the
orders are then electronically relayed to the supplier or
manufacturer.  The length of time from requisition to delivery of the
item can take 30 days or longer.  In comparison, private sector
companies using just-in-time techniques often receive supplies from
their key suppliers within hours after ordering.  The use of such
techniques allows these companies to reduce or eliminate the need to
manage, store, and distribute these items from warehouse locations at
their facilities. 

DLA's direct delivery programs provide only incremental reductions
from hardware inventory levels held in 1992.  DLA estimates that
hardware inventories of $8 billion in 1992 will decrease to $6.4
billion in 1997, or approximately 20 percent.\1 As of June 1994,
DLA's hardware inventories were valued at $7.8 billion.  Much of this
overall reduction will result from the disposing of excess and
obsolete items.  Even then, based on DLA's projected inventory and
demand for the four groups of hardware items (construction,
electronics, general, and industrial), it could have enough inventory
on hand to last for an average between 795 days and 1,381 days (see
fig.  3.4).  In comparison, private sector suppliers of similar types
of items often hold only 90 days of supply to meet customer needs. 

   Figure 3.4:  DLA's Inventory of
   Hardware Items

   (See figure in printed
   edition.)

Companies have applied innovative practices at industrial centers
where they use large quantities of consumable hardware items, such as
bearings, valves, and fasteners, to maintain and repair their
equipment.  According to private sector officials, these items offer
the greatest opportunity because they are generally standard, used in
large quantities, and commonly stocked by several suppliers.  Through
concepts like supplier parks, companies have reduced similar types of
inventories and the costs to manage and store them.  For example, PPG
Industries and Bethlehem Steel Corporation have used supplier parks
and similar just-in-time concepts to eliminate as much as 80 percent
of their consumable item inventories.  In addition, these companies
estimate that they have saved millions in related operating costs. 

In September 1994, DLA contracted for a study of the feasibility of
using supplier parks at three maintenance and repair facilities.  In
December 1994, the contractor reported that the concept of a supplier
park was feasible and strongly recommended that DLA give serious
consideration to using this concept at these facilities.  The study
concluded that a supplier park concept would provide enhanced
customer support in terms of quicker response times and improved
material availability while reducing both operating and inventory
costs at DLA depots and maintenance and repair facilities.  The
contractor estimated a first year savings between $9.9 million and
$16.8 million to DOD.  According to DLA, it plans to continue
studying the feasibility of this concept. 


--------------------
\1 In commenting on a draft of this report, DOD stated that the $8
billion and $6.4 billion includes inventory transferred from the
military departments as part of DOD's consumable item transfer
program.  When those transferred items are excluded, DLA's inventory
of consumable items decreased 36 percent between fiscal years 1992
and 1994. 


   FACTORS AFFECTING DOD'S ABILITY
   TO IMPLEMENT BEST PRACTICES
---------------------------------------------------------- Chapter 3:4

The success of DOD's initiatives to improve inventory management
practices will depend on DOD's ability to change its traditional
inventory management philosophy.  Private sector companies have moved
away from this philosophy in an attempt to lower the cost of doing
business, provide better service, and remain competitive.  Private
sector companies have changed their philosophy by relying on
established commercial distribution networks where suppliers have a
financial incentive to make their operations efficient and achieve
savings.  In response to competition, these suppliers must be
extremely cost conscious and responsive to their customers in order
to stay in business.  DOD can achieve similar results by adopting a
philosophy in which it relies more on the existing distribution
network that supports the private sector. 

Another factor is that DOD will be continuously challenged to
identify and adopt the best practices being used to improve logistics
operations.  Private sector companies that have achieved the greatest
success continually seek new and better practices to further improve
operations.  For example, Vanderbilt University Medical Center
officials told us that they plan to take the next step with their
inventory system by controlling inventory consumption through closer
supply arrangements with its prime vendor.  According to these
officials, the latest concept involves a risk-sharing strategy
designed around the development of an agreed upon cost per medical
treatment.  Under this arrangement, the doctors, nurses, and the
prime vendor agree on a standard medical supplies listing for each
type of medical treatment.  When a patient is admitted to the
hospital for treatment, the prime vendor will be notified and a
standard set of supplies will be delivered to the patient's floor. 
This concept is expected to minimize the amount of supplies used by
the hospital staff to that amount necessary to perform the required
treatment.  The monetary risks and benefits of this arrangement are
shared by both the prime vendor and the hospital. 


CONCLUSIONS AND RECOMMENDATIONS
============================================================ Chapter 4

DOD has made progress in adopting best inventory practices for
consumable items, but it could do more to further reduce inventories
and operating costs.  Private sector companies that have successfully
adopted innovative just-in-time concepts for consumable items have
taken several key steps.  First, they selected high usage, low unit
cost items to test these practices.  Second, they arranged for
suppliers to make small, frequent deliveries of these items to a
point close to where the items are used.  As they gained confidence
in this new system and as suppliers refined the distribution process,
the companies expanded this service to include a wider range of
items.  Finally, they established a close partnership between the
supplier and end-user, thereby enabling the supplier to use its
expertise and the pre-existing distribution network to maximize
savings for its customers.  As discussed in chapter 2, these savings
can result in as much as an 80-percent reduction in inventory levels
and in millions of dollars in lower annual operating costs. 

For personnel items, which represent 23 percent of DLA's inventory,
DLA is beginning to take similar steps.  The most successful program
to date is the pharmaceutical prime vendor program, which is now in
place at DOD hospitals nationwide.  Thus far, DLA's implementation of
the prime vendor concept has reduced wholesale pharmaceutical
inventories by 49 percent.  At the retail level, one of the most
aggressive DOD medical facilities applying this concept is the Walter
Reed Army Medical Center, which has reported an inventory reduction
of $3.8 million and a estimated savings of over $6 million annually
in related inventory management expenses.  To accomplish these
savings, Walter Reed has turned over much of its inventory management
responsibilities to the prime vendor. 

However, the aggressive steps taken by Walter Reed are not typical of
those throughout all of the DOD medical facilities we visited. 
Because each service has used the prime vendor's services
differently, and some even continue to retain unnecessary inventory
layers, DOD has not realized the same improvements that progressive
civilian hospitals have achieved.  In fact, military hospitals we
visited still held inventories that could last for many weeks
compared to just days for some leading civilian hospitals.  DOD's
approach neither eliminates unnecessary inventory storage locations
nor allows hospitals to fully use the inventory management expertise
of the prime vendor.  Under this approach, a partnership environment
may not fully develop. 

For hardware items, which represent 77 percent of its inventory and a
$7.8-billion investment, DLA has not taken the steps necessary to
adopt just-in-time concepts.  DOD operates industrial facilities that
use large quantities of hardware items to repair and maintain
aircraft, land vehicles, and ships.  At these facilities, DOD uses
the same types of hardware items for which private sector companies
have established supplier parks and other innovative concepts that
transfer management responsibilities to their suppliers and reduce
inventory levels.  Although we recommended a DOD test of the supplier
park concept in our June 1993 report, it is still studying the
feasibility of the concept 2 years later. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 4:1

To ensure that the medical prime vendor programs are more
consistently and aggressively applied, we recommend that the
Secretary of Defense direct the secretaries of each of the military
services to use the prime vendor program in enhancing the partnership
between the DOD medical facilities and the prime vendors.  Actions
that would enhance such an arrangement include

  delivering supplies directly to the point of use in the hospital,

  integrating the vendor into the day-to-day supply operations,

  delivering supplies on a frequent basis (several times a day), and

  using the vendor's expertise to improve inventory management
     operations. 

These actions could further reduce inventory layers in the DOD system
and bring military medical facilities closer to the levels of success
achieved by progressive private sector hospitals. 

To encourage DLA and the services to establish supplier parks for
hardware items, we recommend that the Secretary of Defense direct the
secretaries of each of the military services and the Director of DLA
to initiate several actions that have been taken by private sector
companies when developing these concepts.  Specifically, each service
and DLA should work together to

  identify an Army, Navy, and Air Force site that will test the
     supplier park concept;

  identify specific items with high usage rates and low unit costs to
     use in a test program;

  negotiate with prospective suppliers to perform these inventory
     management functions during the test program;

  establish partnerships with the suppliers allowing them access to
     DOD inventory information and facilities, which will enable the
     suppliers to deliver items directly to the end-user;

  develop evaluation criteria that will measure the total costs of
     inventory delivered under the test program in order to compare
     costs and benefits to the total cost being incurred under the
     current system; and

  establish aggressive milestones for the initial phases of this test
     program to achieve early results. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 4:2

In commenting on a draft of this report, DOD generally agreed with
the findings, conclusions, and recommendations and stated that, while
significant gains have occurred, further progress can be made in
adopting best commercial practices in providing both personnel and
hardware items to the military services.  DOD stated that DLA, in its
role as commodity manager for medical supplies, is taking the lead in
enhancing prime vendor arrangements for medical items.  DOD also
stated that DLA is aggressively pursuing the establishment of a
supplier park at two military service facilities in Texas. 

According to DOD, DLA has contracted with a consultant to complete an
analysis of existing purchasing systems, compile an economic
analysis, and develop an implementation plan.  The consultant is
expected to complete a report by August 31, 1995.  DLA has not yet
established specific milestones to test the operation of the concept. 
An actual operational test of the concept can help DLA (1) determine
whether the concept can be applied to its logistics operations and
(2) evaluate the feasibility of expanding the concept at other
locations having similar inventory requirements. 




(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================ Chapter 4



(See figure in printed edition.)

Now on pp.  3-5, 27-33, and 38-39. 



(See figure in printed edition.)



(See figure in printed edition.)

Now on pp.  5-6, 33-36, and 38-39. 



(See figure in printed edition.)

Now on pp.  4 and 36-37. 



(See figure in printed edition.)

Now on pp.  6 and 39. 

Now on pp.  6 and 39. 



(See figure in printed edition.)

Now on pp.  7 and 39. 

Now on pp.  7 and 39. 



(See figure in printed edition.)

Now on pp.  7 and 39. 

Now on pp.  7 and 40. 



(See figure in printed edition.)

Now on pp.  7 and 40. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix II:1

Donna M.  Heivilin
Kenneth R.  Knouse, Jr. 


   CINCINNATI REGIONAL OFFICE
-------------------------------------------------------- Appendix II:2

Matthew B.  Lea
Robert L.  Repasky
William E.  Haines
