Defense Inventory: Extent of Diminishing Manufacturing Sources Problems
Still Unknown (Letter Report, 04/21/95, GAO/NSIAD-95-85).
The Pentagon believes that diminishing manufacturing sources is a major
problem, particularly in the electronics and microcircuit areas.
According to industry sources and Defense Department (DOD) officials,
because of rapidly changing technology in the electronics and
microcircuit industry, decreasing demands due to military downsizing,
and DOD increasing use of commercial off-the-shelf items, the private
sector is increasingly more sensitive to its commercial customers than
DOD. As a result, DOD expects the availability of DOD specification
items to decrease and manufacturing sources to diminish. This report
discusses (1) DOD's progress since GAO's August 1990 report
(GAO/NSIAD-90-126) toward implementing a Diminishing Manufacturing
Sources and Material Shortages program and (2) whether DOD has
determined the cost-effectiveness of the actions taken to resolve
diminishing manufacturing sources.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-95-85
TITLE: Defense Inventory: Extent of Diminishing Manufacturing
Sources Problems Still Unknown
DATE: 04/21/95
SUBJECT: Military inventories
Inventory control systems
Defense procurement
Spare parts
Electronic equipment
Cost effectiveness analysis
Defense contingency planning
Military cost control
Manufacturing industry
Management information systems
IDENTIFIER: DOD Diminishing Manufacturing Sources and Material
Shortages Program
DOD Government/Industry Data Exchange Program
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Cover
================================================================ COVER
Report to the Secretary of Defense
April 1995
DEFENSE INVENTORY - EXTENT OF
DIMINISHING MANUFACTURING SOURCES
PROBLEMS STILL UNKNOWN
GAO/NSIAD-95-85
Defense Inventory
Abbreviations
=============================================================== ABBREV
DOD - x
DMSMS - x
DESC - x
GIDEP - x
Letter
=============================================================== LETTER
B-260177
April 21, 1995
The Honorable William J. Perry
The Secretary of Defense
Dear Mr. Secretary:
We have completed our survey of the Department of Defense's (DOD)
Diminishing Manufacturing Sources and Material Shortages (DMSMS)
program. Our objectives were to determine (1) what progress DOD had
made since our 1990 report\1 toward implementing a DMSMS program and
(2) whether DOD had determined the cost-effectiveness of the actions
taken to resolve DMSMS situations.
DOD has indicated that diminishing manufacturing sources is a major
potential problem, particularly in the electronics and microcircuit
areas. According to industry sources and DOD officials, because of
rapidly changing technology in the electronics and microcircuit
industry, decreasing demands due to the downsizing of DOD, and the
emphasis on DOD using commercial off-the-shelf items, the private
sector is increasingly more sensitive to its commercial customers
rather than DOD. As a result, DOD expects the availability of DOD
specification items to decrease and the number of DMSMS situations to
increase. DOD officials have also asserted that DMSMS situations may
affect the availability of parts to DOD in areas other than
electronics and microcircuits.
--------------------
\1 Defense Inventory: DOD Could Better Manage Parts With Limited
Manufacturing Sources (GAO/NSIAD-90-126, Aug. 16, 1990).
BACKGROUND
------------------------------------------------------------ Letter :1
The DMSMS program is intended as a management tool for the early
identification and resolution of situations when there is a loss or
an impending loss of manufacturers of items or suppliers of raw
materials. Such situations can occur when manufacturers and
suppliers cease production, discontinue distribution, or move to a
foreign country. Additionally, DMSMS situations can be caused by
rapidly changing technology and low demand for the items or
materials. The loss of item manufacturers and material suppliers can
affect weapon systems and equipment during initial design,
development, production, and life-cycle support.
When the services are notified that a manufacturer or supplier plans
to discontinue production or distribution, they can (1) try to
encourage the existing source to continue production, (2) try to find
another manufacturer or supplier, (3) attempt to identify a
substitute item, (4) redesign the system so it does not require the
problem part, (5) redefine the military specifications and consider
buying the item from commercial sources, or (6) make life-of-type
buys.\2 Because the services are often not aware of the
discontinuance of an item until the manufacturer has made the
decision, the services may be in a reactive mode with limited options
for addressing the problem.
An alternative to the reactive mode of operation is a predictive
analysis in which the services try to predict which items are likely
to be discontinued due to changing technology, declining demands, and
other causes. To the extent that the services can anticipate which
items may be discontinued, they have more flexibility in designing a
course of action to address DMSMS situations.
In our 1990 report, we pointed out that the services had not fully
implemented the DMSMS program. At that time, the services were
developing program policies and plans, had not developed adequate
guidance for computing life-of-type buys, and did not have the data
necessary to monitor and measure the effects of DMSMS.
--------------------
\2 A life-of-type buy is the procurement of sufficient items to meet
anticipated demands throughout the system's life or until another
solution can be found to resolve the DMSMS situation.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
Data is not collected on a DOD-wide basis concerning what the total
number of DMSMS situations were, how the situations were resolved,
whether the most cost-effective solutions were selected, or how DMSMS
affects the capability of the forces. As a result, the services do
not have oversight and monitoring systems that provide quantitative
information on the magnitude and extent of the DMSMS problem.
According to DOD officials, these systems are still in the planning
stage and will not be available for at least a year.
To date, most of the services' DMSMS efforts have been reactive.
However, the Navy and, to a lesser extent, the Army have made some
progress toward developing predictive analysis systems. These
systems, however, do not provide a servicewide approach, and analyses
have not been performed to evaluate the cost-effectiveness of the
actions taken in response to DMSMS situations. Consequently, DOD
does not know whether and under what circumstances a reactive or
predictive approach is the preferred course of action for dealing
with DMSMS problem parts.
OVERSIGHT ON DMSMS IS
INADEQUATE
------------------------------------------------------------ Letter :3
DOD issued regulations in January 1993 requiring each service and the
Defense Logistics Agency to designate a focal point for planning and
coordinating DMSMS actions. Part of the focal point's responsibility
is to ensure a continuous source of supply for parts used in the
design, redesign, or production of weapon systems by screening the
parts for current and near-term obsolescence (1 year to 5 years).
Another key aspect of the regulations is to ensure effective
communication and exchange of DMSMS information between industry and
the government.
DOD directed the services to use the Government/Industry Data
Exchange Program (GIDEP) as the central repository for discontinuance
notices so that all affected parties can have access to the
information. DOD believed that the new GIDEP database would provide
the information needed for oversight and effectively manage the DMSMS
program. DOD also directed the establishment of DMSMS management
information systems that would show (1) the dollar value of the DMSMS
inventory, (2) the number of managed DMSMS items, and (3) the dollar
value of life-of-type buys.
In June 1993, the DOD Inspector General, however, issued a memorandum
that pointed out that the services continued to have inadequate
oversight of the program and had not established mechanisms or
developed databases to monitor program effectiveness.
DMSMS PROGRAM DEVELOPMENT IS
SPORADIC
------------------------------------------------------------ Letter :4
The Defense Electronics Supply Center (DESC) has had a management
focus on DMSMS since the mid-1970s, and it continues to play a major
role in the piece part management of DMSMS. The reason for this is
that electronic parts have been most affected by manufacturers'
production discontinuances. However, DESC's efforts are primarily
reactive in nature in that it notifies the services when it receives
a discontinuance notice. DESC then identifies the best alternative
for addressing the DMSMS problem to include emulation, flexible
computer integrated manufacturing, aftermarket manufacturing, and/or
life-of-type buys.
The Air Force, in April 1994, issued draft DMSMS policy guidance and
in August 1994 established an Integrated Process Team to determine
the magnitude of DMSMS problems in the Air Force. Another objective
of the team was to develop requirements for an efficient and
cost-effective DMSMS program. The Air Force views this as a
necessary first step before committing resources to a program where
the seriousness and magnitude of the problem are not known. Air
Force officials told us that they expect to receive the team's report
about August 1995.
COST-EFFECTIVENESS OF A
PREDICTIVE ANALYSIS IS NOT
KNOWN
------------------------------------------------------------ Letter :5
The Navy and the Army have established entities to provide predictive
analyses to other service entities to minimize the impact of DMSMS in
designing, redesigning, and supporting systems. However, these
entities do not provide servicewide coverage for all affected parts.
Furthermore, the Navy and the Army do not routinely track the
cost-benefit effectiveness of their predictive analyses to
demonstrate whether they are more cost-effective than the routine
reactive actions being taken in cases where discontinuance notices
are received.
The Naval Air Warfare Center and the Surface Warfare Center have a
Diminishing Manufacturing Source Technology Center that attempts to
predict future obsolescence problems for electronics. According to
Navy officials, the Center's predictive analyses cover many of the
Navy's major weapon systems but still account for about 70 percent of
the total electronic parts used in Navy systems. The Navy provides
such analyses to Navy program offices that are willing to fund them.
The Army's Missile Command also performs predictive obsolescence
analyses for a limited number of Army program offices. The Command's
predictive analyses involve about 8 percent of the electronic parts
that are used in Army missile weapon systems.
DOD officials told us that they are studying the feasibility of
developing a predictive analysis model that would be owned by DOD and
would be available to the services and the Defense Logistics Agency.
At the time of our review, the research phase of the feasibility
study had just been completed. According to DOD officials, if DOD
had its own model, it would not have to depend on private sector
contractors for much of the information that the Army and the Navy
currently use in performing their predictive analyses. The main
reason for the limited predictive analysis efforts in both the Army
and the Navy is that the program offices have to pay for the
predictive analyses and that many program offices rely on the
manufacturers to advise them of emerging material shortages or plans
to diminish manufacturing efforts, rather than spend their funds on
predictive analyses.
From a theoretical perspective, predictive analyses should aid DOD
and the services in minimizing the impact of DMSMS situations.
However, the service entities engaged in predictive analyses have not
clearly demonstrated on a wide-ranging basis that predictive analyses
are a cost-effective way of dealing with DMSMS problems.
We held discussions with service entities who do predictive analyses
and several manufacturers about the cost-effectiveness of such
analyses. The Navy's Technology Center has tracked the cost
avoidances achieved by predictive analyses, and it could only
identify 10 such examples. In total, these examples accounted for
about $8 million in cost avoidances over an 18-month period. In
addition, GIDEP identified cost avoidances of about $7.2 million in
1993. These cost avoidances, however, were not related to predictive
analyses but rather to savings as a result of GIDEP notifying users
of the discontinuance of certain electronic and microcircuit items.
RECOMMENDATIONS
------------------------------------------------------------ Letter :6
Because DOD does not have information on the extent of DMSMS problems
in DOD and does not know whether predictive analyses are a
cost-effective means to address DMSMS problems, DOD cannot make an
accurate assessment of the current DMSMS actions being taken or
planned. Before DOD makes any decisions concerning the future scope
of the DMSMS program or the need for additional program funds, we
recommend that the Secretary of Defense ensure that, at a minimum,
DOD has
quantitative data on the extent of the DMSMS problem,
information to determine the effectiveness of ongoing and planned
actions for minimizing the impact of DMSMS, and
supporting analyses for the cost-effectiveness of DMSMS predictive
analyses versus other alternatives for dealing with DMSMS problems.
AGENCY COMMENTS
------------------------------------------------------------ Letter :7
In commenting on a draft of this report, DOD generally concurred with
the report and its recommendations. DOD said that it recognized the
need to improve service oversight of DMSMS and indicated that in
conjunction with GIDEP, it and the services were working to develop a
database that will collect information on the number of stock numbers
and manufacturer part numbers that are being discontinued.
Information will also be collected on which alternative was used to
address the discontinuance problem.
DOD said that, by April 30, 1995, it will prepare a memorandum to the
services and the Defense Logistics Agency that emphasizes the need to
collect cost data associated with handling DMSMS problems and to
report the data to GIDEP. DOD also said that it recognizes the need
to identify and retain data on the cost-effectiveness of predictive
analyses. As such, it will prepare a memorandum to the services, by
April 30, 1995, emphasizing the need to routinely track the
cost-effectiveness of their predictive analyses to demonstrate
whether they are more cost-effective than the routine reactive
approaches that are now being taken. DOD comments are presented in
their entirety in appendix I.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8
We reviewed DOD and the services' policies and procedures for
managing DMSMS and met with DOD and service officials to understand
how the policies and procedures are implemented. We obtained and
reviewed studies, reports, and documentation that addressed the DMSMS
problem and various actions being taken and planned by government and
industry to deal with the problem.
To determine how DMSMS was being managed, we visited the Defense
Electronic Supply Center, the Navy's DMSMS Technology Center, the Air
Force Materiel Command, the U.S. Army Tank-Automotive and Armaments
Command, and the U.S. Army Missile Command. We also interviewed
officials from Army, Navy, and Air Force inventory control points,
engineering activities, and Army and Navy program offices. We also
held telephone interviews with representatives from GIDEP and private
sector companies who sell electronic components and/or build weapon
systems and components for DOD and the services.
At these organizations, we discussed the pros and cons of using a
predictive analysis versus reacting to the problem after it happens.
We also asked for examples that showed the cost-effectiveness of the
DMSMS actions being taken or planned.
Our review was conducted from August 1994 to January 1995 in
accordance with generally accepted government auditing standards.
---------------------------------------------------------- Letter :8.1
As you know, the head of a federal agency is required by 31 U.S.C.
720 to submit a written statement on actions taken on our
recommendations to the House Committee on Government Reform and
Oversight and the Senate Committee on Governmental Affairs not later
than 60 days after the date of this report. A written statement must
also be submitted to the House and Senate Committees on
Appropriations with the agency's first request for appropriations
made more than 60 days after the date of the report.
We are also sending copies of this report to the Chairmen and Ranking
Minority Members, House and Senate Committees on Appropriations,
House Committee on National Security, Senate Committee on Armed
Services, Senate Committee on Governmental Affairs, House Committee
on Government Reform and Oversight; the Secretaries of the Army,
Navy, and Air Force; and the Directors, Defense Logistics Agency and
Office of Management and Budget.
If you or members of your staff have any questions or would like to
discuss the matters in this report in further detail, please call me
at (202)512-5140. Other major contributors to this report are Robert
J. Lane, Gilbert W. Kruper, and Michael J. Jones.
Sincerely yours,
Mark E. Gebicke
Director, Military Operations
and Capabilities Issues
(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================== Letter
(See figure in printed edition.)
(See figure in printed edition.)
Now on p. 5.
(See figure in printed edition.)
Now on p. 5.
Now on p. 5.
(See figure in printed edition.)