Inventory Management: Adopting Best Practices Could Enhance Navy Efforts
to Achieve Efficiencies and Savings (Letter Report, 07/12/96,
GAO/NSIAD-96-156).

Pursuant to a congressional request, GAO examined the Navy's aircraft
logistics system, focusing on the Navy's efforts to improve and reduce
the cost of the system.

GAO found that: (1) the best practices identified in the airline
industry could improve the responsiveness of the Navy's logistics system
and save millions of dollars; (2) the Navy's logistics system is complex
and often does not respond quickly to customer needs; (3) the factors
contributing to this situation include the lack of spare parts, slow
distribution, and inefficient repair practices; (4) some customers wait
as long as 4 months for available parts; (5) the Navy is centralizing
its supply management and repair activities, outsourcing certain
management functions, and analyzing the effectiveness of its repair
pipeline; (6) the best practices employed by the private sector show
promise for the Navy because these firms hold minimum levels of
inventory, have readily accessible spare parts, and quick repair times;
(7) it takes an average of 11 days to repair a broken part in the
private sector, as opposed to 37 days in the Navy's repair process; (8)
this is a result of repairing items immediately after they break, using
local distribution centers and integrated supplier programs, and
third-party logistic providers; and (9) many of the airline industry's
best practices are compatible with the Navy's logistics system.

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

 REPORTNUM:  NSIAD-96-156
     TITLE:  Inventory Management: Adopting Best Practices Could Enhance 
             Navy Efforts to Achieve Efficiencies and Savings
      DATE:  07/12/96
   SUBJECT:  Logistics
             Inventory control systems
             Aircraft components
             Military cost control
             Spare parts
             Naval aircraft
             Federal property management
             Military inventories
             Airline industry
             Equipment repairs

             
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Cover
================================================================ COVER


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

July 1996

INVENTORY MANAGEMENT - ADOPTING
BEST PRACTICES COULD ENHANCE NAVY
EFFORTS TO ACHIEVE EFFICIENCIES
AND SAVINGS

GAO/NSIAD-96-156

Inventory Management

(709140)


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

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

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


B-271850

July 12, 1996

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 is the ninth in a series of reports comparing the
Department of Defense's (DOD) logistics practices with those of the
private sector.\1 As you requested, we are continuously examining
DOD's inventory management practices to identify areas where costs
can be reduced and problems can be avoided by adopting leading
commercial practices.  While DOD has implemented some innovative
practices, many opportunities exist for improving the logistics
system.  This report focuses on the Navy's logistics system for
aircraft parts.  The objectives of this review were to (1) examine
the current performance of the Navy's logistics system, (2) review
the Navy's efforts to improve its logistics system and reduce costs,
and (3) examine leading best practices used by the airline industry
to identify potential opportunities to improve the efficiency and
effectiveness of the Navy's logistics operations. 


--------------------
\1 See Related GAO Products. 


   BACKGROUND
------------------------------------------------------------ Letter :1

The private sector, driven by today's globally competitive business
environment, is faced with the challenge of improving its service
while lowering costs.  As a result, many companies have adopted
innovative business practices to meet customer needs and retain
profitability.  Since DOD is facing a similar challenge of providing
better service at a lower cost, it has begun to reexamine its
business practices.  With the end of the Cold War, the DOD logistics
system must support a smaller, highly mobile, high technology force
with fewer resources.  Also, due to the pressures of budgetary limits
and base closures, DOD must seek new and innovative ways to make
logistics processes as efficient and effective as possible. 

To supply reparable parts for its approximately 4,900 aircraft, the
Navy uses an extensive logistics system based on management concepts
largely developed decades ago.\2 The Navy's system, commonly called a
ï¿½pipeline," consists of many activities that play a key role in
providing aircraft parts to end-users when and where needed.  This
pipeline encompasses several functions, including the purchase,
storage, distribution, and repair of parts.  Another important
function of this pipeline is to provide consumable parts (e.g., nuts,
bearings, and fuses) that are used extensively to fix reparable parts
and aircraft.  The Defense Logistics Agency (DLA) provides most of
the consumable parts that Navy repair activities need and handles a
large part of the warehousing and distribution of reparable parts. 

Although not as large as the Navy, commercial airlines have similar
operating characteristics to the Navy.  They maintain fleets of
aircraft that use reparable parts and operate logistics pipelines
whose activities are similar.  For both the Navy and commercial
airlines, time plays a crucial role in the responsiveness of
logistics operations and the amount of inventory needed.  Pipeline
complexity also adds to logistics costs by increasing overhead and
adding to pipeline times.  Condensing and simplifying pipeline
operations, therefore, simultaneously improves responsiveness and
decreases costs by reducing inventory requirements and eliminating
infrastructure (warehouses, people, etc.) needed to manage
unnecessary material. 


--------------------
\2 Reparables are parts that, if damaged or worn, can be fixed or
overhauled for less than the cost of new items.  These items include
landing gear, hydraulic pumps, and ï¿½black boxesï¿½ essential to an
aircraft's operations. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The Navy is working to improve its logistics system.  Our work shows
that the best practices we identified in the airline industry have
the potential for use in the Navy's system.  These practices, if
applied where feasible, could improve the responsiveness of the
Navy's logistics system and potentially save hundreds of millions of
dollars.  The Navy's system, characterized by a $10-billion inventory
of reparable parts, is slow and complex and often does not respond
quickly to customer needs.  For example, customers wait, on average,
16 days at operating bases and
32 days on aircraft carriers to receive parts from the wholesale
system.  If the wholesale system does not have the item in stock,
customers wait over
2.5 months.  Many factors contribute to this situation, but among the
most prominent is a slow and complex repair pipeline.  Within this
pipeline, broken parts can pass through as many as 16 steps, which
can take as long as 4 months, before they are repaired at a repair
depot and available again for use.  Specific problems that prevent
parts from flowing quickly through the pipeline include a lack of
consumable parts needed to complete repairs, slow distribution, and
inefficient repair practices.  For example, the Navy's practice of
routing parts through several workshops at repair depots increases
the time needed to complete repairs.  One item we examined had a
repair time of 232 hours, only 20 hours of which was spent actually
repairing the item.  The remaining 212 hours involved time to handle
and move the part to different locations. 

The Navy recognizes it must improve its logistics system to make it
more responsive and less costly.  To achieve these goals, the Navy
has established programs that focus on centralizing supply management
and repair activities and outsourcing certain material management
functions.  It has also established a logistics response team to
analyze the Navy's pipeline and identify opportunities to reduce its
length and complexity.  The Navy is in the early stages of developing
these programs and has not yet identified many of the specific
business practices that it will use to achieve its goals.  However,
the initiatives provide a framework for improvements by focusing on
pipeline time and complexity. 

Best practices used by the private sector provide opportunities to
build on the Navy's improvement efforts.  These best practices appear
feasible for inclusion in the Navy's efforts and could potentially
save hundreds of millions of dollars while improving customer
service.  The commercial airline industry has adopted leading-edge
practices that have resulted in significant improvements and reduced
logistics costs.  Leading firms in the airline industry hold minimum
levels of inventory that can turn over four times as often as the
Navy's.  Parts are more readily available and delivered to the
customer within hours.  The repair process is faster, taking an
average of 11 days for certain items at one airline we examined,
compared to the Navy's 37-day process.  Specific practices that have
enabled companies to achieve these results include (1) repairing
items promptly after they break, (2) employing a "repair cell"
concept to speed the repair of component parts, (3) using local
distribution centers and integrated supplier programs to improve
consumable item support and reduce "just-in-case" inventory, and (4)
using third-party logistics providers to manage logistics functions. 

Although we cannot say with certainty that these best practices can
be integrated into the Navy's logistics system, we believe they are
compatible with many aspects of the Navy's operations.  Because of
the significant benefits realized by private firms, we further
believe that the potential benefits to the Navy in adopting these
practices are enough to justify a demonstration project.  Such an
approach can determine with certainty the feasibility or
cost-effectiveness of the practices. 


   THE NAVY'S SYSTEM RESULTS IN
   LARGE COSTS AND UNTIMELY
   SERVICE
------------------------------------------------------------ Letter :3

The Navy's overall inventory management philosophy is one of
maintaining large inventory levels at many different locations to
ensure parts are readily available to meet customers' needs.  As of
September 1995, the Navy had reparable inventory valued at $10.4
billion.  However, a portion of this inventory is not needed to
support daily operations and war reserves.  Of the $10.4 billion
inventory, the Navy classifies $1.9 billion
(18 percent) as long supply--a term denoting that more stock is on
hand than is needed to meet daily operations and war reserve
requirements.\3 The $10.4-billion and the $1.9-billion inventories
were valued using DOD's standard valuation methodology--reparables
requiring repair were reduced by the estimated cost of repair and
excess inventory was valued at salvage prices (2.5 percent of latest
acquisition cost).  Figure 1 details the Navy's allocation of its
inventory to daily operations, war reserves, and long supply. 

   Figure 1:  Navy Inventory
   Allocation

   (See figure in printed
   edition.)

\a Includes parts in transit between locations. 

Source:  DOD's Supply System Inventory Report as of September 30,
1995. 

The inventory turnover rate is a measure of how efficiently a
business uses its inventory investment and can be expressed as the
ratio of the dollar value of repairs to the average inventory value. 
One commercial airline we visited calculated that, using this ratio,
it would turn its reparable inventory over once every 5 months.  In
comparison, we calculate that, based on fiscal year 1995 repairs, the
Navy's wholesale-level inventory of reparable parts would turn over
once every 2 years.\4 The Navy incurs significant costs to manage
this large inventory investment.  At the wholesale level alone, the
Navy estimates it spent almost $1.8 billion to repair, buy, and
manage reparable parts during fiscal year 1995 (see
table 1).  This amount does not include the costs to store and
maintain parts at operating locations, such as bases and aircraft
carriers. 



                                Table 1
                
                   Navy Wholesale Costs for Reparable
                        Parts--Fiscal Year 1995

                         (Dollars in millions)

Category                                                         Costs
------------------------------------------------------------  --------
Component repairs                                               $957.4
Purchases                                                        250.4
Material management                                              584.8
======================================================================
Total                                                         $1,792.6
----------------------------------------------------------------------
Source:  Naval Inventory Control Point. 

Despite the billions of dollars invested in inventory, the Navy's
logistics system is still often unable to provide spare parts when
and where needed.  During fiscal year 1995, Navy aircraft were not
mission capable 11.9 percent of the time because spare parts were not
available to repair the aircraft (see fig.  2). 

   Figure 2:  Navy Aircraft
   Readiness Rates--Fiscal Year
   1995

   (See figure in printed
   edition.)

Source:  Navy data. 

One reason parts were not available was that the Navy's system often
does not provide timely deliveries of parts.  The Navy reported that,
between October 1994 and June 1995, parts were not immediately
available to mechanics at operating locations 25 percent of the time
for reparable parts and 43 percent for consumable parts.  When a part
is not available, an end-user requisitions the part from the
wholesale supply system.  According to the Navy's data, the length of
time from requisition to delivery of a part takes, on average, 16
days to operating bases and 32 days to aircraft carriers.  If the
Navy's wholesale system does not have the item in stock (32 percent
of the time for reparable parts), the Navy places the item on
backorder.  According to the Navy's data, customers wait over
2.5 months, on average, to receive backordered items.  The Navy
reported that, as of June 1995, it had more than 31,000 backorders
for reparable parts, worth about $831 million. 

The delay in receiving parts often forces mechanics to cannibalize
parts (removing parts from one aircraft to make repairs on another). 
Between July 1994 and June 1995, the Navy reported that its mechanics
at operating bases and on aircraft carriers cannibalized parts at
least 70,500 times.  This practice is inefficient because the
mechanics have to remove a working part from one aircraft and then
install the part on a different aircraft.  According to Navy
guidance, cannibalization is a symptom of a failure somewhere in the
logistics system, but, in some instances, can be a viable management
tool in keeping aircraft operational.  Aircraft squadron officials at
several locations we visited, however, told us that cannibalizing
parts is a routine practice because the Navy's system does not
consistently provide replacement parts on a dependable basis. 


--------------------
\3 In our report entitled, Defense Inventory:  Opportunities to
Reduce Warehouse Space (GAO/NSIAD-95-64, May 24, 1995), we
recommended that DOD systematically review and dispose of items most
likely to have no future need. 

\4 Wholesale-level stocks are generally held in large quantities at
DLA storage depots.  This stock is used to resupply end-user
locations. 


   SEVERAL FACTORS CONTRIBUTE TO
   INEFFICIENT SYSTEM
------------------------------------------------------------ Letter :4

The Navy's large inventory costs and slow customer service are the
result of several factors, but the largest contributor is a slow and
complex repair pipeline.  According to Navy officials, about 75
percent of component repairs are relatively minor in nature and can
be done by maintenance personnel at the operating bases.  They also
stated that, when a part requires more complex and extensive repair
(about 25 percent of the time), the process can create as many as 16
time-consuming steps as parts move through the repair pipeline (see
fig.  3).  Component parts can accumulate at each step in the
process, which increases the total number of parts that are needed to
meet customer demands and to ensure a continuous flow of parts. 
Tracking parts through each of the 16 steps listed in figure 3, we
estimate, using the Navy's flow time data, that it can take about 4
months, on average, from the time a broken part is removed from an
aircraft until the time it is ready for reissue. 

   Figure 3:  Navy Repair Pipeline
   (for parts requiring repair
   beyond the base level)

   (See figure in printed
   edition.)

As figure 3 illustrates, a broken part can pass through a number of
base- and wholesale-level steps.  At the base level, after a mechanic
removes a broken part from an aircraft, the item is routed through
base maintenance.  If the part cannot be repaired at the base, it is
then sent to a wholesale storage location, where it sits until
scheduled for repair.  Once scheduled, it is inducted into repair
workshops and fixed, then sent to storage or used to fill a
customer's order.  The Navy reported that over 190,000 parts were
fixed through this process during fiscal year 1995 at a cost of about
$957 million. 

While the repair pipeline time can take as long as 4 months, on
average, it could be significantly longer because it does not include
the time parts sit in wholesale storage awaiting repair.  The Navy
does not measure this step in the process; however, this time could
be substantial.  For example, the Navy does not promptly forward
items to repair workshops after they break.  Also, because the Navy
schedules most repairs quarterly, many broken items could sit in
storage for several months before being repaired.  Parts may also sit
in storage because many broken items in the Navy's system are not
needed to support daily operations or war reserves. 

Of the portions of the pipeline that are measured, the time spent
receiving and repairing items at repair facilities accounts for the
largest amount of pipeline time.  Shown in figure 3 as "repair
facility receiving" and "repair workshops," these activities take an
average of 73 days to complete.\5

In examining the repair process at two repair facilities, we found
that parts can be routed through several different workshops, thereby
increasing the time to complete repairs.  Functions such as testing,
cleaning, machining, and final assembly are sometimes done at
different locations at the repair facility.  As a result, parts could
be handled, packaged, and transported several times throughout the
repair process.  According to Navy officials, this is a common
practice at the Navy's repair facilities. 

At one repair facility, we examined 10 frequently repaired pneumatic
and hydraulic components and found that about 85 percent of the
repair time needed for these parts involved activities such as
unpacking, handling, and routing the part to different workshops. 
The remaining 15 percent of the time was spent on the actual repair
of the items.  One item we examined had a repair time of 232 hours. 
However, only 20 hours was needed to actually repair the item; the
remaining 212 hours involved time to handle and move the part to
different locations. 

In addition to delays caused by routing parts to different locations,
mechanics often do not have the necessary consumable parts (nuts,
bolts, bearings, fuses, etc.) that are used in large quantities to
repair parts.  According to Navy officials, having the necessary
consumable parts is another important factor affecting the timely
repair of components.  The Navy calculates that the lack of parts
adds as much as 4 weeks to the average repair time.  As of February
1996, the Navy had 11,753 reparable aircraft parts, valued at $486
million, in storage because parts were not available during the
repair process to complete repairs.  These items, which had been
packaged and moved to a warehouse next to the repair facility, had
been in storage for an average of 9 months.  Figure 4 shows aircraft
components awaiting parts in a warehouse at the Navy's repair depot
at Cherry Point, North Carolina. 

   Figure 4:  Components Awaiting
   Parts at a Navy Repair Depot

   (See figure in printed
   edition.)

The Navy's data indicates that DOD's distribution and transportation
system is slow in moving material among storage, repair, and end-user
facilities and is another factor adding to the length of the repair
pipeline.  For example, with the current system, it takes an average
of 16 days for a customer to receive a part at an operating base
after a requisition is placed.  As of June 1995, the Navy estimated
that over one-half of this time involved DLA's retrieval of the part
from the warehouse and shipment of the part to the customer. 


--------------------
\5 Based on an August 1995 Naval Inventory Control Point analysis. 


   THE NAVY RECOGNIZES THE NEED TO
   IMPROVE LOGISTICS OPERATIONS
------------------------------------------------------------ Letter :5

In recognition of a changing global threat, increasing budgetary
pressures, and the need for improvements to logistics system
responsiveness, the Navy has recently undertaken three primary
initiatives aimed at streamlining logistics operations.  These
initiatives are the regionalization of supply management and
maintenance functions, privatization and outsourcing, and logistics
response time reductions.  The Navy is in the early stages of
developing these initiatives and has not yet identified many of the
specific business practices that it will use to achieve its goals. 
We have not reviewed the feasibility of these initiatives.  However,
we believe the initiatives provide a framework for improvements by
focusing on the speed and complexity of the logistics pipeline. 


      REGIONALIZING SUPPLY
      MANAGEMENT AND MAINTENANCE
      FUNCTIONS
---------------------------------------------------------- Letter :5.1

Under its regional supply initiative, the Navy is consolidating
certain supply operations that are managed by a number of
organizations under regionally managed supply centers.  For example,
naval bases, aviation repair depots, and shipyards each have supply
organizations to manage their parts needs.  These activities often
use different information systems and business practices and their
own personnel and facilities.  Under the new process, one supply
center in each of seven geographic regions will centrally manage the
spare parts for these individual operations, with the objective of
improving parts' visibility and reducing the overhead expenses
associated with separate management functions.  The Navy also hopes
this approach will lead to better sharing of inventory between
locations, thus allowing it to reduce inventories.  The Navy is not
consolidating inventories into fewer storage locations; however, it
is transferring data and management functions to the centers. 

Similarly, maintenance activities, such as base-level repair
operations and depot-level repair operations, are managed by
different organizations.  As a result, maintenance capabilities,
personnel, and facilities may be unnecessarily duplicated.  Under the
regional maintenance initiative, the Navy is identifying these
redundant maintenance capabilities and consolidating these operations
into regionally based repair facilities.  For example, in one region,
the Navy is consolidating 32 locations used to calibrate maintenance
test equipment into 4 locations. 

The Navy believes that, by eliminating the fragmented management
approach to supply management and maintenance, it can decrease
infrastructure costs by reducing redundancies and eliminating excess
capacity.  The Navy also believes that by moving away from highly
decentralized operations, it will be better positioned to improve and
streamline operations Navy-wide.  Both initiatives are in the early
phases, however, so broad-based improvements have not yet occurred. 


      PRIVATIZING AND OUTSOURCING
      FUNCTIONS
---------------------------------------------------------- Letter :5.2

The Navy also has an initiative to outsource and privatize functions. 
This initiative encompasses a broad spectrum of Navy activities, and
possible outsourcing of functions within the reparable parts pipeline
is only one aspect of this effort.  Within the pipeline, the Navy has
identified several material management functions, such as cataloging
of items and overseas warehousing operations, as potential candidates
for outsourcing.  In January 1996, the Navy began developing cost
analyses to determine whether contracting these functions out would
be beneficial.  Navy officials told us that they did not know when
analyses on all candidates would be completed.  One official said,
however, that some candidates may be outsourced in 1997 at the
earliest. 

The Navy expects other activities to be targeted for outsourcing in
the future.  According to Navy officials, those candidates will be
identified as the Navy's initiatives to streamline and improve
operations progress. 


      IMPROVING LOGISTICS SYSTEM
      RESPONSIVENESS
---------------------------------------------------------- Letter :5.3

The objective of this initiative is to reduce the amount of time it
takes a customer, such as a mechanic, to receive a part after placing
an order.  This initiative takes into account the series of processes
that contribute to ensuring customers get the parts they need.  These
processes include placing and processing orders; storing,
transporting, and distributing inventory; and repairing broken items. 
The Office of the Secretary of Defense (OSD) has established
responsiveness goals that the Navy and other services are encouraged
to meet.  OSD wants to reduce the time it takes to fill a customer's
order from wholesale stock to 5 days by September 1996 and to 3 days
by September 1998.  OSD also wants to reduce the average backorder
age to 30 days by October 2001.  The Navy hopes to achieve these
goals by looking at the pipeline as a whole and improving processes
where needed. 

To identify and carry out improvements, the Navy has established a
Logistics Response Time team, consisting of representatives from
across the Navy and from DLA.  Thus far, the team has focused
primarily on collecting the data needed to accurately measure
pipeline performance.  In the spring of 1996, the team expects to
begin identifying areas where process improvements should be applied
to achieve the biggest gains in performance.  This work will then be
used to identify specific practices for carrying out these
improvements. 


   INDUSTRY BEST PRACTICES CAN BE
   USED TO BUILD ON NAVY
   INITIATIVES
------------------------------------------------------------ Letter :6

The airline industry has developed leading-edge practices that focus
on reducing the time and complexity associated with logistics
operations.  We identified four best practices in the airline
industry that have the potential for use in the Navy's system.  These
practices have resulted in significant improvements and reduced
logistics costs, especially for British Airways.  These practices
include the prompt repair of items, the reorganization of the repair
process, the establishment of partnerships with key suppliers, and
the use of third-party logistics services.  When used together, they
can help maximize a company's inventory investment, decrease
inventory levels, and provide a more flexible repair capability.  In
our opinion, they address many of the same problems the Navy faces
and represent practices that could be applied to Navy operations. 
These practices appear particularly suited to Navy facilities that
repair aircraft and components, such as repair depots and operating
bases. 


      REPAIRING ITEMS PROMPTLY
---------------------------------------------------------- Letter :6.1

Certain airlines begin repairing items as quickly as possible, which
prevents the broken items from sitting idle for extended periods. 
Minimizing idle time helps reduce inventories because it lessens the
need for extra "cushions" of inventory to cover operations while
parts are out of service.  In addition, repairing items promptly
promotes flexible scheduling and production practices, enabling
maintenance operations to respond more quickly as repair needs arise. 

Prompt repair involves inducting parts into maintenance shops soon
after broken items arrive at repair facilities.  Prompt repair does
not mean that all parts are fixed, however.  The goal is to quickly
fix only those parts that are needed.  One airline that uses this
approach routes broken items directly to holding areas next to repair
shops, rather than to stand-alone warehouses, so that mechanics can
quickly access broken parts when it comes time for repair.  These
holding areas also give mechanics better visibility of any backlog. 

It is difficult to specifically quantify the benefits of repairing
items promptly because it is often used with other practices to speed
up pipeline processes.  One airline official said, however, that his
airline has kept inventory investment down partly because it does not
allow broken parts to sit idle.  In addition, the Air Force found
through a series of demonstration projects that prompt repair, when
used with other practices, could enable operations to be sustained
with significantly fewer parts.  For example, the Air Force reported
in February 1995 that after the new practices were put in place at
one location, 52 percent ($56.3 million) of the items involved in the
test were potentially excess.  The Air Force tested the new practices
as part of its Lean Logistics program, which aims to improve Air
Force logistics operations. 


      REORGANIZING THE REPAIR
      PROCESS
---------------------------------------------------------- Letter :6.2

One approach to simplify the repair process is the "cellular"
concept.  This concept brings all the resources, such as tooling and
support equipment, personnel, and inventory, that are needed to
repair a broken part into one location, or one "cell." This approach
simplifies the flow of parts by eliminating the time-consuming
exercise of routing parts to workshops in different locations.  It
also ensures that mechanics have the technical support so that
operations run smoothly.  In addition, because inventory is placed
near workshops, mechanics have quick access to the parts they need to
complete repairs more quickly.  British Airways adopted the cellular
approach after determining that parts could be repaired as much as 10
times faster using this concept.  Another airline that adopted this
approach in its engine-blade repair shop was able to reduce repair
time by 50 to 60 percent and decrease work-in-process inventory by 60
percent.  Figure 5 shows a repair cell used in British Airways
maintenance center at Heathrow Airport. 

   Figure 5:  A British Airways
   Repair Center Cell

   (See figure in printed
   edition.)


      ESTABLISHING PARTNERSHIPS
      WITH KEY SUPPLIERS
---------------------------------------------------------- Letter :6.3

Several airlines and manufacturers have worked with suppliers to
improve parts support while reducing overall inventory.  Two
approaches--the use of local distribution centers and integrated
supplier programs--
specifically seek to improve the management and distribution of
consumable items.  These approaches help ensure that the consumable
parts for repair and manufacturing operations are readily available,
which prevents items from stalling in the repair process and is
crucial in speeding up repair time.  In addition, by improving
management and distribution methods, such as using streamlined
ordering and fast deliveries, these approaches enable firms to delay
the purchase of inventory until a point that is closer to the time it
is needed.  Firms, therefore, can reduce their stocks of "just-
in-case" inventory. 

Local distribution centers are supplier-operated facilities that are
established near a customer's operations and provide deliveries of
parts within 24 hours.  One airline that used this approach has
worked with key suppliers to establish more than 30 centers near its
major repair operations.  These centers receive orders electronically
and, in some cases, handle up to eight deliveries a day.  Airline
officials said that the ability to get parts quickly has contributed
to repair time reductions.  In addition, the officials said that the
centers have helped the airline cut its on-hand supply of consumable
items nearly in half. 

Integrated supplier programs involve shifting inventory management
functions to suppliers.  Under this arrangement, a supplier is
responsible for monitoring parts usage and determining how much
inventory is needed to maintain a sufficient supply.  The supplier's
services are tailored to the customer's requirements and can include
placing a supplier representative in customer facilities to monitor
supply bins at end-user locations, place orders, manage receipts, and
restock bins.  Other services can include 24- hour order-to-delivery
times, quality inspection, parts kits, establishment of data
interchange links and inventory bar coding, and vendor selection
management.  One manufacturer that used this approach received parts
from its supplier within 24 hours of placing an order
98 percent of the time, which enabled it to reduce inventories for
these items by $7.4 million--an 84-percent reduction. 

We have issued a series of reports on similar private sector
practices that could be applied to DOD's consumable inventories.\6
These reports recommended new techniques that would minimize DOD's
role in storing and distributing consumable inventories.  Companies,
such as PPG Industries and Bethlehem Steel, have reduced consumable
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 to end-users. 


--------------------
\6 Inventory Management:  DOD Could Build on Progress in using Best
Practices to Achieve Substantial Savings (GAO/NSIAD-95-142, Aug.  4,
1995); Commercial Practices:  DOD Could Reduce Electronics
Inventories by Using Private Sector Techniques (GAO/NSIAD-94-110,
June 29, 1994); and Commercial Practices:  DOD Could Save Millions by
Reducing Maintenance and Repair Inventories (GAO/NSIAD-93-155, June
7, 1993). 


      USING THIRD-PARTY LOGISTICS
      PROVIDERS
---------------------------------------------------------- Letter :6.4

The airlines we contacted provided examples of how third-party
logistics providers can be used to reduce costs and improve
performance.  Third-party firms take on responsibility for managing
and carrying out certain logistics functions, such as storage and
distribution.  Outsourcing these tasks enables companies to reduce
overhead costs because it eliminates the need to maintain personnel,
facilities, and other resources that are required to do these
functions in-house.  It also helps companies improve various aspects
of their operations because third-party providers can offer expertise
that companies often do not have the time or the resources to
develop. 

For example, one airline contracts with a third-party logistics
provider to handle deliveries and pickups from suppliers and repair
vendors, which has improved the reliability and speed of deliveries
and reduced overall administrative costs.  The airline receives most
items within 5 days, which includes time-consuming customs delays,
and is able to deliver most items to repair vendors in 3 days.  In
the past, deliveries took as long as 3 weeks. 

Third-party providers can also assume other functions.  One
third-party firm that we visited, for example, can assume warehousing
and shipping responsibilities and provide rapid transportation to
speed parts to end- users.  The company can also pick up any broken
parts from a customer and deliver them to the source of repair within
48 hours.  In addition, this company maintains the data associated
with warehousing and in-transit activities, offering real-time
visibility of assets. 


      BRITISH AIRWAYS ILLUSTRATES
      BENEFITS OF USING BEST
      PRACTICES
---------------------------------------------------------- Letter :6.5

The best practices that we observed in the airline industry can prove
particularly beneficial when used in an integrated fashion.  One
airline, British Airways, used all of these practices as part of an
overall reengineering effort, and it illustrates the benefits of
using such an integrated approach.  These efforts have helped
transform British Airways from a financially troubled, state-owned
airline into a successful private sector enterprise.  British Airways
today is considered among the most profitable airlines in the world
and has posted profits every year since 1983.  Table 2 shows several
key logistics performance measures of British Airways and the Navy. 



                                Table 2
                
                   British Airways and Navy Logistics
                          Performance Measures

                                British Airways
Key performance measure         (1994)              Navy (1995)
------------------------------  ------------------  ------------------
Consumer-level supply availability rates
----------------------------------------------------------------------
Reparable parts                 86%                 75%

Consumable parts                97%                 57%\a

Average order-ship time         1 to 5 days         16 to 32 days\b


Inventory turnover
----------------------------------------------------------------------
Reparable parts                 1 time every 5      1 time every 2
                                months              years\c

Consumable parts                1 time every 8      1 time every 2
                                months              years\c


Repair times
----------------------------------------------------------------------
Avionics                        11 days             37 days\d
----------------------------------------------------------------------
\a DLA-managed items only. 

\b Represents the time it takes to obtain an item through the
wholesale system when it is unavailable at the consumer level
(includes requisition submission, inventory control point processing,
stock point processing, transportation hold, and transportation
times). 

\c The Navy's turnover rate includes retention stocks that are kept
for future peacetime needs. 

\d Does not include time awaiting parts. 

In addition to implementing the four practices discussed earlier,
British Airways took a number of other steps to successfully
reengineer its logistics operations.  One of the first steps was to
undertake a fundamental shift in corporate philosophy, where British
Airways placed top priority on customer service and cost containment. 
This philosophy directed all improvement efforts, and specific
practices were assessed on how well they furthered these overall
goals.  Also, British Airways approached the process of change as a
long-term effort that requires a steady vision and a focus on
continual improvement.  Although the airline has reaped significant
gains to date, it continues to reexamine and improve its operations. 

Additional steps taken by British Airways to reengineer its
operations include (1) reorienting the workforce toward the new
philosophy; (2) providing managers and employees with adequate
information systems to control, track, and assess operations; and (3)
refurbishing existing facilities and constructing new ones to
accommodate the new practices.\7


--------------------
\7 Our recent report, Best Management Practices:  Reengineering the
Air Force's Logistics System Can Yield Substantial Savings
(GAO/NSIAD-96-5, Feb.  21, 1996), provides additional detail on how
British Airways carried out improvements in each of these areas. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

As part of the Navy's current efforts to improve the logistics
system's responsiveness and reduce its complexity, we recommend that
the Secretary of Defense direct the Secretary of the Navy, working
with DLA, to develop a demonstration project to determine the extent
to which the Navy can apply best practices to its logistics
operations.  We recommend that the Secretary of the Navy identify
several naval facilities to participate in the project and test
specific practices highlighted in this report.  The practices should
be tested in an integrated manner, where feasible, to maximize the
interrelationship many of these practices have with one another.  The
specific practices that should be tested are

  -- inducting parts at repair depots soon after they break,
     consistent with repair requirements, to prevent parts from
     sitting idle;

  -- reorganizing repair workshops using the cellular concept to
     reduce the time it takes to repair parts;

  -- using integrated supplier programs to shift the management
     responsibilities for consumable inventories to suppliers;

  -- using local supplier distribution centers near repair facilities
     for quick shipments of parts to mechanics; and

  -- expanding the use of third-party logistics services to store and
     distribute spare parts between the depots and end-users to
     improve delivery times. 

We recommend that this demonstration project be used to quantify the
costs and benefits of these practices and to serve as a means to
identify and alleviate barriers or obstacles (such as overcoming a
strong internal resistance to change and any unique operational
requirements) that may inhibit the expansion of these practices. 
After these practices have been tested, the Navy should consider
expanding and tailoring the use of these practices, where feasible,
so they can be applied to other locations. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

In its comments on a draft of this report, DOD agreed with the
findings and recommendations.  DOD stated that by September 30, 1996,
the Deputy Under Secretary of Defense (Logistics) will issue a
memorandum to the Secretary of the Navy and the Director of DLA,
requesting that a demonstration project be initiated.  According to
DOD, this project should be started by the first quarter of fiscal
year 1997.  The Navy will conduct a business case analysis and assess
the leading-edge practices highlighted in this report for their
applicability in a Navy setting and, where appropriate, will tailor
and adopt a version of these practices for use in its repair process. 
DOD also stated that it will ask the Navy to submit an in-process
review not later than 6 months after the inception of the business
case analysis.  Finally, DOD agreed that after the practices have
been tested, the Navy should consider expanding and tailoring the use
of these practices so they can be applied to other locations.  DOD's
comments are included in appendix I. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :9

We reviewed detailed documents and interviewed officials about the
Navy's inventory policies, practices, and efforts to improve its
logistics operations.  We contacted officials at the Office of the
Chief of Naval Operations, Washington, D.C.; U.S.  Naval Supply
Systems Command, Arlington, Virginia; U.S.  Naval Air Systems
Command, Arlington, Virginia; U.S.  Atlantic Fleet Command, Norfolk,
Virginia; and the Naval Inventory Control Point, Philadelphia,
Pennsylvania.  Also at these locations, we discussed the potential
applications of private sector logistics practices to the Navy's
operations. 

To examine Navy logistics operations and improvement efforts, we
visited the following locations: 

  -- Naval Aviation Depot, Cherry Point, North Carolina;

  -- Naval Aviation Depot, Jacksonville, Florida;

  -- Oceana Naval Air Station, Virginia Beach, Virginia;

  -- Jacksonville Naval Air Station, Jacksonville, Florida;

  -- Norfolk Naval Air Station, Norfolk, Virginia;

  -- Fleet and Industrial Supply Center, Norfolk, Virginia;

  -- Fleet and Industrial Supply Center, Jacksonville, Florida;

  -- Defense Distribution Depot, Cherry Point, North Carolina;

  -- Defense Distribution Depot, Jacksonville, Florida; and

  -- U.S.S.  Enterprise. 

At these locations we discussed with supply, maintenance, and
aircraft squadron personnel, the operations of the current logistics
system, customer satisfaction, and the potential application of
private sector logistics practices to their operations.  Also, we
reviewed and analyzed detailed information on inventory levels and
usage; repair times; supply effectiveness and response times; and
other related logistics performance measures.  Except where noted,
our data reflects inventory valued by the Navy at latest acquisition
costs.  We did not test or otherwise validate the Navy's data. 

To identify leading commercial practices, we used information from
our February 1996 report that compared Air Force logistics practices
to those of commercial airlines.  This information included an
extensive literature search to identify leading inventory management
concepts and detailed examinations and discussions of logistics
practices used by British Airways, United Airlines, Southwest
Airlines, American Airlines, Federal Express, Boeing, and Tri-Star
Aerospace.  We also participated in roundtables and symposiums with
recognized leaders in the logistics field to obtain information on
how companies are applying integrated approaches to their logistics
operations and establishing supplier partnerships to eliminate
unnecessary functions and reduce costs.  Finally, to gain a better
understanding on how companies are making breakthroughs in logistics
operations, we attended and participated in the Council of Logistics
Management's Annual Conference in San Diego, California.  We did not
independently verify the accuracy of logistics costs and performance
measures provided by private sector organizations. 

We conducted our review from June 1995 to April 1996 in accordance
with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :9.1

We are sending copies of this report to the appropriate congressional
committees; the Secretaries of Defense and the Navy; the Directors of
DLA and the Office of Management and Budget; and other interested
parties.  We will make copies available to others upon request. 

Please contact me on (202) 512-8412 if you or your staff have any
questions concerning this report.  The major contributors to this
report are listed in appendix II. 

Sincerely yours,

David R.  Warren, Director
Defense Management 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.)


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

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Charles I.  (Bud) Patton, Jr.
Kenneth R.  Knouse, Jr. 

DAYTON OFFICE

Matthew B.  Lea
Robert L.  Repasky
Jeanne M.  Willke

NORFOLK OFFICE

Sandra F.  Bell
Jeffrey L.  Overton, Jr.
Patricia F.  Blowe




RELATED GAO PRODUCTS
============================================================ Chapter 0

Best Management Practices:  Reengineering the Air Force's Logistics
System Can Yield Substantial Savings (GAO/NSIAD-96-5, Feb.  21,
1996). 

Inventory Management:  DOD Can Build on Progress in Using Best
Practices to Achieve Substantial Savings (GAO/NSIAD-95-142, Aug.  4,
1995). 

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

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

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

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

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

Commercial Practices:  Opportunities Exist to Reduce Aircraft Engine
Support Costs (GAO/NSIAD-91-240, June 28, 1991). 

*** End of document. ***