Best Management Practices: Reengineering the Air Force's Logistics System
Can Yield Substantial Savings (Chapter Report, 02/21/96, GAO/NSIAD-96-5).

Pursuant to a congressional request, GAO reviewed the Air Force's
management of its reparable parts inventory, focusing on: (1) commercial
airline industry practices to streamline logistics operations and
improve customer service; (2) Air Force reengineering efforts to improve
its logistics system and reduce costs; and (3) barriers to the Air
Force's reengineering efforts.

GAO found that: (1) the commercial airline industry is using highly
accurate information systems, updated repair facilities, and
just-in-time parts inventories to improve logistics operations and
reduce costs; (2) one airline is using an integrated, long-term approach
to reduce its repairs costs and streamline its logistics system; (3)
manufacturers, suppliers, and third party logistics providers, usually
through partnership arrangements, are helping the airlines streamline
their logistics operations; (4) the Air Force has begun reengineering
its logistics operations by removing unnecessary inventory layers,
testing a centralized inventory concept, repairing parts as they break,
and rapidly transporting parts between the end user and the repair
facility, but it needs to adopt additional commercial management
practices to maximize the benefits of its reengineering efforts; and (5)
the Air Force must overcome major barriers such as inherent
organizational resistance to change, the Defense Logistics Agency's
traditional supplier role for expendable parts, top-level management's
lack of support for improving logistics, and inadequate information
systems to reduce inventory control costs and improve service.

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

 REPORTNUM:  NSIAD-96-5
     TITLE:  Best Management Practices: Reengineering the Air Force's 
             Logistics System Can Yield Substantial Savings
      DATE:  02/21/96
   SUBJECT:  Logistics
             Air Force facilities
             Spare parts
             Equipment repairs
             Airline industry
             Military cost control
             Customer service
             Inventory control systems
             Federal supply systems
IDENTIFIER:  Air Force Lean Logistics Program
             DOD Supply System Inventory Report
             
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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

February 1996

BEST MANAGEMENT PRACTICES -
REENGINEERING THE
AIR FORCE'S LOGISTICS SYSTEM CAN
YIELD SUBSTANTIAL SAVINGS

GAO/NSIAD-96-5

Best Management Practices

(709002)


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

  AFB - Air Force Base
  AFMC - Air Force Materiel Command
  ALC - Air Logistics Center
  DLA - Defense Logistics Agency
  DOD - Department of Defense
  FLS - FedEx Logistics Service
  GAO - General Accounting Office
  JLSC - Joint Logistics Systems Center
  TIME - Total Inventory Management for Engineering

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


B-266259

February 21, 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 was prepared in response to your request that we continue
to compare commercial logistics practices with similar Department of
Defense (DOD) operations.  We compared the Air Force's management of
its $33 billion reparable parts inventory with the operations of
leading-edge private sector firms to identify opportunities where
costs could be reduced and service improved.  This report focuses on
(1) best management practices used in the commercial airline industry
to streamline logistics operations and improve customer service, (2)
Air Force reengineering efforts to improve the responsiveness of its
logistics system and reduce costs, and (3) barriers that may stop the
Air Force from achieving the full benefits of its reengineering
efforts. 

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

If you or your staff have any questions concerning this report,
please call me on (202) 512-8412.  Major contributors to this report
are listed in appendix III. 

Sincerely yours,

David R.  Warren,
Director
Defense Management Issues


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


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

As part of GAO's continuing effort to review the Department of
Defense's (DOD) inventory management practices, GAO compared the Air
Force's management of its $33 billion reparable parts inventory with
the operations of leading-edge private sector firms to identify
opportunities where costs could be reduced and service improved.  The
review was done at the request of the Ranking Minority Member,
Subcommittee on Oversight of Government Management and the District
of Columbia, Senate Committee on Governmental Affairs.  This report
focuses on (1) best management practices used in the commercial
airline industry to streamline logistics operations and improve
customer service, (2) Air Force reengineering efforts to improve the
responsiveness of its logistics system and reduce costs, and (3)
barriers that may stop the Air Force from achieving the full benefits
of its reengineering efforts. 


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

The private sector, driven by today's globally competitive business
environment, is faced with the challenge of maintaining and improving
quality service at lower costs.  At the same time, new technology and
management concepts are being introduced that facilitate achieving
those goals.  As a result, many firms have radically changed, or
reengineered, their ways of doing business to meet customer needs and
retain profitability.  Since DOD is facing a similar challenge of
providing better service at a lower cost, DOD and the services must
begin to reexamine their business practices.  With the end of the
Cold War, DOD's logistics system must now support a smaller, highly
mobile, high-technology force.  Also, due to the pressures of
budgetary limits, DOD must seek ways to make logistics processes as
efficient as possible. 

To provide reparable parts for its approximately 6,800 aircraft, the
Air Force uses an extensive logistics system that was based on
management processes, procedures, and concepts that have evolved over
time but are largely outdated.  Reparable parts are expensive items
that can be fixed and used again, such as hydraulic pumps,
navigational computers, wing sections, and landing gear.  The Air
Force's logistics system, often referred to as a logistics pipeline,
consists of a number of activities that play a role in providing
aircraft parts where and when they are needed.  These activities
include the purchase, storage, distribution, and repair of parts,
which together require billions of dollars of investments in
personnel, equipment, facilities, and inventory. 

Although not as large as the Air Force, commercial airlines'
operations are similar to the Air Force's.  They operate fleets of
aircraft that also use reparable parts and operate reparable parts
pipelines that consist of the same activities as the Air Force.  For
both the Air Force and commercial airlines, time plays a crucial role
in the responsiveness of logistics operations and the amount of
inventory needed.  Condensing pipeline times, therefore,
simultaneously improves responsiveness and drives down costs. 
Pipeline complexity also adds to logistics costs by increasing
overhead and contributing to lengthy pipeline times. 


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

The commercial airline industry, including certain manufacturers,
suppliers, and airlines, are using leading-edge practices to improve
logistics operations and reduce costs.  Some manufacturers are
providing aircraft parts to their customers on a just-in-time basis,
and suppliers are assuming inventory management responsibilities for
airlines and manufacturers.  One airline GAO reviewed reengineered
its entire logistics system in an integrated fashion by examining all
aspects of its logistics operations to pinpoint and remove
inefficient processes and functions. 

In recognition of increasing budgetary pressures, the changing global
threat, and the need for radical improvements in its logistics
system, the Air Force has begun a reengineering program aimed at
redesigning its logistics operations.  GAO has urged these changes
and supports them, and has identified additional private sector
practices that may result in even greater savings.  However, there
are several major barriers to bringing about change that must be
addressed and resolved if the Air Force is to reengineer its
logistics system and save billions of dollars. 

The Air Force reengineering effort addresses inherent problems with
its logistics system, but additional steps can be taken to maximize
potential improvements.  Under this effort, the Air Force is
beginning to test certain management practices found in the private
sector, such as removing unnecessary inventory layers, repairing
parts as they break, and rapidly transporting parts between the end
user and the repair facility.  Additional steps GAO identified that
could enhance this program include establishing a top-level DOD
champion of change to support the Air Force initiatives, greater use
of third-party logistics services, closer partnerships with
suppliers, encouraging suppliers to use local distribution centers,
centralizing repair functions, and modifying repair facilities to
accommodate these new practices. 

The success of the Air Force in achieving a "quantum leap" in system
improvements hinges on its ability to address and overcome certain
barriers, such as inherent organizational resistance to change. 
Top-level DOD officials must be supportive of and engaged in Air
Force reengineering efforts to remove these barriers and drive
success.  Also, information systems do not always provide Air Force
managers and employees with accurate, real-time data on the cost,
amount, location, condition, and usage of inventory--elements that
are required to successfully plan, control, and measure inventory
management operations.  Without the support of top-level DOD
management and accurate, real-time inventory information, the
expansion of the Air Force's reengineering efforts could be seriously
impaired. 


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


      PRIVATE SECTOR INITIATIVES
      ARE STREAMLINING LOGISTICS
      SYSTEMS
-------------------------------------------------------- Chapter 0:4.1

The airline industry is developing leading-edge practices that are
primarily focused on reducing the time and complexity associated with
logistics pipelines.  For example, British Airways, a leader in the
airline industry, has an efficient logistics system that has helped
it achieve profitable operations every year from 1983 to 1995. 
Starting in 1981, British Airways began making radical changes to
streamline its logistics system.  It changed the corporate focus,
placing customer service as its number one priority; obtained new
information systems; reorganized its repair processes; and
streamlined the storage and distribution of spare parts.  It
approached this system reengineering in an integrated fashion by
setting a clear corporate strategy, and then simultaneously examining
and improving all aspects of its operations. 

The most dramatic and effective changes GAO observed were in British
Airways' new repair facilities, which incorporated new management
philosophies, material management systems, repair processes, and
information systems with a mostly new workforce of flexible,
team-oriented employees.  These facilities, built to embody the new
corporate vision, have actually magnified the success of British
Airways' reengineering efforts. 

Through these efforts, British Airways has improved inventory data
accuracy to 95 percent; achieved 97 and 86 percent supply
availability rates for expendable and reparable parts, respectively;
and maintained low inventory levels.  Moreover, these efforts have
recently contributed to millions of dollars in companywide savings
during 1993 and 1994. 

GAO also noted that other airlines have pursued initiatives similar
to those taken by British Airways and have likewise seen dramatic
improvements.  In addition, GAO observed other practices that have
enabled airlines to minimize the inventory investments they must make
and reduce the inefficiencies in their logistics pipeline.  For
example, one airline achieved substantial savings in reduced
inventory investment by developing systems to automatically
redistribute inventory to different operating locations when
shortages arise.  Another airline reduced shop repair times from
90 days to 3 days in its wheel shop by rearranging its work stations
to allow for a more orderly flow of parts and by transferring other
functions to the flight line. 


      NEEDED AIR FORCE
      IMPROVEMENTS FACE MAJOR
      BARRIERS
-------------------------------------------------------- Chapter 0:4.2

The Air Force currently operates an inefficient and costly logistics
system.  Although it is difficult to precisely determine actual
logistics costs, for fiscal year 1996, the Air Force estimates it
will cost about $4.6 billion for maintenance of equipment and
aircraft at the depot level.  Also, as of September 1994, the Air
Force had invested about $37 billion in aircraft parts.  Of this
amount, $20 billion, or 56 percent, was needed to support daily
operations and war reserves, and the remaining $16 billion was
divided among safety stock, other reserves, and excess inventory. 

Under the current process, the Air Force can spend several months or
even years to contract for an item and have it delivered or it may
take several months to repair the parts and then distribute them to
the end user.  The complexity of the repair and distribution process
creates as many as 12 different stopping points and several layers of
inventory as parts move through the process.  Parts can accumulate at
each step in the process, which increases the total number of parts
in the pipeline.  One part GAO examined had an estimated repair cycle
time of 117 days; it took British Airways only 12 days to repair a
similar part. 

Recognizing the need for radical improvements to its logistics
system, the Air Force has started a reengineering effort, called
"Lean Logistics," that reflects many of the concepts GAO observed in
the private sector, such as testing a consolidated inventory concept,
providing rapid transportation services, and repairing individual
component parts soon after they break.  All of these actions address
ways of reducing pipeline time, cost, and complexity.  There are,
however, several initiatives not currently included in the Air Force
plan that have worked successfully in the private sector and, if
applied where feasible, could aid in reducing cost and improving
service.  Some of these initiatives include (1) the benefits of
transferring inventory management responsibilities to third parties,
(2) the use of supplier distribution centers that enable suppliers to
respond to customer needs within a few hours, (3) the application of
repair process improvements that reduce the time to conduct repairs,
and (4) the upgrade of facilities that magnify the success of
reengineered processes. 

There are certain barriers to successful reengineering that stand in
the Air Force's way of accomplishing major process improvements in
its logistics system.  For example, (1) the "corporate culture"
within DOD and the Air Force has been traditionally resistant to
change and must become receptive to radical new concepts of
operations; (2) the traditional role of DLA as a supplier of
expendable parts and as a storage and distribution service will be
significantly altered and, until DLA decides what new approaches to
implement, the Air Force's ability to improve repair processes may be
limited; and (3) improvements to outdated and unreliable inventory
data systems require management actions and funding decisions that
must be made outside the responsibility of both Lean Logistics
managers and the entire Air Force.  Issues like these must be
resolved before the Air Force achieves a fully reengineered logistics
system that substantially reduces cost and improves service. 


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

To build on existing Air Force reengineering efforts and achieve
major logistics system improvements, GAO recommends that the
Secretary of Defense commit and engage top-level DOD managers to
support and lead Air Force reengineering efforts to ensure its
success.  In addition, GAO recommends that the Secretary of Defense
direct the Secretary of the Air Force to incorporate additional
leading-edge logistics concepts into the existing Lean Logistics
program, where feasible, and prepare a report to the Secretary of
Defense detailing its strategy to adopt these leading practices. 

GAO further recommends that the Secretary of Defense use the Air
Force report to set forth the actions and milestones to alleviate any
barriers or obstacles, provide the appropriate resources, and ensure
the collaboration between the Air Force and other DOD components that
would enable the Air Force to achieve an integrated approach to
reengineering its processes.  Once these steps are taken, GAO
recommends that the Secretary of Defense direct the Secretary of the
Air Force to institutionalize its reengineering effort. 


   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 the
Air Force's Lean Logistics program should receive top-level DOD
support in achieving its goals.  DOD also stated that the Air Force
should consider incorporating additional leading-edge practices into
its reengineering effort.  According to DOD, the Air Force will be
asked to provide a report to the Secretary of Defense by July 1996
that will discuss the feasibility of including such additional
practices in the Lean Logistics initiative and to address other
concerns raised in this report.  By October 1996, the Office of the
Secretary of Defense will address how it plans to alleviate any
barriers and obstacles identified in the Air Force's report.  DOD
indicated that the Air Force plans to take steps to institutionalize
its reengineering efforts by December 1996. 


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

The private sector, driven by today's globally competitive business
environment, is faced with the challenge of maintaining and improving
quality service at lower costs.  As a result, many firms have
radically changed, or reengineered, their ways of doing business to
meet customer needs.  Since the Department of Defense's (DOD)
environment is also changing, it needs to do the same.  With the end
of the Cold War, DOD's logistics system must now support a smaller,
highly mobile, high-technology force.  Also, due to the pressures of
budgetary limits, DOD must seek ways to make logistics processes as
efficient as possible. 


   THE AIR FORCE'S LOGISTICS
   SYSTEM
---------------------------------------------------------- Chapter 1:1

To provide reparable parts for its aircraft, the Air Force uses an
extensive logistics system that was based on management processes,
procedures, and concepts largely developed decades ago.  As of
September 1994, the Air Force had invested $33 billion in reparable
parts for its fleet of more than 6,800 aircraft.\1 Reparable parts
are items that can be fixed and used again, such as hydraulic pumps,
navigational computers, landing gear, and wing sections.  The Air
Force's logistics system, often referred to as a logistics pipeline,
consists of a number of activities, including the purchase, storage,
distribution, and repair of parts. 

The Air Force's reparable parts pipeline primarily exists to ensure
that aircraft stationed around the world at Air Force installations
can get the parts they need to keep them operational.  It also exists
to support aircraft overhaul activities, when aircraft are
periodically taken out of service for structural repairs and parts
replacements. 

The Air Force Materiel Command (AFMC) is the organization that has
primary responsibility for carrying out pipeline operations.  Its
tasks include determining how much inventory the Air Force needs to
support its fleet, purchasing parts when necessary, and operating the
facilities where major parts and aircraft repair are done.  To carry
out many of these tasks, AFMC has five air logistics centers (ALC)
that are located in different regions throughout the United States.\2
Each center is responsible for managing a portion of the reparable
parts inventory, repairing certain parts, and overhauling specific
types of aircraft.  For fiscal year 1996, the Air Force estimates it
will cost about $4.6 billion for maintenance of equipment and
aircraft at the depot level. 

Other organizations also play a role in pipeline operations,
including Air Force bases around the world, where Air Force aircraft
are stationed.  Although base maintenance personnel handle minor
repairs, they send parts and aircraft to the ALCs for the heavier,
more involved repairs.  The bases, in turn, order replacement parts
through the ALCs, where the bulk of Air Force inventory is stored. 

Another of these organizations is the Defense Logistics Agency (DLA),
which handles the warehousing and distribution operations at each of
the five ALCs.  In general, new and repaired parts are stored at each
center in DLA warehouses until they are needed.  When an order is
placed for a part, DLA retrieves the part from warehouse shelves and
ships it accordingly.  DLA also receives the broken items being
shipped from the bases and stores them until the ALC repair shops are
ready to fix them. 

Figure 1.1 shows how the Air Force's inventory was distributed among
Air Force bases and the ALCs (including DLA warehouses) as of
September 1994.  It also shows the amount of inventory in transit
between the various locations. 

   Figure 1.1:  Location of Air
   Force Reparable Parts

   (See figure in printed
   edition.)

DLA plays another important role in pipeline operations; it provides
expendable parts needed by the various Air Force repair activities. 
Expendable parts--also known as consumables--include items such as
nuts, bolts, and rivets that are used extensively to fix reparable
parts and aircraft.  If these items are not readily available, repair
operations can stall and lead to large quantities of unrepaired
inventory.  We have issued a series of reports on private sector
practices that could be applied to DOD's expendable inventories.\3
Each report recommended new techniques that would minimize DLA's role
in storing and distributing expendable inventory. 


--------------------
\1 The Air Force has also invested an additional $3.7 billion in
expendable parts. 

\2 In June 1995, the Defense Base Realignment and Closure Commission
recommended that two of the five ALCs--McClellan and Kelly Air Force
Bases (AFB)--be closed. 

\3 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); and Commercial Practices:  DOD Could Save Millions by
Reducing Maintenance and Repair Inventories (GAO/NSIAD-93-155, June
7, 1993). 


   SIMILARITIES BETWEEN AIR FORCE
   AND COMMERCIAL AIRLINE
   LOGISTICS OPERATIONS
---------------------------------------------------------- Chapter 1:2

Although not as large as the Air Force, commercial airlines'
operations resemble the Air Force's in several ways.  First, airlines
operate out of a number of different airports, and they must provide
the aircraft at these locations with the parts they need.  Second,
airlines must periodically overhaul their aircraft and ensure that
repair activities get the necessary parts.  Third, the reparable
parts pipeline that exists to fulfill these needs involves the
purchase, storage, distribution, and repair of parts. 

In addition, for both the Air Force and commercial airlines, time
plays a crucial role in the reparable parts pipeline.  The amount of
time involved in the various pipeline activities directly affects the
responsiveness of logistics operations.  For example, the longer it
takes to deliver parts to a mechanic, the longer it will be before
the aircraft can be repaired and ready for takeoff.  Time also has a
significant impact on cost.  For example, the longer it takes to
repair a part, the more inventory an organization must carry to
ensure coverage while that part is out of service.  Condensing
pipeline times, therefore, simultaneously improves responsiveness and
drives down costs. 

Complexity also plays an important role; it adds to costly overhead
and pipeline time.  For example, if an organization holds multiple
layers of inventory at different locations, it must provide the
space, equipment, and personnel to accommodate this inventory at each
location, all of which contribute to overhead costs.  Moreover, if a
part must filter through each of these levels before finally reaching
the end user, such as a mechanic, each stop along the way adds to
pipeline time. 


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

As part of our continuing effort to help improve DOD's inventory
management practices, the Ranking Minority Member, Subcommittee on
Oversight of Government Management and the District of Columbia,
Senate Committee on Governmental Affairs, requested that we compare
the Air Force's management of its $33 billion reparable parts
inventory with the operations of leading-edge private sector firms. 
This report focuses on (1) best management practices used in the
commercial airline industry to streamline logistics operations and
improve customer service, (2) Air Force reengineering efforts to
improve the responsiveness of its logistics system and reduce costs,
and (3) barriers that may stop the Air Force from achieving the full
benefits of its reengineering efforts. 

To obtain DOD's overall perspective on the Air Force's logistics
system and the potential application of private sector practices to
its operations, we interviewed officials at the Office of the Under
Secretary of Defense for Logistics and Air Force Headquarters,
Washington, D.C., and DLA Headquarters, Alexandria, Virginia.  We
also discussed specific Air Force logistics policies and operations
and reviewed inventory records at AFMC, Dayton, Ohio. 

To examine Air Force repair facilities, other logistics operations,
and the new logistics practices being tested in the Air Force, we
visited the Sacramento ALC, McClellan AFB, California; San Antonio
ALC, Kelly AFB, Texas; Oklahoma City ALC, Tinker AFB, Oklahoma; and
Dyess AFB, Texas.  At these locations, we discussed maintenance and
repair activities and processes, inventory management practices,
"Lean Logistics" and reengineering program initiatives, and the
potential application of additional private sector practices.  We
also contacted officials at the Warner Robins and Ogden ALCs to
discuss and document the new business practices being tested and
planned at those locations. 

Except where noted, our analysis reflects inventory valued at the
last acquisition cost, as of September 1994.  As highlighted in this
report, the accuracy of Air Force inventory information is
questionable.  We did not test or otherwise validate the Air Force
inventory data. 

During this review, we selected and physically examined a sample of
items from the Air Force inventory that we believe highlighted the
effect of the current and past DOD inventory management practices. 
This judgmental sample was drawn from E-3 and C-135 unique parts. 
Because we selected these items based on high dollar value, high
levels of inventory on hand, and/or low demand rates, the results of
our sample analysis cannot be projected to the total Air Force
inventory. 

To identify best management practices being used by the private
sector, we reviewed over 200 articles from various management and
distribution publications, identified companies that were highlighted
as developing innovative management practices, and visited the
following organizations in the airline industry: 

  American Airlines Maintenance Center, Tulsa, Oklahoma;

  British Airways Engineering, Heathrow Airport, United Kingdom;

  British Airways Avionics Engineering, Llantrissant, South Wales,
     United Kingdom;

  British Airways Maintenance Cardiff, South Wales, United Kingdom;

  United Airlines, San Francisco, California;

  United Airlines Maintenance Center, Indianapolis, Indiana;

  Boeing Commercial Airplane Group, Seattle, Washington;

  Federal Express, Memphis, Tennessee; and

  Tri-Star Aerospace Corporation, Deerfield Beach, Florida. 

At each company, we discussed and examined documentation related to
the company's reengineering efforts associated with management,
employees, information technology, maintenance and repair processes,
and facilities.  We also contacted Southwest Airlines to obtain
information on its maintenance and material management operations and
visited the Northrop-Grumman Corporation aircraft production facility
in Stuart, Florida, to examine its integrated supplier operations. 

To obtain additional information on supplier partnerships and
implementation strategies, we participated in an International
Quality and Productivity Center symposium on supplier partnerships in
Nashville, Tennessee.  Representatives from John Deere Waterloo
Works; Bethlehem Steel; Federal Express; BP Exploration (Alaska),
Inc.; E.I.  DuPont; Salem Tools; Volvo GM-Heavy Trucks; Berry Bearing
Company; The Torrington Company; Procard, Inc.; Lone Star Gas
Company; Coors Brewing Company; Texas Instruments, Inc.; Allied
Signal; Oryx Energy Company; Timken; Sun Microsystem, Inc.; Dixie
Industrial Supply; Darter, Inc.; Mighty Mill Supply, Inc.; Alloy
Sling Chain Industries; Columbia Pipe and Supply Company; Strong Tool
Company, Inc.; Id One, Inc.; and Magid Glove and Safety Manufacturing
Company, discussed their supplier partnership concepts,
implementation strategies, and results. 

To gain a better understanding of how companies are applying
integrated approaches to their logistics operations, we attended an
integrated supply chain round table, hosted by Procter and Gamble. 
Attending this round table were representatives from Chrysler
Corporation, Digital Equipment Corporation, E.I.  Dupont Corporation,
Levi Strauss, Massachusetts Institute of Technology, Siemens
Corporation, 3M Corporation, and Xerox Corporation.  To determine the
ongoing problems of the current Air Force logistics system, we
reviewed related reports issued since 1990 by us, the Air Force Audit
Agency, and Air Force Logistics Management Agency. 

We conducted our review from August 1993 to August 1995 in accordance
with generally accepted government auditing standards. 


PRIVATE SECTOR PRACTICES INCREASE
EFFICIENCIES AND REDUCE COSTS
============================================================ Chapter 2

Commercial airlines have cut costs and improved customer service by
streamlining their logistics operations.  The most successful
improvements include using highly accurate information systems to
track and control inventory, employing various methods to speed the
flow of parts through the pipeline, shifting certain inventory
management tasks to suppliers, and letting third parties handle parts
repair and other functions. 


   BRITISH AIRWAYS ILLUSTRATES THE
   BENEFITS OF REENGINEERING
---------------------------------------------------------- Chapter 2:1

One of the airlines we studied, British Airways, has substantially
reengineered its logistics operations over the last 14 years.  These
improvements 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. 

British Airways has 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 from
improvements to date, it continues to reexamine operations and is
making continuous improvements to its logistics system. 

British Airways has used an integrated approach to reengineer its
logistics system.  It laid out a clear corporate strategy, determined
how logistics operations fit within that strategy, and tied
organizationwide improvements directly to those overarching goals. 
With this approach, the various activities encompassed by the
logistics pipeline were viewed as a series of interrelated processes
rather than isolated functional areas.  For example, when British
Airways began changing the way parts were purchased from suppliers,
it considered how those changes would affect mechanics in repair
workshops. 

British Airways takes a significantly shorter time than the Air Force
to move parts through the logistics pipeline.  Figure 2.1 compares
British Airways' condensed pipeline times with the Air Force's
current process by showing how long it takes a landing gear component
to move through each organization's system. 

   Figure 2.1:  Comparison of Air
   Force's and British Airways'
   Pipeline Times for a Landing
   Gear Component

   (See figure in printed
   edition.)

British Airways officials described how an integrated approach could
lead to a continuous cycle of improvement.  For example, culture
changes, improved data accuracy, and more efficient processes all
lead to a reduction in inventories and complexity of operations. 
These reductions, in turn, improve an organization's ability to
maintain accurate data, and they stimulate continued change in
culture and processes, both of which fuel further reductions in
inventory and complexity. 

Despite this integrated approach, British Airways' transformation did
not follow a precise plan or occur in a rigid sequence of events. 
Rather, according to one manager, airline officials took the position
that doing nothing was the worst option.  After setting overall
goals, airline officials gave managers and employees the flexibility
to continually test new ideas to meet those goals. 

The five general areas in which British Airways has reengineered its
practices are corporate focus and culture, information technologies,
material management, repair processes, and facilities.  These efforts
are summarized in table 2.1 and are discussed briefly after the table
and in more detail in appendix I. 



                               Table 2.1
                
                Key Characteristics of British Airways'
                         Reengineering Efforts

----------------------------------------------------------------------
Corporate focus and culture

Top management champions of change with full authority to make changes

Integrated pipeline management

Performance measures aligned with corporate goals

Successful continuous improvement

Use of third parties to reduce complexity and cost of pipeline

Information technology

Accurate information on amount, location, condition, and usage of
inventory

Real-time inventory data

Extensive use of data systems to track and manage flow of parts

Timely development of new systems

Material management

Supplier partnerships, reduced supplier base

Supplier-operated local distribution centers to delay purchase of
inventory until needed

Fast, reliable deliveries

Reduction in layers of inventory

High fill rates

Reduction of just-in-case inventory

Repair process

Cellular process, fast turnaround times

Repair of individual parts as they break

Availability of parts when required for repairs

Facilities

Facilities reflect new business practices

Gree-field sites reflect most aggressive changes
----------------------------------------------------------------------

      CORPORATE FOCUS AND CULTURE
-------------------------------------------------------- Chapter 2:1.1

British Airways officials said changing the corporate mind-set was
the single most important aspect of change, as well as the most
difficult.  Before reforms got underway in 1981, British Airways was
an inefficient, over-staffed government organization on the brink of
bankruptcy.  By 1987, when privatization occurred, British Airways
had substantially changed the culture that gave rise to these
problems.  Converting this culture has entailed

  appointing new top management from private industry to bring a
     better business focus to the organization and serve as champions
     of change;

  undertaking an initial round of drastic cost cuts, which included a
     35-percent reduction in the workforce to eliminate redundant and
     unnecessary positions;

  adopting a new corporate focus and strategy in which improving
     customer service became the driving force behind all
     improvements;

  setting new performance measures that reflected customer service
     goals and corporate financial targets;

  instituting ongoing training and education programs to familiarize
     managers and employees with the new corporate philosophy;

  adopting total quality management principles to promote continual
     improvement;

  replacing managers who were unwilling or unable to adapt to the new
     focus; and

  negotiating agreements with employee unions to allow for a more
     flexible workforce. 


      INFORMATION TECHNOLOGIES
-------------------------------------------------------- Chapter 2:1.2

British Airways officials said the airline could not have
successfully reengineered its practices without having the right
technological tools to plan, control, and measure operations.  As a
result, the airline developed three key systems, the most important
of which was an inventory tracking system that provides real-time,
highly accurate visibility of parts and processes.  The three systems
have enabled managers and workers to know what parts are on hand,
where they are, what condition they are in, when they will be needed,
and how well operations are meeting corporate goals. 


      MATERIAL MANAGEMENT
-------------------------------------------------------- Chapter 2:1.3

The airline did not delay initiatives to streamline specific
processes until changes in corporate culture and upgrades in data
systems had been made; it began reexamining its processes
concurrently.  Two of the areas targeted were the way parts flow in
from suppliers as well as how they are stored and distributed
internally.  Initiatives to streamline these areas have included

  shifting from in-house personnel to a third-party logistics company
     the task of arranging, tracking, and ensuring delivery of parts
     from its primarily North American suppliers and to third-party
     repair vendors;

  reducing the number of suppliers from 6,000 to 1,800 and working
     toward more cooperative relationships with the remaining
     suppliers;

  working with key expendable parts suppliers to establish more than
     30 local distribution centers near British Airways' main repair
     depot, such as the one shown in figure 2.2, to provide 24-hour
     delivery of such parts;

  establishing an integrated supplier program in which a key
     expendable parts vendor has taken on responsibility for
     monitoring parts usage and determining when to replenish
     inventory levels;

  consolidating internal stocking points into strategic locations to
     reduce inventory layers and improve responsiveness to end users;
     and

  installing automated storage, retrieval, and delivery systems to
     help ensure quick delivery of parts to end users. 

   Figure 2.2:  Boeing's Local
   Distribution Center at Heathrow
   Airport

   (See figure in printed
   edition.)


      REPAIR PROCESSES
-------------------------------------------------------- Chapter 2:1.4

British Airways also targeted its component repair and aircraft
overhaul operations for change because it wanted to speed up the
repair process.  It has converted a number of workshops to a
"cellular" arrangement, which involves bringing the resources needed
to repair an item or range of items into one location, or "cell" (see
fig.  2.3).  These resources include not only the mechanics and the
equipment directly involved in the repairs, but also support
personnel and inventory.  In the past, all of these resources may
have been scattered among several different sites.  The cellular
approach has reduced repair times by simplifying the flow of parts
through repair workshops and ensuring that mechanics have the support
they need to complete work quickly. 

   Figure 2.3:  A British Airways'
   Repair Center Cell

   (See figure in printed
   edition.)


      FACILITIES
-------------------------------------------------------- Chapter 2:1.5

While reengineering its processes, British Airways decided to
renovate existing structures or build entirely new facilities to
accommodate the new practices.  Converting to cellular operations,
for example, required moving widely scattered workshops under one
roof and providing additional space for inventory and support staff. 
The renovations occurred primarily at British Airways' main repair
depot at London's Heathrow Airport.  Two new facilities were
constructed in South Wales to house avionics component repair and
Boeing 747 aircraft overhaul activities. 

British Airways was able to implement the most aggressive changes
through the new facilities, called "green field sites" (see fig. 
2.4).  British Airways, which undertook this new construction after
determining that it needed additional capacity, used the new
facilities as an opportunity to start with a clean slate.  It was
able to fully implement state-of-the-art practices in workforce
management philosophies, information systems, material management,
and repair processes without being hindered by preexisting
conditions.  For example, one of the most valuable aspects of the
green field sites has been British Airways' ability to establish an
entirely new corporate culture.  Most employees are new hires, and
all had to pass through a rigorous screening process to ensure that
they possessed the skills and personal characteristics conducive to
the flexible, team-oriented environment envisioned. 

   Figure 2.4:  British Airways
   Green Field Site for Avionics
   Repair

   (See figure in printed
   edition.)

   Source:  British Airways.

   (See figure in printed
   edition.)


   IMPROVEMENTS ACHIEVED BY
   BRITISH AIRWAYS
---------------------------------------------------------- Chapter 2:2

British Airways' initiatives have helped improve the responsiveness
of logistics operations and reduced associated costs.  Table 2.2
shows key performance measures that illustrate the result of British
Airways' efforts. 



                               Table 2.2
                
                    British Airways' Key Performance
                                Measures

--------------------------------------------------  ------------------
Inventory data accuracy (percent)                                   95
Supply availability (fill) rate (percent)\a
Reparable parts                                                     86
Expendable parts                                                    97
Inventory levels (months on hand)\b
Reparable parts                                                   5.12
Expendable parts                                                  8.06
----------------------------------------------------------------------
\a This rate is a measure of how often the supply system immediately
fills the requests of a mechanic.  It is calculated by dividing the
total number of parts issued by the total number of requests for that
part. 

\b Inventory levels are expressed in months on hand, which is the
total inventory divided by the amount requested per month (expendable
parts) or amount repaired per month (reparable parts). 


   OTHER AIRLINES' INITIATIVES
   ALSO ILLUSTRATE REENGINEERING
   BENEFITS
---------------------------------------------------------- Chapter 2:3

Other airlines have pursued improvements similar to the steps taken
by British Airways and have likewise seen dramatic results.  For
example, United Airlines adopted cellular repair in its engine blade
overhaul workshop.  As a result, United Airlines has reduced repair
time by 50 to 60 percent and decreased work-in-process inventory by
60 percent. 
Table 2.3 highlights examples of some of the approaches other
companies have used. 



                                    Table 2.3
                     
                      Summary of Other Airlines' Initiatives

Area
addressed    Company      Detail                    Results
-----------  -----------  ------------------------  ----------------------------
Information  American     Developed systems to      Achieved substantial savings
technologie  Airlines     determine how to          by minimizing inventory
s                         allocate inventory        investment while maintaining
                          across American's         parts availability, reducing
                          different operating       the number of flight delays,
                          locations, identify       and averting costly flight
                          potential shortages that  cancellations.
                          could arise, and
                          automatically
                          redistribute inventory
                          to cover these
                          shortages.

Material     United       Developing program in     Expected to reduce amount of
management   Airlines     which Boeing provides     expendable inventory carried
                          kits of expendable parts  at overhaul docks.
                          needed for aircraft
                          overhaul; mechanics
                          would use the parts they
                          needed then return the
                          kit to Boeing, which
                          would bill United only
                          for the parts used.

Component    United       In wheel shop,            Reduced shop repair times
repair       Airlines     rearranged the work       from 90 days to 3 days.
                          stations to make for a
                          more logical flow of
                          parts and transferred
                          certain functions to the  Reduced shop repair time
                          flight line.              from between 45 and 50 days
                                                    to 17 days; saved $38
                          In constant speed drive   million, which includes
                          shop, pinpointed the      reductions in inventory,
                          bottleneck that was       over the 8 years this
                          slowing repairs and       approach has been in place.
                          contracted that function
                          to an outside vendor;
                          also, assigned mechanics
                          to handle specialized,
                          rather than a range of
                          tasks, after determining
                          that mechanic expertise
                          speeded up repairs.

Component    Southwest    Contracts out almost all  Recognized as one of the
and          Airlines     maintenance, thus         most consistently profitable
aircraft                  avoiding costly           airlines in the United
overhaul                  investments in            States and has often served
                          facilities, personnel,    as a benchmark for other
                          and inventory.            carriers.

Facilities   United       Established green field   Facility is in start-up
             Airlines     site for aircraft         phases; final results are
                          overhaul and is using     not available.
                          the cellular workshop
                          approach in overhaul
                          bays; 90 percent of
                          items removed from the
                          aircraft, such as seats
                          and doors, remain in the
                          bay for repair.
--------------------------------------------------------------------------------
Southwest Airlines differs from other airlines; it contracts out
almost all component repair and aircraft overhaul.  In selecting
repair vendors, Southwest emphasizes the quality of repairs because
fewer breakdowns enable it to carry less inventory and keep repair
costs down.  Southwest also emphasizes the speed of repairs.  It
stipulates specific repair turnaround times, and it applies penalties
whenever these times are exceeded. 


   MANUFACTURERS, SUPPLIERS, AND
   THIRD PARTIES CAN HELP
   STREAMLINE OPERATIONS
---------------------------------------------------------- Chapter 2:4

Manufacturers, suppliers, and third-party logistics providers are
also playing a role in streamlining operations and improving the
effectiveness of logistics activities.  In many cases, these vendors
enter partnership-type arrangements with customers that involve
longer term relationships and more open sharing of information.  The
following are examples of vendors that are helping companies better
meet logistics needs. 


      BOEING COMMERCIAL AIRPLANE
      GROUP
-------------------------------------------------------- Chapter 2:4.1

Boeing, one of the world's leading aircraft manufacturers, has
adopted a policy in which it promises next-day shipment for all
standard part orders unless the customer specifies otherwise. 
Through its main distribution center in Seattle, Washington, and a
network of smaller distribution centers worldwide, Boeing is
providing quick order-to-delivery times and making it possible for
customers to move from just-in-case toward just-in-time stocking
policies. 


      TRI-STAR AEROSPACE
-------------------------------------------------------- Chapter 2:4.2

Tri-Star, a distributor of aerospace hardware and fittings, offers an
integrated supplier program in which it works closely with customers
to manage expendable parts inventories.  Its services, which can be
tailored to customer requirements, include placing a Tri-Star
representative in customer facilities to monitor inventory bins at
end-user locations, place orders, manage receipts, and restock bins. 
Tri-Star also maintains data on usage, determines what to order and
when, and provides replenishment on a just-in-time basis.  The
integrated supplier programs entail other services as well, such as
24-hour order-to-delivery times, quality inspection, parts kits,
establishment of electronic data interchange links and inventory bar
coding, and vendor selection management. 

Tri-Star operates integrated supplier programs with nine aerospace
companies, including British Airways, the first airline to enter such
an arrangement with Tri-Star, and United Airlines, a recent addition. 
Table 2.4 shows the types of services, reductions, and improvements
achieved by Tri-Star for some of its customers (designated as A
through E) under the integrated supplier program. 



                                    Table 2.4
                     
                     Tri-Star Integrated Supplier Program Key
                       Characteristics (data as of February
                                      1995)

Company               A           B           C           D           E
--------------------  ----------  ----------  ----------  ----------  ----------
Date                  10/16/93    1/17/92     1/7/94      7/29/92     7/9/93

Length of contract    5           5           3           3           3
(years)

Number of line items  8,858       8,000       4,500       1,888       1,900

Numbers of stocking   29,505      3,404       13,153      not         4,311
points/bins                                               available

Number of customer    45          7           3           1           1
facilities

Amount of inventory   $7,350,000  $2,000,000  $1,800,000  $300,000    $200,000
reduction

Percent reduction     84          50          60          30          29

Fill rate (percent)   98.0        88.7        96.7        99.0        94.3

Order ship time       24          48          48          24          24
(hours)

Frequency of          Daily       Daily       Daily       Daily       Daily
deliveries

Number of orders      300         200         150         15          75
filled daily
--------------------------------------------------------------------------------
Source:  Tri-Star Aerospace. 


      FEDEX LOGISTICS SERVICES
-------------------------------------------------------- Chapter 2:4.3

FedEx Logistics Services (FLS), a division of express delivery
pioneer Federal Express, enables companies to shed certain logistics
functions while boosting their capabilities to respond to operational
or customer needs.  Among its services is PartsBank, in which FLS
stores a company's spare parts at FLS warehouses; takes orders; and
retrieves, packs, and ships needed parts.  Once a replacement part is
received, the customer can place the broken item in the package, and
Federal Express will pick up the item and deliver it to the source of
repair within 48 hours.  FLS provides coverage 24 hours a day, 365
days a year.  It also maintains the data associated with these
activities and can provide real-time visibility of assets in the
warehouse or in transit.  In addition to PartsBank, FLS will develop
customized services, which involves examining a client's distribution
practices and finding ways to eliminate wasteful steps. 


AIR FORCE REENGINEERING EFFORTS
CAN BE EXPANDED, BUT OBSTACLES
MUST BE OVERCOME
============================================================ Chapter 3

In recognition of increasing budgetary pressures, the changing global
threat, and the need for radical improvements to its logistics
system, the Air Force has begun a reengineering program aimed at
redesigning its logistics operations.  This program, called Lean
Logistics, is testing many of the same leading-edge concepts found in
private sector that have worked successfully in reducing cost and
improving service.  The Air Force, however, could expand and improve
Lean Logistics, where feasible, by including closer "partnerships"
with suppliers and third-party logistics services, testing the
cellular concept in the repair process, and modifying its facilities. 
Incorporating some of these practices will require the collaboration
of DLA and other DOD components.  Also, to adopt these concepts Air
Force-wide, the Air Force must improve its information system
capabilities. 

Certain issues must be resolved before the Air Force achieves a fully
reengineered logistics system that substantially reduces cost and
improves service.  For example, (1) the basic DOD culture must become
receptive to radical new concepts of operations, (2) the traditional
role of DLA as a supplier of expendable parts and as a storage and
distribution service will be significantly altered, and (3)
improvements to outdated and unreliable inventory data systems
require management actions and funding decisions that must be made
outside the responsibility of both Lean Logistics managers and the
entire Air Force. 


   THE AIR FORCE OPERATES AN
   OUTDATED LOGISTICS SYSTEM
---------------------------------------------------------- Chapter 3:1

The current Air Force logistics system is slow and cumbersome.  Under
the current process, the Air Force can spend several months or even
years to contract for an item or piece parts and have it delivered or
it may take several months to repair the parts and then distribute
them to the end user.  The complexity of the repair and distribution
process creates many different stopping points and layers of
inventory as parts move through the system.  Parts can accumulate at
each step in the process, which increases the total number of parts
in the pipeline. 

The Air Force has developed both a three-level and a two-level
maintenance concept to repair component parts.  Under the three-level
concept (organizational, intermediate, and depot), a broken part must
pass through a number of base-level and depot-level steps in the
pipeline (see fig.  3.1).  After a broken part is removed from the
aircraft by a mechanic, it is routed through the base repair process. 
If the part cannot be repaired at the base, it is sent to an ALC and
enters the depot repair system.  After it is repaired, the part is
either sent back to the base or returned to the DLA warehouse, where
it is stored as serviceable inventory.  When DLA receives a request
for a part, it ships the part to the base, where it is stored until
needed for installation on an aircraft. 

   Figure 3.1:  Air Force Repair
   Cycle

   (See figure in printed
   edition.)

Currently, the Air Force estimates that this repair cycle takes an
average of 63 days to complete.  This estimate, however, is largely
based on engineering estimates that do not provide an accurate
measure of repair cycle time.  The actual repair time may be
significantly longer because the Air Force does not include in its
estimate the time a part sits in the repair shop or in storage
awaiting repair. 

Under the two-level maintenance concept (organizational and depot),
items that were previously repaired at the intermediate base
maintenance level will be repaired at the depot level, thus
significantly reducing the logistics pipeline, inventory levels, and
maintenance personnel and equipment at the base level. 


      BILLIONS HAVE BEEN INVESTED
      IN PARTS THAT MIGHT BE
      UNNECESSARY
-------------------------------------------------------- Chapter 3:1.1

In part because of the length of its pipeline, the Air Force has
invested $33 billion in reparable aircraft parts and $3.7 billion in
expendable parts, totaling $36.7 billion as of September 1994.\1

The Air Force estimates that $20.4 billion of its total inventory is
needed to support daily operations and war reserves.  The Air Force
allocates the remaining 44 percent to other types of reserves to
ensure that it will not run out of parts if they are needed.  The
reserve inventory, valued at $16.3 billion, consists of the following
categories: 

  $1.7 billion for safety stocks, which are stocks purchased to
     ensure the Air Force will not run out of routinely needed parts;

  $2.8 billion for numeric stockage objective items, which are parts
     that are not routinely needed but are considered critical to
     keep an aircraft in operational status, so they are purchased
     and stored just in case an item fails; and

  $11.8 billion for items considered in "long supply," which is a
     term denoting that more stock is on hand than what is needed to
     meet current demands, safety, and numeric stockage objective
     levels, but this stock is not currently being considered for
     disposal. 

Figure 3.2 details the Air Force's allocation of its inventory to
daily operations, war reserves, and other categories of stock. 

   Figure 3.2:  Allocation of Air
   Force Inventory as of September
   1994

   (See figure in printed
   edition.)


--------------------
\1 DOD's Supply System Inventory Report lists the Air Force as having
$27.5 billion in reparable parts and $3.5 billion in consumable
parts.  The difference between these values and the inventory values
presented in this report is caused by DOD's use of its standard
valuation methodology.  For example, DOD reports excess inventory at
salvage value (2 percent of last acquisition cost).  Also, DOD
reduces the value of reparable parts requiring repair by the
estimated cost of repair. 


   THE AIR FORCE RECOGNIZES THE
   NEED FOR CHANGE
---------------------------------------------------------- Chapter 3:2

Air Force officials have said the Air Force can no longer continue
its current logistics practices if it is to effectively carry out its
mission in today's environment.  Budgetary constraints in recent
years have led to substantial reductions in personnel, leaving the
remaining workforce to deal with a logistics operation that has
traditionally relied on large numbers of personnel to make it work. 
At AFMC, the organization primarily responsible for supporting the
Air Force fleet, the workforce was reduced by 18.5 percent between
1990 and 1994.  Moreover, in June 1995, the Defense Base Realignment
and Closure Commission recommended that two of AFMC's five ALCs be
closed.  As these ALCs are eventually closed, AFMC will have to find
ways to accommodate their workload with the resources that remain. 

In addition, the end of the Cold War has led to an evolution of the
military services' roles and missions.  DOD's emphasis today is on
sustaining a military force that can respond quickly to regional
conflicts, humanitarian efforts, and other nontraditional missions. 
These changing roles and missions, combined with ongoing fiscal
constraints, has resulted in DOD's call for a smaller, highly mobile,
high-technology force and a leaner, more responsive logistics system. 

To address logistics needs, in 1994 DOD issued a strategic plan for
logistics that sets forth a series of improvements.  This plan, which
reflects many of the philosophies found in the private sector,
outlines improvements in three areas.  First, it calls for reducing
logistics response times--the time necessary to move personnel,
inventory, and other assets--to better meet customer needs.  Second,
it calls for a more "seamless" logistics system.  The different
activities comprising logistics operations are to be viewed and
managed as a series of interdependent activities rather than isolated
functional areas.  Third, the plan seeks a streamlined infrastructure
to help reduce overhead costs associated with facilities, personnel,
and inventory. 


   SIGNIFICANT CHANGES ENVISIONED
   THROUGH AIR FORCE INITIATIVES
---------------------------------------------------------- Chapter 3:3

The Air Force has described its initiatives to improve its logistics
system as the cornerstone of all future improvements.  These efforts,
spearheaded by AFMC, are aimed at dramatically improving service to
the end user while simultaneously reducing pipeline time, excess
inventory, and other logistics costs.  The initiatives, called Lean
Logistics, are still in the early stages and therefore still
evolving.  Nonetheless, AFMC began testing certain practices through
small-scale demonstration projects in October 1994, with promising
results to date.  In addition, AFMC plans to begin testing
additional, broader-based process improvements in fiscal year 1996. 

The demonstration projects underway as of March 1995 involved less
than 1 percent of Air Force inventory items and tested the following
primary concepts:  (1) consolidated serviceable inventories, in which
minimum levels of required inventory were stored in centralized
distribution points in ALCs; (2) rapid transportation of parts
between bases and ALCs; (3) repair of broken parts at ALCs as they
arrive from bases or as centralized inventory levels drop;\2 and (4)
improved tracking of parts through the repair process.  Each ALC
tested some combination of these concepts and was identifying the
information system improvements needed to adopt these practices on a
wider scale. 

The tests scheduled to begin in fiscal year 1996 are aimed at
broadening these efforts.  Teams involving personnel from AFMC
headquarters and each ALC have been redesigning five underlying
business processes to overhaul the way parts are bought, distributed,
and repaired.  The teams are now determining how the redesigned
processes must fit together so that reforms can be carried out in an
integrated manner.  Table 3.1 shows the business areas being
addressed and briefly describes how each process will be changed. 



                               Table 3.1
                
                  Air Force Lean Logistics Projects--
                               March 1995

Business area           Current process         Future process
----------------------  ----------------------  ----------------------
Requirements            Purchase or repair of   Automated process to
determination           items based on          buy or repair items
                        forecasts produced by   based on actual
                        three different         demands created when
                        requirement             items are taken from
                        computation systems     the consolidated
                        and manual              serviceable inventory.
                        intervention.

Stock control and       Complex distribution    Automated process to
distribution            process characterized   ship items where and
                        by multiple layers of   when needed.
                        inventory, lack of
                        asset visibility, and
                        manual intervention.

Workload management     Complex process to      Streamlined process to
                        match requirements      channel Air Force
                        with internal Air       repair requirements to
                        Force sources of        any source of repair
                        repair and available    (Air Force,
                        funding.                contractor, and other
                                                services).

Production              Lengthy aircraft        Increased throughput,
                        overhaul and component  reduced operating
                        repair processes.       expenses, and reduced
                                                inventories.

Depot maintenance       Management information  Management information
business area           and measures focused    and measures focused
operations              on output efficiency.   on repair cost.
----------------------------------------------------------------------

--------------------
\2 ALC repair shops traditionally "batch" items for repair based on
schedules developed almost 1 year in advance.  This approach causes
items to sit idle awaiting repair, sometimes for extended periods,
until enough items accumulate to make a batch. 


      RESULTS
-------------------------------------------------------- Chapter 3:3.1

The test projects currently underway have demonstrated that the Air
Force could sustain operations with significantly fewer parts.  For
example, at the Sacramento ALC, where all four concepts are being
tested, 62 percent ($52.3 million) of the items involved in the
project were identified as potential excess.  Similarly, at the
Warner Robins ALC,
52 percent ($56.3 million) of the items in its test program were
identified as potential excess. 


   THE AIR FORCE CAN TEST
   ADDITIONAL LEADING-EDGE
   PRACTICES
---------------------------------------------------------- Chapter 3:4

AFMC has recently developed a preliminary plan for implementing its
Lean Logistics concepts commandwide.  Although these concepts could
substantially improve operations, Air Force efforts to date are not
as extensive as they could be.  A number of leading-edge practices
that have worked successfully in the private sector in reducing cost
and improving service are not currently incorporated into the Lean
Logistics program.  These include the following: 

  Use of third parties:  The current Lean Logistics program does not
     include the use of third-party logistics services to store and
     distribute reparable parts between the bases and depot repair
     centers.  As discussed in chapter 2, these services not only
     provide delivery of parts within 48 hours, they also alleviate
     information technology shortfalls by independently tracking
     parts through the storage and distribution process. 

  Fast information system capability improvements:  The Air Force
     expects the information technology improvements needed to expand
     Lean Logistics initiatives to come from two sources--commercial
     software for interim solutions to its current needs and DOD-wide
     system improvements being managed by the Joint Logistics Systems
     Center (JLSC) for long-term solutions.  These long-term
     solutions may not be available for 5 to 10 years.  In contrast,
     British Airways fully implemented information system
     improvements within 3 years. 

  Supplier partnerships and reduced supplier base:  The Air Force has
     not incorporated the concept of an integrated supplier into the
     Lean Logistics program.  As discussed in chapter 2, British
     Airways and some aircraft manufacturers have significantly
     improved their logistics systems using this concept.  Improved
     availability of expendable parts is critical to reducing the
     amount of time it takes to repair component parts. 

  Supplier distribution centers:  Similar to the integrated supplier
     program, the supplier distribution center is a technique used by
     British Airways to minimize the amount of time it takes to
     receive parts from a suppler.  Currently, the Lean Logistics
     program is not testing this concept. 

  Cellular concept for repair processes:  To minimize the amount of
     time it takes to repair parts, British Airways adopted the
     cellular concept that centralizes the functions and resources
     needed to repair a part (e.g., testing, cleaning, machining,
     tooling, and supplies) in one location.  British Airways also
     applied this concept to the aircraft overhaul facilities.  The
     Lean Logistics program has not planned to test this concept. 

  Modernize existing or build new facilities to reflect new business
     practices:  To adopt the cellular concept and improve the
     storage and distribution of parts, British Airways modernized
     existing facilities.  To maximize the impact of their entire
     reengineered process and corporate culture, British Airways
     built green field site facilities and staffed them with
     employees selected for their technical competence as well as
     their flexibility for new processes and team orientation. 
     Although new construction and modernization of logistics
     facilities is a very difficult aspect of reengineering for the
     Air Force because of base closures and funding limitations, this
     aspect of reengineering could be a consideration when future
     logistics decisions are made for supporting new weapon systems. 

A number of these additional initiatives would require new
relationships between the Air Force and commercial suppliers,
distributors, and other third parties.  To develop these
relationships, the Air Force and DLA must work together because,
under the current system, DLA is the primary supplier to the Air
Force for expendable items and provides a storage and distribution
service for Air Force reparable parts. 


   OBSTACLES MAY PREVENT THE AIR
   FORCE FROM MAKING NECESSARY
   CHANGES
---------------------------------------------------------- Chapter 3:5

Several major obstacles stand in the way of the Air Force's efforts
to institutionalize its reengineered logistics system.  These
obstacles include the following: 

  The "corporate culture" within DOD and the Air Force has been
     traditionally resistant to change.  Organizations often find
     changes in operations threatening and are unwilling to change
     current behavior until proposed ideas have been proven.  This
     kind of resistance must be overcome if the Air Force is to
     expand its radical new concepts of operations. 

  One of the largest obstacles to speeding up repair times is the
     lack of expendable parts needed to complete repairs.  With a new
     approach to better serve its military customers, the role of DLA
     as the traditional supplier of consumable items and as a storage
     and distribution service is changing.  However, at this point,
     DLA is still considering alternative approaches to manage
     expendable parts and is discussing these new concepts with
     contractors and the services.  Until these new approaches are
     implemented, the Air Force's ability to improve the repair
     process may be limited. 

  Some of the biggest gains available to the Air Force, such as
     improvements to outdated and unreliable inventory data systems,
     require management actions and funding decisions that must be
     made outside the responsibility of both Lean Logistics managers
     and the entire Air Force.  In addition, some of these systems
     will not be fully deployed throughout the Air Force for 5 to 10
     years. 

Changes in corporate culture must accompany efforts to transform
operations if progress is to continue within the Air Force
reengineering program.  According to a Lean Logistics official, the
current mindset may hinder Lean Logistics for several reasons. 
First, people find radical changes in operations threatening and, as
is common in many organizations, resist efforts to change.  Second,
Lean Logistics is still a relatively new concept, and personnel lack
a thorough understanding of what it is and how it will improve
operations.  As a result, they are unwilling to change current
behaviors until Lean Logistics concepts are proven.  Third, Lean
Logistics does not yet have support from all of the necessary
functional groups within AFMC, the Air Force, and DOD.  This support
will be needed if the full range of changes is to be carried out. 

In June 1994, we convened a symposium on reengineering that brought
together executives from five Fortune 500 companies that have been
successful in reengineering activities.\3 The following principles
for effective reengineering, reflecting panel members' views, emerged
from the symposium: 

  Top management must be supportive of and engaged in reengineering
     efforts to remove barriers and drive success. 

  An organization's culture must be receptive to reengineering goals
     and principles. 

  Major improvements and savings are realized by focusing on the
     business from a process rather than functional perspective. 

  Processes should be selected for reengineering based on a clear
     notion of customer needs, anticipated benefits, and potential
     for success. 

  Process owners should manage reengineering projects with teams that
     are cross-functional, maintain a proper scope, focus on customer
     metrics, and enforce implementation timelines. 

Panel members at the symposium expressed the view that committed and
engaged top managers must support and lead reengineering efforts to
ensure success because top management has the authority to encourage
employees to accept reengineered roles.  Also, top management has the
responsibility to set the corporate agenda and define the
organization's culture and the ability to remove barriers that block
changes to the corporate mindset.  For example, the Vice President of
Reengineering at Aetna Life and Casualty Insurance Company said, "Top
management must drive reengineering into the organization.  Middle
management won't do it." The panelists agreed that a lack of top
management commitment and engagement is the cause of most
reengineering failures. 

According to the Corporate Headquarters Program Manager of Process
Management at IBM, "To be successful, reengineering [needs to be]
embedded in the fiber of our people until it becomes a way of life."
To develop a corporate culture that is receptive to reengineering,
the panelists emphasized the importance of communicating
reengineering goals consistently on all levels of the organization,
training in skills such as negotiation and conflict resolution, and
tailoring incentives and rewards to encourage and reinforce desired
behaviors. 

One of the largest obstacles to speeding up repair times is the lack
of expendable parts needed to complete repairs.  Supplier-operated
local distribution centers could help ensure quick availability of
such parts.  Similarly, integrated supplier programs, in which
certain inventory management responsibilities are shifted to the
supplier, are also aimed at improving expendable item support.  We
have strongly urged DLA to endorse the use of aggressive just-in-time
concepts whose principal objectives are to transfer inventory
management responsibilities to key distributors. 

Existing information systems are also an obstacle because they do not
always provide the accurate, real-time information needed to expand
current efforts beyond their limited scope.  According to AFMC's
deputy chief of staff for logistics, AFMC is working with systems
that have not been significantly improved in 15 years.  As a result,
much of the data used to run the Lean Logistics demonstration
projects have been collected manually, a task that project leaders
said would be impossible under an Air Force-wide program. 

Improvements to material management and depot maintenance information
systems--key to success of the Lean Logistics initiatives--are under
the control of JLSC.  JLSC is staffed with personnel from the
military services and DLA, and is trying to standardize data systems
across DOD.  These systems, however, will not be fully deployed
throughout the Air Force for 5 to 10 years.  Currently, AFMC
officials are working with JLSC officials to define Air Force
requirements.  They are also working to develop short-term solutions
to enable the Lean Logistics program to move forward using commercial
software.  According to one Lean Logistics official, however, AFMC
may have trouble pursuing and later adopting many of these short-term
solutions because funding for systems outside of JLSC's umbrella is
severely limited. 


--------------------
\3 Reengineering Organizations:  Results of a GAO Symposium
(GAO/NSIAD-95-34, Dec.  13, 1994). 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:6

The current Air Force logistics system is inefficient and costly
compared with leading-edge business practices.  AFMC has recognized
the need for radical change and is beginning to pursue some of these
practices.  Because some of the results to date have been promising,
these efforts should be supported and expanded.  The Air Force,
however, could build on its reengineering effort by including
additional practices pursued and successfully adopted by the private
sector. 

In addition, current and future AFMC initiatives will be seriously
hindered unless top-level DOD commitment and engagement is received,
and all affected Air Force organizations and other DOD
components--specifically DLA and JLSC--fully support AFMC's efforts. 
DLA's support will be critical for developing local distribution
centers and integrated supplier programs to meet the Air Force
requirements for expendable parts.  JLSC officials may have to find
ways that will allow the Air Force the flexibility to use existing
commercial software to resolve existing information technology
weaknesses and expand its reengineering initiatives. 

Without these logistics system improvements, the Air Force will
continue to operate a logistics system that results in billions of
dollars of wasted resources.  Given the budget reductions it has
already absorbed, the Air Force might not be able to provide
effective logistics support to future DOD operations. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 3:7

To build on the existing Air Force reengineering efforts and achieve
major logistics system improvements, we recommend that the Secretary
of Defense commit and engage top-level DOD managers to support and
lead Air Force reengineering efforts to ensure its success.  We also
recommend that the Secretary of Defense direct the Secretary of the
Air Force to incorporate additional leading-edge logistics concepts
into the existing Lean Logistics program, where feasible.  Specific
concepts that have been proven to be successful and should be
considered, but have not been incorporated in the current Air Force
program include

  installing information systems that are commercially available to
     track inventory amounts, location, condition, and requirements;

  counting existing inventory once new systems are in place to ensure
     accuracy of the data;

  establishing closer relationships with suppliers;

  encouraging suppliers to establish local distribution centers near
     major repair depots for quick shipment of parts;

  using integrated supplier programs to shift to suppliers the
     responsibility for managing certain types of inventory;

  using third-party logistics services to manage the storage and
     distribution of reparable parts and minimize DOD information
     technology requirements;

  reorganizing workshops, using the cellular concept where
     appropriate, to reduce the time it takes to repair parts; and

  integrating successful reengineered processes and flexible,
     team-oriented employees in new facilities (like the green field
     sites) to maximize productivity improvements, as new facilities
     are warranted to meet changes in the types and quantities of
     aircraft. 

In addition, we recommend that the Secretary of the Air Force (1)
prepare a report to the Secretary of Defense that defines its
strategy to adopt these leading practices and expand the
reengineering program Air Force-wide and (2) establish milestones for
the report's preparation and issuance and identify at a minimum

  the barriers or obstacles that would hinder the Air Force from
     adopting these concepts;

  the investments (people, skills, and funding) required to begin
     testing these new concepts and the projected total costs to
     implement them Air Force-wide;

  the potential savings that could be realized; and

  the Air Force and other DOD components whose support will be needed
     to fully test these new concepts. 

We further recommend that the Secretary of Defense use the Air
Force's report to set forth the actions and milestones to alleviate
any barriers or obstacles (such as overcoming resistance to
organizational change and improving outdated inventory information
systems), provide the appropriate resources, and ensure the
collaboration between the Air Force and other DOD components that
would enable the Air Force to achieve an integrated approach to
reengineering its processes.  Once these steps are taken, we
recommend that the Secretary of Defense direct the Secretary of the
Air Force to institutionalize a reengineering effort that is
consistent with successful private sector reengineering efforts. 
These efforts include

  communicating reengineering goals and explaining them to all levels
     of the organization,

  training in skills to enable employees to work across functions and
     modifying this training as necessary to support the
     reengineering process, and

  tailoring rewards and incentives to encourage and reinforce desired
     behaviors. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 3:8

In commenting on a draft of this report, DOD generally agreed with
the findings, conclusions, and recommendations, and stated that the
Air Force's Lean Logistics program should receive top-level DOD
support in achieving its goals.  DOD also stated that the Air Force
should consider incorporating additional leading-edge practices into
its reengineering effort.  According to DOD, the Air Force will be
asked to provide a report to the Secretary of Defense by July 1996
that will discuss the feasibility of including such additional
practices in the Lean Logistics initiative and to address other
concerns raised in this report.  By October 1996, the Office of the
Secretary of Defense will address how it plans to alleviate any
barriers and obstacles identified in the Air Force's report.  DOD
indicated that the Air Force plans to take steps to institutionalize
its reengineering efforts by December 1996. 


DETAILS ON BRITISH AIRWAYS'
REENGINEERING INITIATIVES
=========================================================== Appendix I

This appendix details how British Airways reengineered its logistics
practices in five general categories--corporate focus and culture,
information technology, material management, repair processes, and
facilities--to reduce the time and complexity associated with
operations. 


   CORPORATE FOCUS AND CULTURE
--------------------------------------------------------- Appendix I:1

British Airways could not have made such significant changes in
operations without transforming the corporate mind-set, airline
officials said.  British Airways' corporate focus emphasizes serving
customer needs while continually finding ways to keep costs down. 
The customer is defined not only as the passenger on the aircraft but
also as the person on the receiving end of any activity.  This focus
has been the driving force behind all operational improvements, and
bringing managers and employees around to this way of thinking has
involved a number of different efforts over time. 

The changes began with new top management.  In 1981, the British
government appointed a new chairman, who in turn brought in other
executives, after deciding to convert the state-owned airline into a
private sector enterprise.\1 These executives were recruited from
private industry to bring a better business focus to the
organization, and their mission was to make the airline fit for
privatization.  Accomplishing this mission entailed first saving
British Airways from bankruptcy and then setting the airline on a
course to ensure long-term success. 

The organization that the new management inherited suffered from
several problems.  An industrywide recession had pushed the airline
to the brink of bankruptcy after years of increasing debt and meager
profits.  Moreover, according to one top official, British Airways
was grossly overstaffed, managers' time was spent addressing one
crisis after another, and employee morale had collapsed.  Forty
different industrial disputes were going on at one time.  As a
result, "horror stories" about customer service abounded, said the
chief executive officer in a 1987 speech.  The official said a high
proportion of British Airways' customers chose the airline because
they had to, not because they wanted to. 

Changing the culture that allowed these problems to arise was one of
the most important but difficult aspects of British Airways'
turnaround, said one manager.  To begin the transformation, the new
management took two key steps.  First, it launched a series of
cost-cutting measures aimed at averting bankruptcy.  These measures
included reducing the workforce from 55,000 to 36,000 between 1981
and 1983 to eliminate redundant positions and other positions that
added no value to the operation.  Second, it set forth a long-term
strategy for success.  This strategy placed top priority on serving
the customer better, and it emphasized the importance of continually
finding ways to reduce costs. 

To carry out this strategy, management took a number of steps to
reorient the workforce to the new corporate philosophy.  One of the
first steps was to institute ongoing training and education programs. 
The first course, entitled "Putting People First," was offered in
1983 and introduced the workforce to the customer service concepts
British Airways wanted to promote.  Subsequent courses have included
training in total quality management principles, trends in the
airline industry, and the ways different areas within British Airways
contribute to the overall operation. 

In addition, British Airways targeted managers for intensive
training.  Over time, managers have been schooled in measuring
customer service performance, implementing new production methods,
and benchmarking against other companies, among other things.  In
addition, British Airways Engineering, the division responsible for
logistics operations, has helped its top managers attain master's
degrees in business. 

Another key step in the reorientation of the workforce was the
development of new performance measures.  Early on, management began
setting stringent financial and customer service targets, a departure
from past practices in which the few measures that did exist carried
little meaning for employees.  In addition, management changed the
type of measures used to better reflect corporate goals.  For
example, maintenance shops previously focused on their own isolated
goals, such as the number of hours worked or the number of parts
produced each week.  Under current measures, the shops are assessed
on how well repair operations are supporting the British Airways
fleet, such as through reduced repair turnaround time.  British
Airways also bolstered these measures by adopting "rallying cries"
for improvements.  For example, the expression "Times Two" called for
halving costs or doubling productivity in a number of important
areas, and it became the standard under which all improvements were
to be measured. 

Finally, British Airways sought to create an environment that
promoted change.  Toward that end, it instituted total quality
management principles to enable employees at all levels to identify
and carry out improvements.  It also negotiated agreements with
employee unions to allow managers to assign workers to different jobs
whenever necessary.  It has also tried to alleviate employee fears
that efficiencies gained through improvements would lead to job
losses.  In the late 1980s, British Airways made the strategic
decision to aggressively market its repair services to other
airlines.  As a result, additional capacity resulting from
improvements could be used for this additional work. 

Despite the long-term success of these efforts, one manager said the
process of change has sometimes been painful.  For example, managers
who were unwilling or unable to adapt to the new philosophy were let
go.  Even British Airways' chief executive officer, who had been
brought in as part of the new management team, replaced two-thirds of
his staff because they hindered reforms. 


--------------------
\1 Privatization occurred in 1987, when the British government sold
British Airways shares in a public offering. 


   INFORMATION TECHNOLOGIES
--------------------------------------------------------- Appendix I:2

British Airways' success in reengineering logistics practices has
hinged on giving managers adequate technological tools to plan,
control, and measure operations.  British Airways has developed a
number of systems to aid improvements, but three key systems have
been credited with being the most valuable.  The first is an
inventory tracking and control system that provides accurate,
real-time data on the amount of inventory on hand and its location,
condition, and usage.  The second is a material requirements planning
system that determines what parts British Airways will need to
support operations.  The third is a decision support system that
quickly gives managers the data needed to assess performance. 

The most crucial of the three systems has been the inventory tracking
and control system, called Total Inventory Management for Engineering
(TIME).  One manager said that British Airways developed TIME because
it believed that without accurate inventory data, any improvements
would be "built on sand." TIME maintains data accuracy of more than
95 percent and enables British Airways to track inventory and
associated processes.  Bar-coded tags are attached to each item or
package of items, and employees use laser scanners to update TIME on
the items' status each time the items change hands.  Employees also
scan in their bar-coded identification cards to establish clear
ownership of the items.  Moreover, TIME works with other systems to
direct the flow of parts.  For example, when a part is scanned in,
TIME shows whether the part is to go to storage, a particular repair
shop, or a customer.  It also enables British Airways to place orders
electronically with suppliers. 

British Airways began developing TIME in 1984 after internal audits
showed that data accuracy in some areas was as low as 55 percent. 
British Airways used a systematic approach to determine what data was
needed to manage operations, and then it designed in capabilities,
such as the bar-coding features, to ensure the system maintained its
accuracy.  Moreover, when bringing the system on line in 1987,
British Airways counted all inventory to establish an accurate
baseline.  This exercise resulted in savings substantial enough to
pay for the system's implementation because it revealed items that
previously had not been recorded in inventory.  According to one
manager, the switch to TIME was so dramatic, but so important, that
British Airways was willing to risk a disruption in service or even a
total grounding of aircraft to bring the system on line. 

Soon after TIME was on line, British Airways developed the material
requirements planning system to gain even greater control over
inventory.  This system taps into TIME and other systems to forecast
what reparable parts will be needed to support operations.  On the
basis of those forecasts, it determines which items need to be
repaired when, how many reparable and expendable components are
needed to accomplish those repairs, and whether purchases are
necessary.  This capability has helped British Airways avoid critical
shortages, identify excess inventory, avoid unnecessary expense, and
ensure that parts do not stall in workshops for lack of the
components needed to complete repairs. 

British Airways used a flexible, pilot program approach to bring the
material requirements planning system on line.  After selecting
commercially available software, British Airways installed the
software in one shop and then went through several iterations of
identifying and removing bugs from the system and updating employees
on the upgrades.  Through this approach, British Airways was able to
have the software ready for widespread application within 1 year
despite substantial modification.  Implementation was nearly complete
1 year later.  According to British Airways, typical implementation
times for material requirements planning systems in the industry is 4
years.  Therefore, using the pilot program approach shortened the
implementation time by 2 years. 

The third system, called FOCUS, is a decision support system that can
extract data from numerous systems and provide customized reports for
managers.  It has enabled British Airways to base decisions on actual
data rather than estimates by providing almost instant access to
information such as inventory levels, fill rates, and inventory
turnover.  Because of the system's speed and flexibility, managers
can assess numerous aspects of operations.  For example, FOCUS can
provide information on an individual part; a functional group, such
as avionics; or overall inventory.  FOCUS was developed from
commercially available software in 1983.  Although FOCUS was
developed before TIME and the material requirements planning system,
its use grew significantly as the quality of data improved. 


   MATERIAL MANAGEMENT
--------------------------------------------------------- Appendix I:3

With culture change and information system improvements underway,
British Airways began targeting specific processes in the reparable
parts pipeline.  Among these processes were the methods used to
order, store, and distribute inventory.  The goal has been to improve
the availability of parts without substantially increasing inventory
and other costs.  To accomplish this goal, British Airways has
concentrated on relationships with outside vendors as well as on the
way inventory is handled internally. 

British Airways has changed the way parts are transported to and from
suppliers and third-party repair vendors, who are primarily in North
America.  It contracts with a freight forwarder to gather the items
to be shipped, arrange transportation, track the items while they are
in transit, ensure that the items get through customs, and deliver
the items to British Airways' or the vendors' receiving areas. 

This setup has enabled British Airways to improve the reliability of
deliveries.  It receives most items within 5 days, including customs
delays, and is able to deliver most items to third-party repair
vendors within
3 days.  In the past, deliveries ranged anywhere from 3 days to 3
weeks.  In addition, British Airways has reduced its administrative
burden and associated costs.  The freight forwarder has also helped
British Airways identify where items are stalling and the cost of
those delays. 

British Airways has also changed the nature of its relationships with
suppliers.  First, it has decreased the number of suppliers from
6,000 to 1,800, with further reductions planned as part of an overall
move toward more cooperative relationships with fewer suppliers. 
Second, it has worked with key expendable parts suppliers to
establish local distribution centers.  These centers, located near
British Airways' main repair depot, receive orders electronically and
then deliver items within 24 hours.  Twenty-five suppliers have
opened these centers, and seven more are planned. 

The local distribution centers have contributed to reductions in
reparable parts repair times because they help ensure the
availability of the expendable items needed to complete repairs.  The
centers' quick response times have also enabled British Airways to
carry less expendable inventory.  British Airways hopes to eventually
purchase 80 percent of all of its parts, which includes reparable
items, through the centers.  Currently, about 20 percent of purchases
are through the centers. 

British Airways is also moving toward giving suppliers a more active
role in managing its inventory of expendable parts.  In a pilot
program, one local distribution center supplier, Tri-Star Aerospace,
is responsible for monitoring parts usage and determining how much
inventory is needed to maintain a 60-day supply in inventory bins. 
Tri-Star also inspects the items to ensure that they meet quality
standards and maintains data so that any item can be traced back to
individual manufacturing lots. 

Moreover, before the items are shipped from the center, Tri-Star
records on British Airways' inventory system that the items have been
received, which enables Tri-Star items to circumvent British Airways
receiving docks and go directly to storage areas.  Under this
program, British Airways can receive up to eight deliveries a day,
with British Airways staff handling transport from the center to
storage areas. 

British Airways has also used several methods to streamline the way
inventory is handled internally.  It has consolidated inventory
storage locations into four main stores at its major repair
facilities, and these stores are supplemented by a pattern of
substores throughout repair workshops.  This setup replaces the 60 to
70 storage locations previously used.  Although British Airways
considered consolidating inventories further, it determined that it
needed a certain number of substores to provide adequate support to
repair operations. 

In addition, British Airways has installed automated storage and
retrieval systems and uses pneumatic tubes, similar to those found at
bank drive-in windows, to deliver parts within minutes to mechanics. 
When possible, it also provides mechanics with preestablished kits of
parts needed to accomplish specific repairs.  When repairs are
complete, the kit is returned to the stores and replenished. 


   REPAIR PROCESSES
--------------------------------------------------------- Appendix I:4

British Airways targeted its repair processes for improvement because
it wanted to speed up repair time.  It has converted to cellular
workshops, which involves bringing the resources needed to repair an
item or a range of items into one location, or one "cell." These
resources include not only the mechanics and the equipment directly
involved in the repairs, but also support personnel and inventory. 
This approach, which British Airways has applied to component and
aircraft overhaul operations, has helped eliminate obstacles that
slow repairs or stop them altogether.  British Airways adopted the
cellular concept after determining that items could be repaired as
much as 10 times faster if these obstacles were removed. 

The cellular approach simplifies the repair process in a number of
ways.  First, it eliminates the need to route items to several
different locations to complete repairs, thereby eliminating travel
time and the time required to pack and unpack items whenever they
change locations.  In the past, functions such as testing,
inspection, painting, and machining could each have been handled at
different sites.  Second, the approach places the inventory needed to
complete repairs near the workshops so that mechanics can get quick
access to parts.  In fact, British Airways began converting to
consolidated inventory points and pattern of substores with the
cellular approach in mind.  Moreover, broken parts awaiting repair
are also stored near workshops so that employees can easily track any
backlog and have parts readily at hand when it comes time for repair. 
Third, each cell has its own planners, schedulers, and other support
staff to ensure that operations run smoothly. 

The process of redesigning repair operations gave both managers and
employees the opportunity to rethink British Airways' approaches to
repair.  When searching for new approaches, managers benchmarked
British Airways' operations against those of other companies to see
what has worked well in other industries, and used links with
education resources such as Warwick University.  After settling on
the cellular concept, managers sought employees' suggestions on how
to design the new workshops.  Moreover, close examination of existing
operations led British Airways to determine that outside vendors
could handle certain tasks more economically.  For example, British
Airways sold its engine repair facility to General Electric, and the
airline now contracts with General Electric for engine repair. 
British Airways was also able to make informed decisions on processes
that did not lend themselves to cells.  For example, some high
capital cost activities, such as metal plating, remain centralized. 

The cellular approach has helped reduce repair time and provided
other benefits.  British Airways has found that repair cells can now
handle the same or increased volume with fewer staff.  It has also
facilitated the use of performance measures.  For example, because
repairs are concentrated in one area rather than spread out among
several, British Airways can more accurately assess the time and
resources needed for repair.  It can also better assess how managers
and mechanics are performing and reward top performers accordingly. 


   FACILITIES
--------------------------------------------------------- Appendix I:5

British Airways has renovated existing structures or built entirely
new facilities to accommodate many of the reengineered practices. 
These improvements have enabled British Airways to carry out the new
storage and distribution practices, cellular operations, and various
management philosophies.  The new facilities have allowed for the
most aggressive changes in these areas because they gave British
Airways the freedom to start with a clean slate. 

British Airways has focused renovation efforts on its primary
maintenance and storage base at London's Heathrow Airport.  Existing
structures were refurbished to provide space for the consolidated
inventories, cellular workshops, storage points for broken parts, and
support staff work areas.  They were also equipped with automated
storage and retrieval systems and the pneumatic tube inventory
delivery system.  Previously, many of the inventory storage points,
repair workshops, and staff offices were scattered among several
locations.  Inventory storage, retrieval, and delivery had also been
largely manual. 

British Airways constructed the new facilities away from existing
operations.  These green field sites, located 2 hours away in Wales,
consist of separate avionics component overhaul and Boeing 747
aircraft overhaul facilities.  The new facilities were built
specifically to allow British Airways to incorporate state-of-the-art
practices without being hindered by preexisting conditions.  The
airline undertook these projects after determining that it needed the
additional capacity to accommodate continued fleet expansion and
anticipated growth in its repair work for other airlines. 

British Airways has set forth one overriding objective for each
facility.  For avionics, the goal is to achieve a 3-day repair
turnaround time, measured from the time a broken item enters the
facility until the time it leaves fully repaired.  For the 747
facility, the goal is to repair the greatest number of aircraft
possible, which also requires quick turnaround time.  Moreover, each
facility is a stand-alone business that must compete with outside
repair vendors for British Airways work.  All costs incurred by the
facilities are directly attributable to their operations, and their
long-term survival depends on their ability to generate profits. 

With these issues in mind, British Airways scrutinized every
potential activity to be housed at the facilities and eliminated
those that did not contribute each facility's primary objective.  For
example, both facilities have kept layers of inventory to a minimum. 
The avionics facility holds no bench stock,\2 and it eliminated
selected work benches and other workshop furniture so that mechanics
would have no place to stockpile inventory.  All inventory must be
requested through the facility's central automated storage,
retrieval, and delivery system.  The 747 facility also requires
mechanics to request inventory through its central storage area,
although it allows for a minimal amount of bench stock. 

In addition, British Airways recruited a mostly new workforce to
staff the facilities.  This approach has provided for perhaps the
most dramatic difference from existing operations because it enabled
British Airways to build each facility's culture from the ground up. 
For example, each facility has only one labor union compared with
several at existing operations, which has made for a more flexible
workforce.  Employees can be easily reassigned to other jobs as
workload demand dictates.  Moreover, to help create a
labor-management partnership, each facility has established a council
comprised of management and staff to oversee operations and address
workplace issues.  In addition, the facilities have stressed the
importance of teamwork.  At each facility, all employees, including
managers, wear white coveralls, use the same entrance, and eat at the
same cafeteria.  The number of managers has also been kept to a
minimum.  The 747 facility, for example, has 18 managers out of a
total workforce of 500. 

When recruiting the new workforce, British Airways put applicants
through a rigorous screening process.  British Airways first
developed a set of criteria defining the technical skills and
personal characteristics required for the flexible, team-oriented
environment envisioned.  Applicants then passed through a series of
steps, including a 2-hour test and interview, before finally being
selected. 

The results of these efforts show that these new approaches have had
an effect on British Airways' operations.  At the avionics facility,
more than 23 percent of the items met the 3-day standard within the
first 9 months of operations, and more are expected to do so as the
facility matures.  Shops began being moved from existing operations
at Heathrow in December 1993, with the last shop transferred in
October 1994.  In addition, the avionics facility has been able to
handle a greater volume of repairs than Heathrow with fewer staff. 
At the 747 facility, aircraft turnaround time as of November 1994 was
20 percent faster than similar operations at Heathrow.  Planners
originally thought the facility, which opened in June 1993, would
take 2 years to overtake Heathrow's turnaround times. 



(See figure in printed edition.)Appendix II

--------------------
\2 Bench stock typically consists of frequently used expendable
items, and it is generally kept near work areas to allow for quick
access by mechanics. 


COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the Department of Defense's (DOD)
letter dated January 2, 1996. 

GAO COMMENTS

1.  DOD noted that the Supply System Inventory Report as of September
30, 1994, lists the Air Force as having $27.5 billion in reparable
parts and $3.5 billion in consumable parts.  DOD also notes that
$23.5 billion
(76 percent) of this inventory is active inventory and $7.5 billion
(24 percent) is inactive.  In contrast, we reported inventory values
of $33 billion for reparable parts, $3.7 billion for consumable
items, and provide a more detailed breakout of this inventory,
illustrating that 66 percent is allocated by the Air Force for daily
operations and war reserves, with the remaining 44 percent allocated
to other categories. 

We now explain in this report that our inventory values differ
because DOD reduces the value of excess inventory to 2 percent of its
acquisition cost and reparable inventory is reduced by the cost to
repair an item.  The values we use are calculated by the Air Force to
reflect the full value of the inventory computed at the last
acquisition cost for each item.  The allocation of inventory to
"active" and "inactive" stock differs because DOD considers safety
and numeric stock objective items as active inventory, while we have
reported it as reserves designed to ensure the Air Force will not run
out of parts if they are needed. 

2.  DOD noted that the initiatives cited in this report are being
considered to aid in the reduction of pipeline and lead times, such
as privatization efforts, direct vendor delivery programs, prime
vendors, flexible manufacturing, and aggressive use of commercial
transportation.  We agree that DOD is taking steps to reduce pipeline
and lead times and have highlighted the most promising initiatives
being pursued by the Air Force as of March 1995.  We also recognize
that DOD is constantly evaluating new initiatives. 

We believe, however, that DOD can be more aggressive in using these
new techniques and apply them over a wider range of items that it
manages.  For example, direct vendor delivery programs still involve
DOD in the management of inventory.  Some of the more aggressive
techniques highlighted in this report, such as the integrated
supplier concept, have the potential to minimize DOD's inventory
management responsibilities for these items, while simultaneously
reducing repair cycle times and inventory levels. 

3.  DOD noted that the Defense Logistics Agency (DLA) is not an
obstacle to Air Force efforts to institutionalize its reengineering
efforts, and that DLA is aggressively working with the Air Force to
develop creative, tailored methods of support for expendable parts. 
We agree that DLA is not an obstacle to Air Force reengineering
efforts and have revised the report to reflect that position.  Since
June 1993, when we recommended the Secretary of Defense direct the
services and DLA to develop test programs that will determine the
applicability of commercial practices to the military industrial
centers, including the use of supplier parks, DLA has studied the
supplier park and other concepts.  As DOD notes, DLA is about to
issue a broad area announcement that will seek creative industry
approaches to support industrial maintenance centers.  DLA is
discussing with the Air Force a contractor demonstration program at
the Warner Robins Air Logistics Center, and expects to enter into
similar discussions with the other services. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

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

Donna M.  Heivilin
Kenneth R.  Knouse, Jr. 

CINCINNATI REGIONAL OFFICE

Robert L.  Repasky
Cheryl K.  Andrew
Kimberly A.  Gugino
Frederick J.  Naas
Jeanne M.  Willke

DALLAS REGIONAL OFFICE

Hilary C.  Sullivan
Rebecca L.  Pierce

EUROPEAN OFFICE

B.  Patrick Hickey




RELATED GAO PRODUCTS
============================================================ Chapter 1

High Risk Series:  Defense Inventory Management (GAO/HR-95-5, Feb. 
1995). 

Defense Supply:  Acquisition Leadtime Requirements Can Be
Significantly Reduced (GAO/NSIAD-95-2, Dec.  20, 1994). 

Defense Management:  Impediments Jeopardize Logistics Corporate
Information Management (GAO/NSIAD-95-28, Oct.  21, 1994). 

Organizational Culture:  Use of Training to Help Change DOD Inventory
Management Culture (GAO/NSIAD-94-193, Aug.  30, 1994). 

Air Force Logistics:  Improved Backorder Procedures Will Save
Millions (GAO/NSIAD-94-103, Apr.  20, 1994). 

Defense Management Initiatives:  Limited Progress in Implementing
Management Improvement Initiatives (GAO/T-AIMD-94-105, Apr.  14,
1994). 

Defense Management:  Stronger Support Needed for Corporate
Information Management Initiative to Succeed (GAO/AIMD/NSIAD-94-101,
Apr.  12, 1994). 

Air Force Logistics:  Base Maintenance Inventories Can Be Reduced
(GAO/NSIAD-94-8, Dec.  15, 1993). 

Air Force Logistics:  Some Progress, But Further Efforts Needed to
Terminate Excess Orders (GAO/NSIAD-94-3, Oct.  13, 1993). 

Defense Inventory:  More Accurate Reporting Categories Are Needed
(GAO/NSIAD-93-31, Aug.  12, 1993). 

Depot Maintenance:  Issues in Management and Restructuring to Support
a Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993). 

Financial Systems:  Weaknesses Impede Initiatives to Reduce Air Force
Operations and Support Costs (GAO/NSIAD-93-70, Dec.  1, 1992). 

Air Force Requirements:  Cost of Buying Aircraft Consumable Items Can
Be Reduced by Millions (GAO/NSIAD-93-38, Nov.  18, 1992). 

Defense Logistics Agency:  Why Retention of Unneeded Supplies
Persists (GAO/NSIAD-93-29, Nov.  4, 1992). 

Financial Management:  Internal Control Weaknesses Impede Air Force's
Budgeting for Repairable Items (GAO/AFMD-92-47, Aug.  26, 1992). 

Air Force Logistics:  Improved Redistribution of Retail Inventories
Needed (GAO/NSIAD-91-165, July 10, 1991). 

Financial Audit:  Air Force's Base-Level Financial Systems Do Not
Provide Reliable Information (GAO/AFMD-91-26, Jan.  31, 1991). 

Strategic Missiles:  Logistics Support for Advanced Cruise Missile
Based on Outdated Plans (GAO/NSIAD-90-178, Sept.  13, 1990). 

Air Force Logistics:  Increased Costs for Spare Parts Safety Levels
Are Not Justified (GAO/NSIAD-90-148, Aug.  23, 1990). 

Defense Inventory:  Growth in Air Force and Navy Unrequired Aircraft
Parts (GAO/NSIAD-90-100, Mar.  6, 1990). 

Financial Audit:  Air Force Does Not Effectively Account for Billions
of Dollars of Resources (GAO/T-AFMD-90-10, Feb.  23, 1990). 


*** End of document. ***