Inventory Management: The Army Could Reduce Logistics Costs for Aviation
Parts by Adopting Best Practices (Letter Report, 04/15/97,
GAO/NSIAD-97-82).

Pursuant to a congressional request, GAO reviewed the Army's logistics
system for aviation parts, focusing on: (1) the current performance of
the Army's logistics system; (2) the Army's efforts to improve the
logistics system and reduce costs; and (3) opportunities where best
practices could be incorporated into the Army's logistics operations.
GAO did not test or otherwise validate the Army's data.

GAO noted that: (1) the Army's efforts to improve its logistics pipeline
for aviation parts and reduce logistics costs could be enhanced by
incorporating best practices GAO has identified in the private sector;
(2) the Army's current repair pipeline, characterized by a $2.6 billion
investment in aviation parts, is slow and inefficient; (3) several
factors contribute to the long pipeline time; (4) these factors are: (a)
broken reparable parts move slowly between field units and a repair
depot; (b) reparable parts are stored in warehouses for several months
before and after they are repaired; (c) repair depots are inefficiently
organized; and (d) consumable parts are not available to mechanics when
needed; (5) the Army has recognized that it must improve its logistics
systems; (6) under a recently established program called "Velocity
Management," the Army plans to focus on and improve four key areas:
repair of components, order and shipment of parts, inventory levels, and
financial management; (7) the program is in the initial stages of
development and has had limited success in actual Army-wide process
improvements to date; (8) best practices used in the airline industry
provide opportunities to build on the Army's efforts to improve its
logistics pipeline; (9) GAO identified key best practices to address
each of the four factors contributing to the Army's long pipeline time:
(a) third-party logistics services can assume warehousing and
distribution functions, and provide rapid delivery of parts and
state-of-the-art information systems that would speed the shipment of
parts between depots and field locations; (b) eliminating excess
inventory and quickly initiating repair actions can reduce the amount of
time parts are stored, improve the visibility of production backlogs,
and reduce the need for large inventory to cover operations while parts
are out of service; (c) cellular manufacturing techniques can improve
repair shop efficiency by bringing all the resources needed to complete
repairs to one location, thereby minimizing the current time-consuming
exercise of routing parts to different workshops located hundreds of
yards apart; and (d) innovative supplier partnerships can increase the
availability of consumable parts, minimize the time it takes to deliver
parts to mechanics, and delay the purchase of parts until they are
needed to complete repairs; and (10) although GAO cannot say that these*

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

 REPORTNUM:  NSIAD-97-82
     TITLE:  Inventory Management: The Army Could Reduce Logistics Costs 
             for Aviation Parts by Adopting Best Practices
      DATE:  04/15/97
   SUBJECT:  Military cost control
             Military aircraft
             Spare parts
             Inventory control
             Logistics
             Airline industry
             Military inventories
             Equipment repairs
IDENTIFIER:  Army Velocity Management Program
             DOD Prime Vendor Program
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Committee on Armed Services,
U.S.  Senate

April 1997

INVENTORY MANAGEMENT - THE ARMY
COULD REDUCE LOGISTICS COSTS FOR
AVIATION PARTS BY ADOPTING BEST
PRACTICES

GAO/NSIAD-97-82

Inventory Management

(709176)


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

  CCAD - Corpus Christi Army Depot
  DLA - Defense Logistics Agency
  DOD - Department of Defense

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


B-272662

April 15, 1997

The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United States Senate

Dear Senator Levin: 

This report is the 10th in a series of reports comparing the
Department of Defense's (DOD) logistics practices with those of the
private sector.\1 As you requested, we are continuously examining
DOD's inventory management practices to identify areas where costs
can be reduced and problems can be avoided if DOD adopts leading-edge
practices that have been applied successfully by the private sector. 

This report focuses on the Army's logistics system for aviation
parts.  It discusses the potential application of best practices to
the Army's operations.  The objectives of this review were to (1)
examine the current performance of the Army's logistics system, (2)
review the Army's efforts to improve the logistics system and reduce
costs, and (3) identify opportunities where best practices could be
incorporated into the Army's logistics operations. 


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


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

The private sector, driven by a global competitive environment, faces
the challenge of improving services while lowering costs.  As a
result, many companies have adopted innovative business practices to
meet customer needs and retain profitability.  DOD faces a similar
challenge of providing better service at a lower cost.  With the end
of the Cold War, DOD's logistics systems must support a smaller,
highly mobile, high-technology force.  Due to the pressures of
budgetary constraints, DOD also must seek ways to make logistics
processes as efficient as possible. 

To provide reparable parts for its approximately 7,300 aircraft
(primarily helicopters),\2 the Army uses an extensive logistics
system that is based on a management process, 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, and landing gear. 
The Army'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.  The Army's depot
repair location for helicopters and aviation parts is the Corpus
Christi Army Depot (CCAD), Texas. 

The Army also relies on this pipeline for consumable parts (e.g.,
nuts, bearings, and fuses) that are used extensively to fix reparable
parts and aircraft.  The Defense Logistics Agency (DLA) provides most
of the consumable parts that Army repair activities need and handles
a large part of the warehousing and distribution of reparable parts. 

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

Over the last 10 years, we have issued more than 30 reports
addressing the Army's logistics problems.  These reports have
highlighted issues related to large inventory levels, inefficient
repair practices, and information system problems.  While the Army
has taken actions to correct its logistics problems, these problems
have not been completely resolved. 


--------------------
\2 The Army also provides helicopter and component repair services to
the Air Force and the Navy. 


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

The Army's efforts to improve its logistics pipeline for aviation
parts and reduce logistics costs could be enhanced by incorporating
best practices we have identified in the private sector.  The Army's
current repair pipeline, characterized by a $2.6 billion investment
in aviation parts, is slow and inefficient.  For example, in one case
we examined, it took the Army 4 times longer than a commercial
airline to ship a broken part to the depot and complete repairs. 
Also, for 24 different types of items examined, we calculated it took
the Army an average of 525 days to repair and ship the parts to field
units.  The Army estimates only 18 days (3 percent) should have been
needed to repair the items.  The remaining 507 days (97 percent) were
used to transport or store the parts or were the result of unplanned
repair delays.  Because of this lengthy pipeline time, the Army buys,
stores, and repairs more parts than would be necessary with a more
efficient system. 

Several factors contribute to the long pipeline time.  These factors
are (1) broken reparable parts move slowly between field units and a
repair depot, (2) reparable parts are stored in warehouses for
several months before and after they are repaired, (3) repair depots
are inefficiently organized, and (4) consumable parts are not
available to mechanics when needed. 

The Army has recognized that it must improve its logistics systems. 
Under a recently established program called "Velocity Management,"
the Army plans to focus on and improve four key areas:  repair of
components, order and shipment of parts, inventory levels, and
financial management.  The program is in the initial stages of
development and has had limited success in actual Army-wide process
improvements to date.  At CCAD, depot officials are not actively
pursuing this program's initiatives.  Instead, depot officials are
initiating process improvements under a local program designed to
identify the actual cost of operations and improve the efficiency of
CCAD operations. 

Best practices used in the airline industry provide opportunities to
build on the Army's efforts to improve its logistics pipeline.  We
identified key best practices to address each of the four factors
contributing to the Army's long pipeline time: 

  -- Third-party logistics services can assume warehousing and
     distribution functions and provide rapid delivery of parts and
     state-of-the-art information systems that would speed the
     shipment of parts between depots and field locations. 

  -- Eliminating excess inventory and quickly initiating repair
     actions can reduce the amount of time parts are stored, improve
     the visibility of production backlogs, and reduce the need for
     large inventory to cover operations while parts are out of
     service. 

  -- Cellular manufacturing techniques can improve repair shop
     efficiency by bringing all the resources (tooling, support
     equipment, etc.) needed to complete repairs to one location,
     thereby minimizing the current time-consuming exercise of
     routing parts to different workshops located hundreds of yards
     apart. 

  -- Innovative supplier partnerships can increase the availability
     of consumable parts, minimize the time it takes to deliver parts
     to mechanics, and delay the purchase of parts until they are
     needed to complete repairs. 

Although we cannot say that these practices can be successfully
integrated into the Army's system, we believe they are compatible
with many aspects of the Army's operations and the Velocity
Management program.  Because of the significant benefits realized by
private firms that have adopted these practices, we further believe
that the potential benefits in adopting these practices are enough to
justify a demonstration project involving the Army and DLA.  This
demonstration project could determine with certainty the feasibility
and cost-effectiveness of these practices. 


   THE ARMY OPERATES A SLOW,
   INEFFICIENT, AND COSTLY
   LOGISTICS SYSTEM
------------------------------------------------------------ Letter :3

The Army's current depot repair pipeline, characterized by a $2.6
billion inventory investment, is slow, unreliable, and inefficient. 
For 24 different types of aviation parts examined, we calculated the
Army's logistics system took an average of 525 days to ship broken
parts from field units to the depot, repair them, and return the
repaired parts to using units.  We estimated 507 days (97 percent) of
this time was the result of unplanned repair delays, depot storage,
or transportation time.  In another measure of efficiency, we
calculated the Army uses its inventory 6 times slower than an airline
in our comparison. 

The amount of time required by the system is important because the
Army must invest in enough inventory to resupply units with
serviceable parts and cover the amount of time it takes to move and
repair parts through this process.  If this repair time were reduced,
inventory requirements would also be reduced.  For example, in an
Army-sponsored RAND study, it was noted that reducing the repair time
for one helicopter component from 90 days to 15 days would reduce
inventory requirements for that component from $60 million to $10
million.\3

Also, in a 1996 preliminary report to the Army, RAND concluded that
"if non-value-added steps [in the repair process] were reduced or
eliminated, repair cycle times could become much shorter and far less
variable.  The benefits for the Army would be greater weapon system
availability, more regular and predictable supply of serviceable
components, savings from reduced pipeline inventory requirements, and
a repair system more flexible and responsive in serving the needs of
the combat commander."\4

To calculate the amount of time the Army's system takes to repair and
distribute parts using the current depot repair process, we
judgmentally selected 24 types of Army aviation parts and computed
the time the parts spent in four key segments of the repair process. 
The key segments were (1) preparing and shipping the parts from the
bases to the depot, (2) storing the parts at the depot before
induction into the repair shop, (3) repairing the parts, and (4)
storing the parts at the depot before they were shipped to a field
unit.  For the parts we selected, it took the Army an average of 525
days to complete this process.  Table 1 shows the fastest, slowest,
and average time the Army took to complete each of the four pipeline
segments. 



                                Table 1
                
                  Average Days Used by the Army Depot
                 Repair System for 24 Types of Aviation
                                 Parts

                                    Fastest     Slowest        Average
                                    time        time              time
Pipeline segment                    (days)      (days)          (days)
----------------------------------  ----------  ----------  ----------
Part preparation and shipment to    Less than   899                 75
the depot                           1

Depot storage prior to repair       Less than   887                158
                                    1

Depot repair time                   1           1,067              147

Depot storage prior to issue        Less than   1,196              145
                                    1

======================================================================
Total depot repair pipeline time\a  Not         Not                525
                                    applicable  applicable
----------------------------------------------------------------------
\a It is inappropriate to sum the pipeline segments for the fastest
and slowest times because these values represent the Army's pipeline
performance on one component in each segment.  The average time for
each segment, however, is appropriate to sum because it represents
the average time for all components that passed through that pipeline
segment. 

As shown in table 1, the repair pipeline time was both long and
highly variable.  The fastest time the Army took to complete any of
the four pipeline segments was less than 1 day, but the slowest times
ranged from 887 days to more than 1,000 days. 

In contrast, one airline we found to be using leading-edge practices,
British Airways, took a much shorter period of time to move a part
through its logistics system.  As shown in figure 1, the average time
to move a gearbox assembly through the first three segments was 116
days for British Airways while the Army's average time was 429 days,
or about 4 times longer.  While the Army's repair time was twice as
long as British Airways, most of the Army's time occurred in the
shipping and storage segments. 

   Figure 1:  Comparison of the
   Army's and British Airways'
   Pipeline Times for a Gearbox
   Assembly

   (See figure in printed
   edition.)

In part, because of this slow process, the Army has invested billions
of dollars in inventory to support peacetime operations that is not
used as effectively as it could be.  DOD reported that as of
September 1995, the value of the Army's reparable aviation parts
inventory was $2.6 billion,\5 with 74 percent ($1.9 billion)
allocated to support daily operations, 11 percent for war reserves,
and 15 percent allocated as long supply-- a term identifying stock
that is excess to current Army requirements. 

One measure of the repair process efficiency is a calculation of how
often an organization uses its inventory.  This calculation is called
the turnover rate.  The higher the turnover rate, the more often a
company is using its inventory.  At one airline we visited--British
Airways--the turnover rate for reparable parts was 2.3 times each
year.  In comparison, we calculated that, based on fiscal year 1995
repairs, the Army's turnover rate was
0.4 times, or about 6 times slower (see fig.  2).  This calculation
neither includes inventory the Army has allocated for war reserves
nor inventory the Army has stored at field level organizations, which
is classified as retail inventory. 

   Figure 2:  Comparison of
   British Airways and Army
   Inventory Turnover Rates

   (See figure in printed
   edition.)

Comparing the Army's engineering estimate of the repair time that
should be needed to complete repairs with the actual amount of time
taken is another measure of the repair process' efficiency.  Of the
525-day average pipeline time from our sample, the Army estimates an
average of 18 days should be needed to repair the item(s).  The
remaining 507 days, or 97 percent of the total time, were spent to
transport or store the part(s) or for unplanned repair delays. 


--------------------
\3 RAND Arroyo Center Documented Briefing, Weapon System Sustainment
Management:  A Concept for Revolutionizing the Army Logistics System
(1994). 

\4 RAND Annotated Briefing, Improving the Army's Repair Process: 
Baseline Repair Cycle Time Measures (DRR-1271-1-A, May 1996). 

\5 These inventory values were calculated by DOD using its standard
valuation methodology--the value of reparable parts requiring repair
was reduced by the estimated cost of repair, and excess inventory was
valued at the estimated salvage price (2.5 percent of the fiscal year
1995 acquisition costs). 


   SEVERAL FACTORS CONTRIBUTE TO
   THIS SLOW SYSTEM
------------------------------------------------------------ Letter :4

Several factors contribute to the Army's slow logistics pipeline. 
Four of the factors are (1) slow processing and shipping of parts
from the field to the repair depot, (2) delays in inducting parts
into the repair shops, (3) inefficient organization of the depot
repair process, and (4) lack of consumable parts needed to complete
repairs.  Because of these factors, parts sit idle or are delayed in
the repair process, which lengthens the total repair time. 


      SLOW PROCESSING AND SHIPPING
      OF PARTS TO THE DEPOT
---------------------------------------------------------- Letter :4.1

Preparing and shipping a broken part from the operating unit to the
depot for repair--a process called "retrograde"--took an average of
75 days for the items we examined.  In contrast, British Airways
estimated that only
2 days were needed to prepare and ship components from operating
locations to its repair centers.  In May 1996, RAND also found the
Army's retrograde process to be slow; the median retrograde time for
a sample of items it measured from the point when maintenance
personnel determined a part was not reparable at the operating unit
until it arrived at a DLA depot storage facility was 22 days and the
longest time was more than 100 days. 


      DELAYED INDUCTION OF PARTS
---------------------------------------------------------- Letter :4.2

Our sample data show that broken parts may sit in storage at the
depot facility for a long period of time until a certain quantity of
parts are moved to or are "inducted" into the repair shop.  Because
different operating units ship parts to the depot in various
quantities, each part that is inducted for repair may be stored for
different amounts of time.  For example, the Army inducted helicopter
gearboxes into the repair shop 5 times over a 2-year period.  The
average storage time for the parts inducted in each group ranged from
15 to 366 days.  Table 2 shows the quantity of parts inducted and the
average amount of days the parts were stored before being inducted. 



                                Table 2
                
                       Gearbox Repair Inductions

                                     Average storage   Number of parts
Group             Induction date         time (days)          inducted
----------------  ----------------  ----------------  ----------------
1                 Sept. 8, 1994                   27                11
2                 Sept. 20, 1994                  15                 7
3                 Dec. 9, 1994                    32                 8
4                 Jan. 17, 1996                  310                10
5                 Apr. 24, 1996                  366                 1
----------------------------------------------------------------------
According to Army officials, parts sit in storage before induction
because of the method that is used to plan repair programs.  Item
managers periodically review and compare inventory levels and the
projected requirements for parts.  Based upon this analysis, an item
manager determines how many parts should be either repaired or
purchased to meet the Army's anticipated needs.  For items that need
to be repaired, the Army develops a repair program, which includes a
funding estimate for the repairs.  The depot can induct parts into
the repair process only after this program and its related funding
have been approved.  Also, parts may sit in storage because an
excessive amount of inventory is available to meet current and
projected Army requirements.  As previously discussed, 15 percent of
the Army inventory is classified as long supply, or excess to current
requirements. 


      INEFFICIENT ORGANIZATION OF
      REPAIR ACTIVITIES
---------------------------------------------------------- Letter :4.3

The Army moves parts from one location to another several times
during the repair process, which increases the time required to
complete a repair.  Functions such as testing, cleaning, and
machining are sometimes done at separate shops that are hundreds of
yards apart.  Routing components through different shops reduces the
efficiency of the process because each time a part is moved, it must
be prepared for transportation, physically moved, and processed
through the shop.  For example, at CCAD, the repair of hydraulic
components involves routing parts through six different shops, each
located 100 to 400 yards from the main repair shop (see fig.  3),
which adds time and reduces the efficiency of the process.  For one
hydraulic part we examined, the Army estimated the repair time of
31 days--only 3 days were estimated for direct labor to repair the
item and
28 days (90 percent) were estimated to cover handling and moving the
part to different shops, or anticipated repair delays. 

   Figure 3:  The Army's Repair
   Process for a Hydraulic
   Component

   (See figure in printed
   edition.)


      INADEQUATE PIECE PART
      SUPPORT
---------------------------------------------------------- Letter :4.4

Another cause of delays is mechanics often do not have the necessary
consumable parts that are used in large quantities to repair aircraft
components.  According to CCAD officials, the lack of piece parts is
the primary cause for repair delays at the depot.  The traditional
DOD supply system used at CCAD to provide piece parts to mechanics
involves several inventory storage locations at the depot and a
wholesale inventory system managed by DLA (see fig.  4). 

   Figure 4:  Multilayered
   Inventory System for Consumable
   Parts

   (See figure in printed
   edition.)

\a DLA inventory is stored at multiple locations nationwide to
support all DOD customers. 

This process has created as many as four layers of inventory in the
CCAD supply system.  As of August 1996, the first two layers (depot
bulk storage and the automated distribution warehouse) stored
inventory valued at $46 million.  For the next two layers
(maintenance shop storage and end-user storage), the Army does not
centrally track inventory levels or supply effectiveness.  Therefore,
CCAD officials could not provide us with consolidated information on
the amount or value of the inventory stored in these locations or if
the inventory was the right type of material or in the appropriate
quantity to meet the mechanics' needs.  Figure 5 shows the CCAD
automated storage and distribution warehouse where $23 million of
inventory is stored.  Figure 6 shows 1 of the 72 maintenance shop
storage locations and is an example of the size of some of these
facilities. 

   Figure 5:  CCAD Automated
   Distribution Warehouse

   (See figure in printed
   edition.)

   Figure 6:  CCAD Maintenance
   Shop Inventory Storage Location

   (See figure in printed
   edition.)

Despite this investment in inventory, the supply system frequently
fails to completely fill orders when they are placed by mechanics or
other CCAD customers.  According to Army records, the CCAD bulk
storage warehouse did not have an adequate supply of inventory to
meet customer demands 75 percent of the time during the first 11
months of fiscal year 1996.\6 When parts are not available at the
bulk storage facility, the maintenance shops can request (backorder)
them from the DLA wholesale system, which may take several days or
even months for delivery.  As of August 1996, CCAD mechanics had more
than $40 million worth of parts on backorder, of which 34 percent was
still unfilled after 3 months. 

Depot officials identified several options available to minimize
repair delays that are caused by part shortages.  For example, depot
personnel can buy the part from local vendors or fabricate the part
in its machine shops.  In other cases, mechanics remove parts from
one component that has just entered the repair shop and install the
part on one that is nearing completion.  This is called a "rob-back"
of parts.  Depot officials did not have any records that specifically
quantify the number of rob-back actions in the depot, but they
indicated that it was a common practice among maintenance personnel. 


--------------------
\6 The Army calculated this fill rate by comparing total demands with
the total number of times a demand was completely filled by the
inventory on hand at depot storage locations.  At times, a demand is
partially filled by inventory on hand, with the remaining unfilled
demands placed on backorder, and filled at a later time.  These
"partial fills" are not included in the 75-percent calculation. 


      EFFECTS OF THE ARMY'S
      PROCESS
---------------------------------------------------------- Letter :4.5

The following examples of parts we examined illustrate the effects of
the Army's slow and inefficient logistics pipeline.  First, in fiscal
year 1995, the Army repaired 25 helicopter rotor heads.  The average
time to ship these units from field locations and complete the repair
of each item was 723 days.  Of the 723-day average, 577 days involved
shipping and storage time and 146 days involved repair time.  The
Army's engineering estimate indicates the optimum repair shop time
should be 35 days.  At the end of fiscal year 1995, the Army had 134
units on hand, valued at $20.9 million.  Using historical demand
data, this inventory could satisfy Army requirements for the next 3.5
years. 

Also, in fiscal year 1995, the Army repaired 79 helicopter
transmissions.  It took the Army an average of 414 days to ship and
repair each of these items.  This 414-day average was comprised of 67
days for shipping, 229 days for storage, and 118 days for repair. 
The Army's engineering estimate indicates 37 days should be needed
for repair shop time.  At the end of fiscal year 1995, the Army had
204 transmissions on hand, which should satisfy routine requirements
for 4.7 years. 


   THE ARMY HAS TARGETED LOGISTICS
   SYSTEM IMPROVEMENTS
------------------------------------------------------------ Letter :5

The Army has recognized that it must develop a faster and more
flexible logistics pipeline.  In early 1995, the Army's Deputy Chief
of Staff for Logistics directed the Army logistics community to
implement a program called "Velocity Management" to speed up key
aspects of the logistics system and reduce the Army's need for large
inventory levels.  Under this program, the Army has established
Army-wide process improvement teams for the following four areas: 
(1) ordering and shipping of parts, (2) the repair cycle, (3)
inventory levels and locations, and (4) financial management.  Also,
under this program, the Army is establishing local-level site
improvement teams to examine and improve the logistics operations of
individual Army units.  As of September 1996, however, Velocity
Management has had no impact on CCAD operations and has had only
limited success in improving overall logistics operations. 

The Army established the Velocity Management program with the goals,
concepts, and top-management support that parallel the improvement
efforts found in private sector companies.  The overall goal of the
program is to eliminate unnecessary steps in the logistics pipeline
that delay the flow of parts through the system.  Like the private
sector, the Army plans to achieve these improvements by changing its
processes, not by refining the existing system that tends to gain
only incremental improvements.  The Army also recognizes the
importance of top-management support to the ultimate success of these
initiatives.  The Army's current leadership has strongly endorsed the
program as a vehicle for making dramatic improvements to its current
logistics system. 

As of September 1996, CCAD was not actively involved in the Velocity
Management program.  Instead, depot officials established a program
to improve CCAD operations.  Under this program, depot officials have
focused on changing the management culture, measuring the actual cost
of operations, and redesigning some of the local repair processes. 
The first major initiative pursued by depot officials was to measure
the actual cost of completing repairs using an activity-based cost
analysis of certain depot processes.  Depot officials have also
redesigned the repair process for helicopter blades, moving all of
the resources needed to complete repairs into one facility, which is
intended to reduce the repair cycle time.  Unless CCAD's local
program is expanded to include other DOD organizations, such as DLA,
substantial reductions in the total pipeline time may not be
possible. 


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

The airline industry has developed leading-edge practices that focus
on reducing the time and complexity of the logistics pipeline.  As
discussed in our reports on Air Force and Navy reparable parts
logistics operations, we identified four best practices in the
airline industry that have the potential for use in military systems
and have resulted in significant improvements and reduced logistics
costs for several airlines, especially British Airways.  These
practices are the prompt repair of items, the reorganization of the
repair process, the establishment of partnerships with key suppliers,
and the use of third-party logistics services.  When used together,
they can help maximize a company's inventory investment, decrease
inventory levels, and provide a more flexible repair capability.  In
our opinion, they address many of the same problems the Army is
facing and represent practices that could be applied to Army
operations. 


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

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

Prompt repair involves inducting parts into maintenance shops soon
after broken items arrive at repair facilities.  In contrast, as
discussed earlier in this report, the Army sometimes holds parts for
more than a year before they are inducted for repair.  Prompt repair
does not mean that all parts are fixed, however.  The goal is to
quickly fix only those parts that are needed.  One airline that uses
this approach routes broken parts directly to holding areas next to
repair shops, rather than to stand-alone warehouses, so that
mechanics can quickly access broken parts when it comes time to
repair them.  These holding areas also give the production managers
and the mechanics better visibility of any backlogs. 


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

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

One airline we visited has also adapted the cellular concept to its
aircraft overhaul process.  The airline established work cells
adjacent to the aircraft bays that contain a variety of tooling and
support equipment that enable mechanics to overhaul a variety of
aircraft parts alongside the aircraft.  At this location, the airline
completes a majority of aircraft repairs planeside, using this
cellular approach. 


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

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

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

Integrated supplier programs involve the shifting of inventory
management functions to suppliers.  Under this arrangement, a
supplier monitors parts usage and determines how much inventory is
needed to maintain a sufficient supply.  The supplier's services are
tailored to the customer's requirements and can include placing a
supplier's representative in customer facilities to monitor supply
bins at end-user locations, place orders, manage receipts, and
restock bins.  Other services can include 24-hour order-to-delivery
times, quality inspections, parts kits, establishment of electronic
data interchange links and inventory bar coding, and vendor selection
management.  Table 3 summarizes the types of services, reductions,
and improvements achieved by an integrated supplier (TriStar
Aerospace Corporation) for some of its customers (designated as A
through E) under the integrated supplier program. 



                                     Table 3
                     
                     Integrated Supplier Program Results for
                                  Five Companies

Company                A             B             C             D             E
----------  ------------  ------------  ------------  ------------  ------------
Date            10/16/93       1/17/92        1/7/94       7/29/92        7/9/93
 establish
 ed
Length of              5             5             3             3             3
 contract
 (years)
Number of          8,858         8,000         4,500         1,888         1,900
 line
 items
Numbers of        29,505         3,404        13,153           Not         4,311
 stocking                                                available
 points/
 bins
Number of             45             7             3             1             1
 customer
 facilitie
 s
Amount of     $7,350,000    $2,000,000    $1,800,000      $300,000      $200,000
 inventory
 reduction
Percent               84            50            60            30            29
 reduction
Fill rate           98.0          88.7          96.7          99.0          94.3
 (percent)
 \a
Order ship            24            48            48            24            24
 time\b
 (hours)
Frequency          Daily         Daily         Daily         Daily         Daily
 of
 deliverie
 s
Number of            300           200           150            15            75
 orders
 filled
 daily
--------------------------------------------------------------------------------
\a Fill rate is the number of times the inventory requested is on
hand and delivered to the customer, expressed as a percent of total
orders. 

\b Order ship time is the amount of time it takes Tri-Star to deliver
inventory to the customer after receiving an order. 

Source:  TriStar Aerospace Corporation. 

The use of an integrated supplier program would significantly alter
the current DOD process of providing piece parts to mechanics at the
repair depot or in the field.  Figure 7 compares using the DOD system
at CCAD with using the integrated supplier concept.  As shown, the
integrated supplier concept provides the opportunity to reduce or
eliminate inventory in the DLA wholesale system, the depot bulk
storage location, and the automated distribution warehouse. 

   Figure 7:  DOD Supply System at
   CCAD Compared to an Integrated
   Supplier Concept

   (See figure in printed
   edition.)


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

The airlines we contacted provided examples of how third-party
logistics providers can be used to reduce costs and improve
performance.  Third-party providers manage and carry out certain
functions, such as inventory storage and distribution.  They can also
offer management expertise that companies often do not have the time
or the resources to develop. 

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

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


   INTEGRATED BEST PRACTICES MAY
   PRODUCE SIGNIFICANT SAVINGS
------------------------------------------------------------ Letter :7

Some combination of the four best practices discussed in this report
may, in our opinion, significantly reduce the Army's repair pipeline
time and inventory requirements.  The current repair pipeline at
CCAD, including the average number of days it took to move the parts
we examined through this pipeline and the flow of consumable parts
into the repair depot, is shown in figure 8.  A modified Army system
incorporating the use of an integrated supplier for consumable items,
third-party logistics services, inducting parts soon after they
arrive at the depot, and cellular repair shops is shown in figure 9. 
A comparison of figures 8 and 9 shows the potential reductions
possible using these key best practices. 

   Figure 8:  Current Repair
   Pipeline at CCAD

   (See figure in printed
   edition.)

   Figure 9:  Best Practices
   Applied to the Army Repair
   Pipeline

   (See figure in printed
   edition.)

The reparable parts pipeline time could be reduced by hundreds of
days with the application of third-party logistics providers, the
cellular concept, and quick induction of parts into repair.  The
consumable parts flow could be improved and inventories substantially
reduced by using the integrated supplier concept.  If the Army were
able to adopt these practices and achieve savings similar to the
private sector, inventory and related management costs could be
substantially reduced. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :8

As part of the Army's current efforts to improve the logistics
system's responsiveness and reduce its complexity, we recommend that
the Secretary of Defense direct the Secretary of the Army, working
with DLA, to develop a demonstration project to determine the extent
to which the Army can apply best practices to its logistics
operations.  We also recommend that the Secretary of the Army appoint
an accountable "change agent" for this program who will periodically
report back to the Secretary on the progress of the demonstration
project.  In addition, we recommend that the Secretary of the Army
identify the Army facilities that will participate in this project,
establish specific test program milestones, and identify the
performance measures that will be used to quantify process
improvements and reductions in the overall pipeline time.  The
practices should be tested in an integrated manner, where feasible,
to maximize the interrelationship many of these practices have with
one another.  The specific practices that should be considered, where
feasible, are

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

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

  -- establishing innovative supplier partnerships to increase the
     availability of parts needed to complete repairs at the depot,
     such as local distribution centers and integrated supplier
     programs; and

  -- using third-party logistics providers to store and distribute
     spare parts between the depot and end users to improve delivery
     times. 

We further recommend that this project be used to quantify the costs
and benefits of these practices and to serve as a means to identify
and alleviate barriers or obstacles that may inhibit the expansion of
these practices.  After these practices have been tested, the Army
should consider expanding and tailoring the use of these practices,
where feasible, so they can be applied to other locations. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :9

In its comments on a draft of this report, DOD agreed with the
findings and recommendations.  DOD indicated that the Army is
participating in DLA's Virtual Prime Vendor pilot program, which is
intended to improve supply support to depot maintenance activities. 
DOD stated that contractors under that program will determine,
working with DLA, the best method of support to meet the performance
criteria of the program. 

DOD estimates that the Army will initiate a Virtual Prime Vendor
pilot at an Army depot by October 1998.  DOD stated that, after the
pilot is successfully implemented at an Army site, the Army plans to
assess the applicability of this approach at other locations. 
However, an implementation date for future projects has not been set. 
In addition, the Army plans to identify and appoint an accountable
change agent for these programs by June 1997.  DOD's comments are
included in appendix I. 


   SCOPE AND METHODOLOGY
----------------------------------------------------------- Letter :10

We reviewed documents and interviewed officials on the Army's
inventory policies, practices, and efforts to improve its logistics
operations.  We contacted officials at the Office of the Deputy Under
Secretary of Defense for Logistics, Washington D.C.; Army
Headquarters, Washington, D.C.; the Army Materiel Command,
Alexandria, Virginia; the Army's Aviation and Troop Command, St. 
Louis, Missouri; and the Army Industrial Operations Command, Rock
Island Arsenal, Rock Island, Illinois. 

To examine the Army's logistics operations and improvement efforts,
we visited the DLA Defense Distribution Depot, Corpus Christi, Texas;
the DLA Premium Services System, Memphis, Tennessee; CCAD, Corpus
Christi, Texas; and the (Army) 101st Airborne Division (Air Assault),
Fort Campbell, Kentucky.  At these locations, we discussed with
supply and maintenance personnel the operations of the Army's current
logistics system, customer satisfaction, planned improvements to
their logistics system, and the potential application of private
sector logistics practices to their operations.  We also reviewed and
analyzed detailed information on inventory levels and usage, repair
times, supply effectiveness and response times, and other related
logistics performance measures.  We did not test or otherwise
validate the Army's data. 

To calculate the amount of time the Army's system takes to repair and
distribute parts using the current depot repair process, we
judgmentally sampled 24 components--9 of the components, provided to
us and currently stored by the Defense Distribution Depot, Corpus
Christi, were ones with an active fiscal year 1996 repair program,
and 15 components were selected from the top 20 repair programs
managed by the Army's Aviation and Troop Command based on dollar
value, impact on readiness, and numbers of backorders. 

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

We conducted our review from January 1996 to December 1996 in
accordance with generally accepted government auditing standards. 


--------------------------------------------------------- Letter :10.1

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

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

Sincerely yours,

David R.  Warren, Director
Defense Management Issues




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



(See figure in printed edition.)



(See figure in printed edition.)


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

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

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

DAYTON FIELD OFFICE

Robert L.  Repasky
Matthew B.  Lea
Frederick J.  Naas

DALLAS FIELD OFFICE

Robert C.  Gorman
Robert D.  Malpass

RELATED GAO PRODUCTS

Inventory Management:  Adopting Best Practices Could Enhance Navy
Efforts to Achieve Efficiencies and Savings (GAO/NSIAD-96-156, July
12, 1996). 

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

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

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

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

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

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

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

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

*** End of document. ***