Inventory Management: More Information Needed to Assess DLA's Best
Practice Initiatives (Letter Report, 09/02/98, GAO/NSIAD-98-218).

Pursuant to a congressional request, GAO reviewed the Defense Logistics
Agency's (DLA) schedule for implementing best commercial practices for
inventory management, focusing on whether the schedule: (1) described
the extent to which the initiatives cover each supply category; (2)
established key performance indicators to measure the overall impact the
initiatives will have on logistics costs and efficiency of operations;
and (3) provided criteria and plans for expanding or fully implementing
the initiatives to cover the entire supply category.

GAO noted that: (1) DLA's schedule provides information on 73
initiatives it identified as best practices for improving the
acquisition and distribution of certain categories of consumable
supplies; (2) although GAO is encouraged that DLA has established these
initiatives, the schedule does not provide adequate information to
assess whether it effectively provides for the implementation of these
practices to be completed by November 2000, as required by the fiscal
year 1998 Defense Authorization Act; (3) specifically, the schedule does
not contain information on the percentage of a supply category that will
be affected by the initiatives; (4) consequently, users of the schedule
are unable to determine the magnitude of impact the initiatives are
intended to have; (5) also, the schedule does not present metrics or
indicators that will be used to determine whether the initiatives are
achieving the desired results; (6) this information is critical to
determine whether readiness and sustainability goals are being met and
cost goals are being achieved; and (7) in addition, the schedule does
not provide milestones necessary to measure progress toward covering the
entire supply category by the implementation date.

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

 REPORTNUM:  NSIAD-98-218
     TITLE:  Inventory Management: More Information Needed to Assess 
             DLA's Best Practice Initiatives
      DATE:  09/02/98
   SUBJECT:  Inventory control systems
             Military cost control
             Logistics
             Military inventories
             Federal supply systems
             Federal property management

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


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

September 1998

INVENTORY MANAGEMENT - MORE
INFORMATION NEEDED TO ASSESS DLA'S
BEST PRACTICE INITIATIVES

GAO/NSIAD-98-218

Inventory Management

(709332)


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

  DLA - Defense Logistics Agency
  DOD - Department of Defense

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


B-280241

September 2, 1998

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

Dear Senator Levin: 

As requested, we reviewed and assessed the Defense Logistics Agency's
(DLA) schedule for implementing best commercial practices for
inventory management.  Section 395 of the National Defense
Authorization Act for Fiscal Year 1998 required the Director of DLA
to develop and submit to Congress a schedule for implementing best
commercial practices for the acquisition and distribution of nine
categories of consumable-type supplies.  The act defined "best
practices" as including the prime vendor concept and other techniques
the DLA Director determines will reduce inventory levels and costs
and improve the responsiveness of the logistics system to user needs. 
The act also requires that the schedule provide for the
implementation of such practices to be completed within 3 years of
enactment, or by November 2000.  The Under Secretary of Defense for
Acquisition and Technology submitted this schedule on May 19, 1998. 

This report assesses the extent to which DLA's schedule effectively
provides for the implementation of best practices within the time
frame specified in the act.  Specifically, we assessed whether the
schedule (1) described the extent to which the initiatives cover each
supply category, (2) established key performance indicators to
measure the overall impact the initiatives will have on logistics
costs and efficiency of operations, and (3) provided criteria and
plans for expanding or fully implementing the initiatives to cover
the entire supply category. 


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

The Department of Defense (DOD) operates a worldwide logistics system
to buy, store, and distribute inventory items.  Through this system,
DOD manages 4.3 million types of consumable items (e.g., food,
clothing, and hardware), of which about 4 million are managed by
DLA.\1 Traditionally, DLA buys consumable items in large quantities,
stores them in wholesale distribution depots until they are requested
by the military services, and then ships them to the service facility
where the items are used.  Each year, DLA spends billions of dollars
to provide these services.  For example, in fiscal year 1997, DLA
estimated that its supply costs were $12.4 billion and that its
inventory on hand was valued at $9.8 billion.\2

Over the last 20 years, we have reported that DOD's inventory
management practices are costly, create unnecessary inventory levels,
provide poor customer service, and generate excess and obsolete
inventory.  For these reasons, we identified DOD inventory management
as a high-risk area for fraud, waste, and abuse.\3 On past occasions,
to help address these problems, we have issued several reports at
your request on leading-edge business practices used by the private
sector to achieve savings and improve operations.\4 Our reports show
that certain leading-edge concepts provide inventory users with a
capability to order supplies as they are needed and then deliver
those items directly to the customer within hours after the order is
placed.  Ordering supplies only as they are needed, combined with
quick logistics response times, enables companies to reduce or
eliminate inventory levels, buy only the items that are currently
needed, and reduce overall supply system costs.  Because we believe
these practices have direct applicability to DOD's operations, our
reports recommended that DOD test these concepts and expand them
where feasible. 

DOD agrees with the need to adopt best practices and has begun to
improve its business operations.  In November 1997, the Secretary of
Defense issued the Defense Reform Initiative report, which called for
a revolution in DOD's business affairs and identified a number of
reengineering initiatives aimed at adopting modern business practices
to achieve world-class standards of performance. 


--------------------
\1 Consumable items are discarded after use rather than repaired. 

\2 The $12.4 billion supply costs include the cost of items purchased
from suppliers and the costs associated with managing, storing, and
distributing inventory. 

\3 In 1990, we began a special effort to review and report on the
federal program areas we identified as high risk because of
vulnerabilities to fraud, waste, abuse, and mismanagement.  This
effort, which was supported by the Senate Committee on Government
Affairs and the House Committee on Government Reform and Oversight,
brought a much-needed focus on problems that were costing the
government billions of dollars.  We identified DOD's inventory
management as a high-risk area at that time because levels of
unneeded inventory were too high and systems for determining
requirements were inadequate. 

\4 See Related GAO Products for a listing of reports that discuss
DOD's logistics systems and our best practices analyses. 


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

DLA's schedule provides information on 73 initiatives it identified
as best practices for improving the acquisition and distribution of
certain categories of consumable supplies.  Although we are
encouraged that DLA has established these initiatives, the schedule
does not provide adequate information to assess whether it
effectively provides for the implementation of these practices to be
completed by November 2000, as required by the fiscal year 1998
Defense Authorization Act.  Specifically, the schedule does not
contain information on the percentage of a supply category that will
be affected by the initiatives.  Consequently, users of the schedule
are unable to determine the magnitude of impact the initiatives are
intended to have.  Also, the schedule does not present metrics or
indicators that will be used to determine whether the initiatives are
achieving the desired results.  This information is critical to
determine whether readiness and sustainability goals are being met
and cost goals are being achieved.  In addition, the schedule does
not provide milestones necessary to measure progress toward covering
the entire supply category by the implementation date. 


   SCHEDULE DOES NOT PROVIDE
   SUFFICIENT INFORMATION TO
   ASSESS BEST PRACTICES
   INITIATIVES
------------------------------------------------------------ Letter :3

The schedule contains one or more initiatives for each of the nine
supply categories listed in the act, except for commercially
available electronics, which had no initiatives.  The schedule also
contains initiatives for six other categories of supplies not listed
in the act.  In total, the schedule contains 73 initiatives aimed at
improving DLA's inventory management operations.  Many of the
initiatives seek to increase DLA's reliance on the private sector to
purchase, store, and distribute supplies.  The initiatives contain
schedule milestones that generally consist of contract award dates. 
For some initiatives, the schedule provides additional information
such as location, geographic region, or types of items covered. 

The schedule, however, does not (1) contain information on the extent
to which the initiatives cover each supply category, (2) establish
key performance indicators to measure the overall impact the
initiatives will have on logistics costs and efficiency of
operations, and (3) provide criteria and plans for expanding or fully
implementing the initiatives to cover the entire supply category. 
Without plans that include milestones and details for when, where,
and how the initiatives will be tested, evaluated, and expanded,
there is no baseline for determining or measuring the significance of
these initiatives or the progress that should be expected in
completing the implementation of best practices within the time frame
specified in the act.  DLA officials stated that planning information
was not provided for the initiatives because of the uncertain nature
of the initiatives. 


      DLA'S SCHEDULE CONTAINS FOUR
      TYPES OF INITIATIVES
---------------------------------------------------------- Letter :3.1

The 73 initiatives in DLA's schedule can be grouped into 4
categories:  44 contracting initiatives, 15 prime vendor programs, 5
electronic commerce initiatives, and 9 "other" types of initiatives. 
The contracting initiatives include long-term contracting, corporate
contracting, and direct vendor delivery contracts.  Under a long-term
contract agreement, DLA agrees to purchase items from a vendor for 1
or more years.  Corporate contracting initiatives involve the
consolidation of a number of different DLA requirements with the same
vendor into one contract.  Direct vendor delivery contracts require
the vendor to deliver items directly to base-level locations,
bypassing the traditional DLA warehouse and distribution operations. 
In some cases, these concepts are combined in one initiative.  For
example, one initiative for aviation items is a long-term corporate
contract that includes a provision for direct delivery of items to
the DOD customer. 

The 15 prime vendor initiatives are designed to transfer a portion of
the traditional DOD inventory management responsibilities to
suppliers.  Under this concept, a single vendor (known as a prime
vendor) buys inventory from a variety of suppliers and stores the
inventory in its warehouse.  The DOD customer orders supplies from
the prime vendor using electronic ordering systems, and the prime
vendor then retrieves the items from its warehouse and delivers them
to the customer. 

The five electronic commerce initiatives involve the use of the
Internet and electronic catalogs to provide DOD customers an improved
system for ordering supplies.  These initiatives provide the
capability for a customer to search the numerous items available in
DLA's and vendors' catalogs for the item that best suits their needs. 
The customers can compare similar products and prices and then place
their orders directly from the catalogs. 

The nine other initiatives consist of three medical and
pharmaceutical, two food, and four fuels initiatives that did not
fall into the three categories discussed above.  For example, one
initiative deals with the purchase of electricity to support DOD
facilities, another initiative provides a mail order pharmaceutical
service to DOD eligible customers. 


      SCHEDULE INFORMATION IS
      INADEQUATE
---------------------------------------------------------- Letter :3.2

Table 1 summarizes the initiatives in DLA's schedule, including
whether the schedule provided an estimate of the initiative coverage,
key performance metrics, and expansion plans for each supply
category.  The sections that follow the table contain our assessment
of the schedule information provided for each supply category.  These
sections briefly describe the DLA initiatives, the nature and extent
of specific schedule information contained in the plan, and our
observations on this information.  In no case did the schedule
contain information on the percentage of a supply category that will
be affected by an initiative, key indicators that could be used to
determine if the initiatives are achieving the desired results, or
milestones necessary to measure progress toward covering the entire
supply category by the implementation date. 



                                     Table 1
                     
                         Our Assessment of DLA's Schedule

                                              Did the schedule
                            Did the schedule  contain key       Did the schedule
                            contain an        performance       contain
                            estimate of       indicators for    expansion plans
Supply           Number of  supply category   the supply        to cover the
category       initiatives  coverage?         category?         supply category?
--------  ----------------  ----------------  ----------------  ----------------
Listed in the act\a
--------------------------------------------------------------------------------
Medical                  8  No                No                No
and
pharmace
utical

Food                     6  No                No                No

Clothing                 2  No                No                No
and
textiles

Commerci                 0  Not applicable    Not applicable    Not applicable
ally
availabl
e
electron
ics

Construc                 1  No                No                No
tion

Industri                 2  No                No                No
al

Automoti                 5  No                No                No
ve

Fuels                    4  No                No                No

Facility                 1  No                No                No
maintena
nce


Not listed in the act\a
--------------------------------------------------------------------------------
Aviation                15  No                No                No

Batterie                 3  No                No                No
s

Material                 2  No                No                No
handling
equipmen
t

Land-                    3  No                No                No
based
systems

Maritime                 5  No                No                No
systems

Other                   16  No                No                No
--------------------------------------------------------------------------------
\a Section 395 of the National Defense Authorization Act for Fiscal
Year 1998. 


         MEDICAL AND
         PHARMACEUTICAL SUPPLIES
-------------------------------------------------------- Letter :3.2.1

The schedule contained two prime vendor, three electronic catalog,
and three other initiatives for medical and pharmaceutical supplies. 
The two prime vendor programs were fully implemented between January
1993 and November 1996.  Our past work found that these two
initiatives were some of the most successful DLA initiatives to date. 
To implement these programs, DLA established a schedule to test and
evaluate the prime vendor concept and a specific schedule to expand
this program to other DOD locations.  These milestones provided a
basis to measure DLA's progress toward full implementation. 
According to other information, DOD's use of prime vendors at over
200 medical facilities saved over $700 million and covered 77 percent
of DLA's sales of medical supplies in fiscal year 1997. 

The three electronic catalog initiatives were for dental, optical,
and laboratory supplies.  Under these programs, catalogs listing
inventory items available from certain suppliers will be accessible
electronically by DOD customers.  The schedule information for these
programs consisted of estimated contract award dates for the fourth
quarter of fiscal year 1998. 

The three other initiatives involve the establishment of a national
mail-order and retail pharmacy network.  The schedule information for
these initiatives consisted primarily of contract award dates. 


         FOOD SUPPLIES
-------------------------------------------------------- Letter :3.2.2

The schedule contained one prime vendor, three contracting, and two
other initiatives for food items.  The prime vendor program is
designed for a vendor to buy, store, and distribute food items to
military dining facilities nationwide and overseas.  The schedule
indicated that this initiative has been fully implemented in the
continental United States, and provided regional contract award dates
for the Europe and Pacific regions and estimated award dates for four
other overseas regions.  The schedule, however, did not indicate the
extent to which the prime vendor would actually be used by DOD
facilities within each region, a planned activation date for those
locations, or a projected date when the prime vendor would be in
place at all applicable locations.  The three contracting initiatives
involve long-term and direct delivery concepts.  The contracts cover
food service equipment, certain rations, and ultrahigh temperature
milk.  For these initiatives, the schedule provided actual or planned
contract award dates and other contract information as well as some
limited schedule information related to concept testing and
evaluation. 

The two other initiatives are related to the handling and delivery of
fresh fruits and vegetables.  The schedule identifies potential
customers and contract information. 


         CLOTHING AND TEXTILES
-------------------------------------------------------- Letter :3.2.3

The schedule contained two prime vendor initiatives for clothing and
textiles.  The first prime vendor program, established in November
1995, was designed for the prime vendor to buy, store, and distribute
recruit clothing items to the Air Force's recruit induction center at
Lackland Air Force Base, Texas.  Air Force and DLA officials stated
that this program is considered to be a successful demonstration of
the prime vendor concept but that DLA does not plan on expanding it
to other DOD facilities. 

According to DLA officials, the second prime vendor program is being
designed differently.  Under this program, DLA plans to buy the
inventory and contract for the prime vendor to store and distribute
the items.  The extent of the schedule information provided for this
initiative was an estimated June 1998 contract award date for a prime
vendor to support
12 states in the Southeast region of the United States and a contract
award date no later than June 1999 for two additional states.  The
schedule, however, did not indicate the extent to which the prime
vendor would actually be used, a planned activation date for
locations, or a projected date when the prime vendor would be in
place at all applicable locations.  Also, the schedule did not
identify the percentage of future clothing and textiles sales or the
percentage of items that DLA expects will be covered by these
initiatives.  Our review of DLA sales records indicated that only 2
percent of DLA's 1997 clothing and textiles sales were conducted
through prime vendors, and DLA projects that these sales will
increase to only 11 percent by fiscal year 2001. 


         COMMERCIALLY AVAILABLE
         ELECTRONICS
-------------------------------------------------------- Letter :3.2.4

The schedule did not describe any initiatives for commercially
available electronics supplies.  According to the schedule, DLA
canceled a prime vendor program during contract negotiations because
the Air Force had changed the scope of the contract.  DLA officials
stated they were considering other alternatives in this area, but no
specific initiatives had been defined as of June 1998. 


         CONSTRUCTION SUPPLIES
-------------------------------------------------------- Letter :3.2.5

The schedule contained one prime vendor initiative for construction
supplies.  Under this program, DLA plans to have a prime vendor
provide bulk lumber and plywood to military bases.  The extent of the
schedule information consisted of a May 1998 planned contract award
date for the first two regions, an October 1998 estimated award date
for the remaining regions within the continental United States, and a
planned award date of December 1998 for overseas locations.  The
schedule did not indicate the extent to which the prime vendor would
actually be used within each region, a planned activation date for
those locations, or a projected date when the prime vendor would be
in place at all applicable locations. 


         INDUSTRIAL SUPPLIES
-------------------------------------------------------- Letter :3.2.6

The schedule contained two prime vendor initiatives for industrial
supplies.  One prime vendor program is designed to provide most of
the consumable items needed to support the C-130 propeller repair
shop at the Warner Robins Air Logistics Center.  The extent of the
schedule information was the contract award date of October 1996. 
The second prime vendor program is designed to provide common-type
items used in the overhaul, repair, and maintenance of weapon
systems, such as bolts, screws, and rivets.  The extent of the
schedule information was a contract award date of May 1998 for one
location and June 1998 for three other locations. 

The schedule did not contain an implementation plan for either prime
vendor initiative in this category.  Specifically, the schedule did
not identify all the locations where the prime vendor could be
expanded, time frames for future locations to begin using the vendor,
or a projected date when the prime vendor would be fully implemented. 


         AUTOMOTIVE SUPPLIES
-------------------------------------------------------- Letter :3.2.7

The schedule contained two prime vendor and three contracting
initiatives for automotive supplies.  The first prime vendor
contract, awarded in April 1998, is for automotive parts used
overseas.  The second prime vendor program, called the fleet
automotive support initiative, is currently designed to cover 2,100
different types of parts.  DLA planned to award this contract in
April 1998.  Under this program, the schedule identified
11 potential geographic regions to be serviced by a prime vendor but
only 2 DOD facilities within these regions that will initially use
the concept. 

The schedule did not contain an implementation plan for either prime
vendor program in this category.  Specifically, the schedule did not
identify milestones for a concept test and evaluation phase, all
locations where the prime vendor could be used, time frames for when
future locations would begin using the vendor, or a projected date
when the prime vendor would be fully used by all applicable DOD
locations. 

The schedule contained three contracting initiatives for automotive
supplies.  These initiatives involve a combination of corporate
contracting, long-term contracting, and direct vendor delivery
concepts.  The schedule provided a range of actual and estimated
contract award dates for these initiatives. 


         FUELS
-------------------------------------------------------- Letter :3.2.8

The schedule contained four other initiatives for demonstration
projects to improve energy management.  The schedule information for
these initiatives consisted of contract-related dates for two of the
initiatives but no schedule information for the other two
initiatives. 


         FACILITY MAINTENANCE
         SUPPLIES
-------------------------------------------------------- Letter :3.2.9

The schedule contained one prime vendor initiative for facilities
maintenance supplies.  This program, called the maintenance, repair,
and operations prime vendor program, was characterized by DLA as a
major program contributing to achievement of several of DLA's
strategic objectives.  Under this program, a supplier is expected to
provide total material support to operating locations for items such
as small tools, paint, and hardware supplies.  This program was also
highlighted in the Defense Reform Initiative report as one that
captures the "best of class" in industry standards for delivery,
returns for excess material, surge capabilities, and customer
service.  The schedule included two contract award dates
(Dec.  1997 and Jan.  1998) for seven states in the Southeast region
of the United States.  DLA estimated potential sales of $200 million
a year if all 73 installations in the Southeast region used the
program.  Also, the schedule calls for a contract award date of July
1998 for prime vendor contracts nationwide and December 1998 for the
Europe and Pacific regions. 

Even though the schedule contained expected regional contract award
dates, it did not contain an implementation plan.  Specifically, the
schedule did not include milestones for a concept test and evaluation
phase, indicate the extent to which the prime vendor would actually
be used within each region, identify a planned activation date for
applicable locations, or project a date when the prime vendor would
be fully implemented.  Additional DLA records indicated that the
absence of this type of information could be misleading.  For
example, the schedule states that regional prime vendor contracts
will be established nationwide by July 1998, but DLA records indicate
that only 40 of a potential 243 installations nationwide are
scheduled at this time to use the program. 


         AVIATION SUPPLIES
------------------------------------------------------- Letter :3.2.10

DLA's schedule contained 1 prime vendor and 14 contracting
initiatives for aviation supplies.  DLA is designing the prime vendor
program to provide consumable items to maintenance depots that repair
engines and weapon systems.  The schedule identified six potential
repair depots to use this program but did not provide any
implementation dates.  Also, the schedule did not include milestones
for a concept test and evaluation phase, indicate the extent to which
the prime vendor would actually be used, identify a planned
activation date for applicable locations, or project a date when the
prime vendor would be in all locations. 

The 14 contracting initiatives include a combination of corporate,
long-term, and direct delivery contracts for a variety of aviation
parts, such as fasteners, engine parts, and cleaning compounds.  The
schedule provided actual or planned contract award dates for most of
the initiatives. 


         BATTERIES
------------------------------------------------------- Letter :3.2.11

The schedule contained three contracting initiatives for batteries. 
These programs include long-term and direct delivery contracts.  The
schedule information for these initiatives consisted of the year that
each contract was awarded and other contract information. 


         MATERIAL HANDLING
         EQUIPMENT
------------------------------------------------------- Letter :3.2.12

DLA's schedule contained one prime vendor and one contracting
initiative for material handling equipment supplies.  The prime
vendor program is designed to provide material handling supplies and
pallets used at distribution depot in two regions; the schedule
indicated that there were at least 13 potential customers in one
region, but did not identify any potential customers for the second
region.  The schedule information consisted of a June 1998 planned
contract award for one region but did not include milestones for a
concept test and evaluation phase, indicate the extent to which the
prime vendor would actually be used within each region, identify a
planned activation date for applicable locations, or project a date
when the prime vendor would be in place at all locations. 

The one contracting initiative is a long-term contract for parts used
to support the 463L cargo handling system.  DLA indicated 13 U.S. 
locations, as well as overseas locations, that use these parts but
plans to award a contract that covers only 2 of these locations.  The
schedule information consisted of a planned contract award date of
September 1998. 


         LAND-BASED VEHICLES
------------------------------------------------------- Letter :3.2.13

DLA's schedule contained two prime vendor and one contracting
initiative for parts supporting land-based vehicles, such as trucks
and aircraft towing tractors.  The first prime vendor is designed to
provide over 2,000 items needed to support the M9 Armored Combat
Earthmover.  The second prime vendor program is designed to provide
supply support for the M939 series 5-ton truck.  The schedule
indicated an estimated award date of August 1998 for the first
initiative, but there was no schedule information provided for the
second initiative. 

The schedule did not contain an implementation plan for either prime
vendor program.  Specifically, the schedule did not include
milestones for a concept test and evaluation phase, indicate the
extent to which the prime vendor will actually be used by DOD
operating locations, a planned activation date for those locations,
or a projected date when the prime vendor would be fully implemented. 

The one contracting initiative is a long-term contract covering parts
for cranes and aircraft towing tractors.  The schedule information
consisted of a planned contract award date and other contract
information. 


         MARITIME SYSTEMS
------------------------------------------------------- Letter :3.2.14

The schedule contained five contracting initiatives for maritime
system supplies.  These five initiatives involve a combination of
corporate contracting, long-term contracting, and direct delivery
concepts.  The contracts cover a range of items, including valves,
filters, and pumps used on Navy vessels.  The schedule provided
planned contract award dates for these initiatives. 


         OTHER CATEGORIES OF
         SUPPLIES
------------------------------------------------------- Letter :3.2.15

The schedule contained 14 contracting initiatives for other
categories of supplies and 2 electronic commerce initiatives.  Other
categories of supplies include industrial gases, fire fighting
equipment, metals, and water purification systems.  The contracting
initiatives include a combination of corporate contracting, long-term
contracting, and direct delivery concepts.  The schedule generally
consisted of actual or estimated contract award dates and other
contract information. 

The first electronic commerce initiative, called the Electronic
Commerce Mall, is designed to allow DOD customers to order supplies
using the Internet.  It also provides the customer with the
capability to search for, find, and select items.  The schedule
information consisted of the date that the latest version of the
initiative was fielded to DOD customers.  The second electronic
commerce initiative is to place suppliers' catalogs on electronic
ordering systems that are accessible to DOD customers.  The schedule
information consisted of the fiscal year that contracts were awarded
for seven electronic catalogs. 


      DLA BELIEVES SCHEDULE
      INITIATIVES ARE UNCERTAIN
---------------------------------------------------------- Letter :3.3

DLA officials stated that planning information was not provided for
the initiatives because of the uncertain nature of the initiatives. 
The officials stated that many initiatives listed in the schedule are
tests that may not become full-scale programs if they do not meet the
criteria of (1) providing consistently high quality materials to the
warfighter at the time and location they are needed and (2) overall
savings to DOD.  In addition, DLA does not have the authority to
require the military services to participate in these programs. 
Therefore, DLA's schedule did not predict the extent to which each
military installation would use these initiatives. 

DLA, however, has been able to develop such implementation plans for
other initiatives, including its most successful ones to date.  For
example, when DLA implemented the prime vendor program for food and
medical supplies, it developed schedules with specific dates for
concept testing and evaluation, expansion to other sites, and full
implementation.  This information provided a basis for measuring the
progress DOD was making in adopting these concepts. 


   CONCLUSIONS
------------------------------------------------------------ Letter :4

Although DLA's best practices implementation schedule identifies a
variety of initiatives, it does not contain the information necessary
to assess implementation progress, the initiatives' use in any
particular supply category, or the results of the initiatives as
measured in terms of cost, service, and readiness.  Such information
is essential for oversight by Congress and DOD managers as they seek
to determine whether the initiatives are being implemented in a
timely manner over the desired scope of operations and are achieving
the intended results. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :5

To develop a more effective implementation schedule, we recommend
that the Secretary of Defense direct the Director of DLA to revise
its schedule.  For each supply category, the schedule should identify
the percentage of future sales or percentage of the items managed
that DLA projects will be covered by the initiatives, key performance
indicators to measure the overall impact the initiatives will have on
logistics costs and efficiencies of operations, and plans for
expanding or fully implementing the initiatives.  For prime vendor
initiatives the schedule should provide specific information on (1)
milestones for testing and evaluating each concept, (2) potential
implementation sites, (3) planned dates for implementing the
practices at the potential sites, and (4) the projected date that
implementation will be completed. 


   MATTER FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :6

In commenting on a draft of this report, DOD indicated that it does
not plan to revise the schedule in a manner suggested in our
recommendation.  If Congress decides it wants more information
regarding DOD's plan to implement best practices over the next 3
years, it may wish to consider requiring DOD to supplement the
information in each supply category with the type of information
listed in our recommendation. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

In commenting on a draft of this report, DOD agreed that more
information is needed to fully assess DLA's best practice
initiatives, but disagreed with our recommendation that DLA's
schedule should be revised to provide that information for each
supply category.  DOD stated that the information contained in the
schedule is the best available at this time and that the specific
items that will be covered by the initiatives and specific
performance measures are subject to negotiations with potential
contractors. 

DOD also disagreed with our recommendation that DLA provide key
implementation information for prime vendor initiatives.  DOD stated
that the pharmaceutical, medical, and subsistence prime vendor
initiatives were already completed, one of the clothing and textile
prime vendor programs was tested and would not be expanded, and three
other prime vendor initiatives discussed in the schedule were
evolving, and expansion depended on successful testing and customer
commitment to use the program.  Rather than revise the schedule to
provide the information we recommended, DOD suggested that DLA
provide annual updates for each of the next 2 years detailing
progress in expanding the initiatives listed in the schedule. 

Although we agree that the identification of specific items to be
included in the prime vendor initiatives and performance metrics are
subject to negotiations with potential contractors, these issues are
separate and distinct from specific goals, objectives, milestones,
and key performance indicators that should be a part of DLA's
strategy to adopt best practices within the 3-year time frame
specified in Section 395 of the National Defense Authorization Act
for Fiscal Year 1998.  We also agree that the prime vendor programs
are evolving, and that they depend on success at test sites and
customer commitment to work effectively.  While we recognize these
uncertainties exist, we believe that should not preclude DOD from
establishing target goals, objectives and milestones that can be
measured and tracked.  Without such information, Congress and DOD
managers would have limited oversight in assessing the progress and
impact of best practices on improving DOD's management of consumable
items.  Since DOD disagreed with our recommendation to revise DLA's
schedule, we added a Matter for Congressional Consideration
concerning whether Congress may want DOD to supplement the schedule
information it has provided. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

Our analysis of DLA's schedule was based on our prior work comparing
DOD and private sector logistics practices, the information contained
in DLA's schedule, and discussions with DOD officials.  We examined
each category of supply to determine if it contained initiative
coverage information, detailed expansion plans, and key performance
metrics we have found in other successful best practice strategies. 

We interviewed officials at DLA Headquarters, Fort Belvoir, Virginia,
and obtained detailed information about ongoing and planned
initiatives from the Defense Supply Center Columbus, Ohio; Defense
Supply Center Richmond, Virginia; Defense Supply Center Philadelphia,
Pennsylvania; and Defense Energy Support Center, Fort Belvoir,
Virginia.  We also obtained and analyzed information from these
organizations on inventory levels, response times, operating costs,
and other related performance measures.  In addition, we used
information from our related reports that have been issued since
1991. 

To obtain additional details on DLA's initiatives, we visited Marine
Corps Headquarters, Arlington, Virginia; Camp Lejeune Marine Corps
Base, Jacksonville, North Carolina; Parris Island Marine Corps
Recruit Depot, Beaufort, South Carolina; and Lackland Air Force Base
and Wilford Hall Medical Center, San Antonio, Texas.  We discussed
with logistics personnel and end users at these locations the results
of DLA's initiatives, the impacts on supply operations, customer
satisfaction, and the approach used for adopting best practices at
their facilities.  We also visited a company that is as a prime
vendor for DOD, and discussed with officials the impact of the
initiative on its operations and the feasibility for adopting the
concept to encompass a greater part of DOD's operations. 

We conducted our review from March to June 1998 in accordance with
generally accepted government auditing standards. 


---------------------------------------------------------- Letter :8.1

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


Please contact me on (202) 512-8412 if you or your staff have any
questions concerning this report.  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. 

James F.  Wiggins
Robert L.  Repasky
Barbara L.  Wooten
Karen S.  Blum

CHICAGO FIELD OFFICE

Matthew B.  Lea

DALLAS FIELD OFFICE

Robert D.  Malpass

RELATED GAO PRODUCTS

Inventory Management:  DOD Can Build on Progress by Using Best
Practices for Reparable Parts (GAO/NSIAD-98-97, Feb.  27, 1998). 

Defense Inventory Management:  Expanding Use of Best Practices for
Hardware Items Can Reduce Logistics Costs (GAO/NSIAD-98-47, Jan.  20,
1998). 

Inventory Management:  Greater Use of Best Practices Could Reduce
DOD's Logistics Costs (GAO/T-NSIAD-97-214, July 24, 1997). 

Inventory Management:  The Army Could Reduce Logistics Costs for
Aviation Parts by Adopting Best Practices (GAO/NSIAD-97-82, Apr.  15,
1997). 

Defense Inventory Management:  Problems, Progress, and Additional
Actions Needed (GAO/T-NSIAD-97-109, Mar.  20, 1997). 

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). 

*** End of document. ***