Defense Inventory Management: Expanding Use of Best Practices for
Hardware Items Can Reduce Logistics Costs (Letter Report, 01/20/98,
GAO/NSIAD-98-47).
Pursuant to a congressional request, GAO reviewed the Department of
Defense's (DOD) progress in adopting inventory management practices for
hardware items, focusing on: (1) DOD and private sector practices for
managing hardware items; (2) whether DOD has adopted best practices for
these items; and (3) opportunities that DOD can take advantage of to
improve its management of hardware items.
GAO noted that: (1) while DOD has implemented some innovative management
practices, more opportunities exist to better manage its reported $5.7
billion hardware inventory and achieve substantial savings; (2) DOD
continues to manage its hardware inventory using outdated and
inefficient business practices that create unnecessary inventory levels,
provide poor customer service, generate excess and obsolete inventory,
and cost approximately $1 billion per year to manage and distribute; (3)
DOD buys hardware inventory years in advance of when the items are
actually used; (4) for example, based on GAO's analysis of DOD records,
62 percent of DOD's hardware items did not have a demand from September
1995 to August 1996, and an additional 21 percent of the items had
enough inventory to last for more than 2 years; (5) these items account
for about $4.4 billion, or 77 percent, of DOD's $5.7 billion hardware
inventory; (6) despite DOD's substantial investment in inventory, in
many cases, hardware inventory is not available when needed by DOD
customers; (7) when this happens, the repair of weapon systems and
components is often delayed; (8) the Navy has estimated that the lack of
parts increases the repair time for aviation parts by as much as 74
percent; (9) DOD's overall progress in adopting best management
practices for hardware items has been limited; (10) in February 1997,
DOD began testing, on a limited basis, the prime vendor concept for
hardware items--one of the concepts GAO recommended; (11) these tests
will potentially affect about 2 percent of DOD's $3.1 billion annual
sales of these items; (12) these tests do not, however, fully optimize
the services available in the private sector, such as ordering, storing,
and distributing supplies to the customer; (13) the business practices
GAO recommended in its past reports have, for the most part, been used
in the private sector to provide customers with a capability to order
supplies as they are needed; (14) ordering supplies as they are needed,
combined with quick logistics response times, reduces overall supply
system costs, eliminates large inventories, and enables companies to
reduce or eliminate the possibility of ordering supplies that may not be
needed or become obsolete; and (15) to achieve similar inventory
reductions, infrastructure savings, and improved customer service, DOD
could expand its prime vendor programs to include tasks such as
ordering, storing, and distributing supplies to the customer, and fully
use the services offered under these programs.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-98-47
TITLE: Defense Inventory Management: Expanding Use of Best
Practices for Hardware Items Can Reduce Logistics Costs
DATE: 01/20/98
SUBJECT: Inventory control systems
Military cost control
Logistics
Surplus property
Federal supply systems
Military inventories
Federal property management
IDENTIFIER: DOD Prime Vendor Program
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Cover
================================================================ COVER
Report to the Ranking Minority Member, Committee on Armed Services,
U.S. Senate
January 1998
DEFENSE INVENTORY MANAGEMENT -
EXPANDING USE OF BEST PRACTICES
FOR HARDWARE ITEMS CAN REDUCE
LOGISTICS COSTS
GAO/NSIAD-98-47
Inventory Management
(709231)
Abbreviations
=============================================================== ABBREV
ALC - Air Logistics Center
DLA - Defense Logistics Agency
DOD - Department of Defense
OMB - Office of Management and Budget
Letter
=============================================================== LETTER
B-278395
January 20, 1998
The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United States Senate
Dear Senator Levin:
This report is the 11th in a series of reports comparing the
Department of Defense's (DOD) logistics practices with those of the
private sector.\1 As you requested, we are continuously examining
DOD's inventory management practices to identify areas where costs
can be reduced and problems can be avoided by using leading private
sector practices. This report focuses on DOD's progress in adopting
best inventory management practices for hardware items such as
bearings, valves, and bolts. The objectives of this review were to
determine (1) DOD and private sector practices for managing hardware
items, (2) whether DOD has adopted best practices for these items,
and (3) opportunities that DOD can take advantage of to improve its
management of hardware items.
--------------------
\1 See related GAO products at end of report.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
While DOD has implemented some innovative management practices, more
opportunities exist to better manage its reported $5.7-billion
hardware inventory and achieve substantial savings.\2 DOD continues
to manage its hardware inventory using outdated and inefficient
business practices that create unnecessary inventory levels, provide
poor customer service, generate excess and obsolete inventory, and
cost approximately $1 billion per year to manage and distribute.
DOD buys hardware inventory years in advance of when the items are
actually used. For example, based on our analyses of DOD records,
62 percent of DOD's hardware items did not have a demand from
September 1995 to August 1996, and an additional 21 percent of the
items had enough inventory to last for more than 2 years. These
items account for about $4.4 billion, or 77 percent, of DOD's $5.7
billion hardware inventory. Despite DOD's substantial investment in
inventory, in many cases, hardware inventory is not available when
needed by DOD customers. When this happens, the repair of weapon
systems and components is often delayed. The Navy has estimated that
the lack of parts increases the repair time for aviation parts by as
much as 74 percent.
DOD's overall progress in adopting best management practices for
hardware items has been limited. In February 1997, DOD began
testing, on a limited basis, the prime vendor concept for hardware
items--one of the concepts we recommended.\3 These tests will
potentially affect about
2 percent of DOD's $3.1 billion annual sales of these items. These
tests do not, however, fully optimize the services available in the
private sector, such as ordering, storing, and distributing supplies
to the customer.
The business practices we recommended in our past reports have, for
the most part, been used in the private sector to provide customers
with a capability to order supplies as they are needed and then
receive those items within hours after the order is placed. Ordering
supplies as they are needed, combined with quick logistics response
times, reduces overall supply system costs, eliminates large
inventories, and enables companies to reduce or eliminate the
possibility of ordering supplies that may not be needed or become
obsolete. To achieve similar inventory reductions, infrastructure
savings, and improved customer service, DOD could expand its prime
vendor programs to include tasks such as ordering, storing, and
distributing supplies to the customer, and fully use the services
offered under these programs.
--------------------
\2 The $5.7 billion is calculated using DOD's valuation methodology
where excess inventory is at salvage prices (3.2 percent of the
item's latest acquisition costs). If the excess hardware inventory
is valued at its latest acquisition cost, hardware inventory would be
an estimated $7.2 billion.
\3 A prime vendor buys inventory from a variety of suppliers, stores
the inventory in its own warehouse, and delivers inventory to the
customer within hours of receiving the order.
BACKGROUND
------------------------------------------------------------ Letter :2
The Defense Logistics Agency (DLA) is the primary manager of
consumable supplies, including hardware items, used by the military
services. Hardware items encompass a large part of DLA's overall
operations. As shown in table 1, DLA manages about 4 million items
of which 3.9 million, or 97 percent, are classified as hardware
items. As of September 30, 1996, DLA's hardware inventory, valued at
$5.7 billion, accounted for 74 percent of DLA's total consumable
inventory.
Table 1
Status of DLA Consumable Item Inventory
(fiscal year 1996)
DLA's Percentage of
DLA's total hardware
hardware inventory inventory to
Category inventory \a total inventory
-------------------------- ------------ --------- -----------------
Number of items managed\b 3.9 million 4.0 97
million
Value of inventory on hand $5.7 billion $7.7 74
billion
Value of material $2.6 billion $5.5 47
purchases billion
Operating costs $1.0 billion $1.4 71
billion
----------------------------------------------------------------------
\a Excludes fuels.
\b Data as of June 1997.
Traditionally, DLA buys hardware items in large quantities, stores
them in distribution depots until they are requested by the services,
and then ships them to the appropriate service facility. For
example, the services operate over 20 repair depots where large
amounts of these items are used for regularly scheduled maintenance
of equipment and weapon systems. To store and distribute hardware
items, DLA uses storage structures at 24 distribution depots, which
are DOD facilities with several large warehouses, as well as 50 or
more additional storage sites. In fiscal year 1996, DLA filled about
12 million requests for hardware items.
DLA's fiscal year 1996 material management costs for hardware items
were reported at about $3.6 billion. Of that amount, about $2.6
billion was spent to purchase hardware items from commercial
suppliers and $1 billion was spent to manage and distribute
inventory. To recover its operating costs, DLA charges the military
services the cost of the item plus a surcharge, which covers supply
center and distribution expenses, inflation, and material-related
expenses such as inventory losses. In fiscal year 1996, the
surcharge averaged about 39 percent for hardware items. In contrast,
DLA has lowered the surcharge for medical supplies from 21.7 percent
to 7.9 percent using best management practices from the private
sector.
DOD CONTINUES TO USE
INEFFICIENT AND INEFFECTIVE
MANAGEMENT TECHNIQUES FOR
HARDWARE ITEMS
------------------------------------------------------------ Letter :3
DOD continues to use outdated and inefficient business practices to
manage its hardware inventory. For example, DOD buys inventory years
in advance of when the items are actually used. Based on our
analyses of DLA records, 62 percent of DLA's hardware items did not
have a demand from September 1995 to August 1996 (see fig. 1). We
found an additional
21 percent of DLA's hardware items had enough inventory on hand to
last for more than 2 years based on demands during the same period.
These items accounted for about $4.4 billion, or 77 percent, of DLA's
$5.7 billion hardware inventory.
Figure 1: Years of Supply on
Hand for Hardware Items Managed
by DLA
(See figure in printed
edition.)
DOD also uses a multilayered process to order and deliver hardware
supplies. When the services order hardware supplies from DLA, the
supplies are sent from the DLA warehouses to the military services.
According to DOD records, this order and delivery process took an
average of 25 days in 1996. The services then operate a base-level
logistics system to deliver the inventory to the end user. This
system usually requires inventory to be stored in three separate
locations--bulk storage warehouses, central distribution storerooms,
and end-user locations. The traditional multilayered logistics
system, as highlighted in our April 1997 report on the Army's
logistics system, is shown in figure 2, using the Corpus Christi Army
Depot's supply system as an illustration.
Figure 2: DOD's Logistics
System Used at Corpus Christi
Army Depot
(See figure in printed
edition.)
\a DLA inventory is stored at multiple locations nationwide to
support all DOD customers.
As of September 30, 1996, DLA reported it was storing $5.7 billion
worth of hardware items in distribution depots and warehouses. Based
on inventory levels and past demands for items, we estimate that this
inventory could satisfy DOD's requirements, on average, for the next
2 years. As shown in figure 2, a base-level logistics system can
also hold millions of dollars of hardware inventory. When DLA-owned
and service-owned inventories are combined, the total inventory
levels could meet current DOD requirements, in some cases, for many
years.
Despite this large investment in inventory, DOD's supply system
frequently does not meet the needs of its customers. As of September
1996, DLA reported it had over 574,000 customer orders, valued at
$843 million, that it could not fill because it did not have the
right stock on hand. Customers had been waiting on parts for an
average of over 3 months. Also, the base-level supply system
frequently could not fill orders placed by mechanics and other
customers. For example, according to Army records, the base
warehouse at one Army depot did not fully meet customer orders 76
percent of the time during fiscal year 1996. At four other locations
we examined, base-level systems did not meet customer needs between
30 and 72 percent of the time.
When hardware items are not immediately available to mechanics, the
repair of weapon systems and their components is delayed, which
increases repair times. For example, the Navy calculates that the
lack of parts increases the repair time for aviation parts by as much
as 74 percent. As of January 1997, the Navy reported it had stopped
repairing over 12,000 aircraft components, valued at $516 million,
because parts were not available to complete repairs. The partially
repaired items were packaged and moved to a warehouse next to the
repair facility. At the time of our review, these items had been in
storage for an average of 230 days. Also, according to Air Force
records, at one Air Force depot location, mechanics stopped repairs
on 2,748 items, valued at $193 million, because necessary parts were
not available.
BEST PRACTICES HAVE REDUCED
PRIVATE SECTOR LOGISTICS COSTS
------------------------------------------------------------ Letter :4
DOD recognizes that it cannot continue to use outdated and
inefficient business practices. Due to the pressures of budgetary
constraints, DOD has recognized that it must seek ways to make
logistics processes as efficient as possible. As a result, the
Office of the Secretary of Defense has encouraged DLA and the
military services to use alternatives to DOD's traditional logistics
systems, such as innovative logistics concepts used by commercial
firms to improve operations.
Some of the alternatives are new concepts that private sector
companies have successfully used during the past decade to improve
their management of consumable items. These items were targeted
because they are generally standard items with a low unit cost, are
commonly stocked by several suppliers, and are used in large
quantities.\4
In general, these concepts provide inventory users with a capability
to order supplies as they are needed and then receive those items
within hours after an order is placed. Ordering supplies only as
they are needed, combined with quick logistics response times, enable
companies to reduce or eliminate the possibility of inventory
spoilage or obsolescence and reduce overall supply system costs.
In prior reports, we highlighted three concepts, or best practices,
that reflect this new business philosophy in the management of
consumable items (see table 2). Each of these practices has resulted
in significant savings for the companies that used them and improved
their inventory management systems. We recommended that DOD test
these concepts and expand them, where feasible, to more defense
facilities. Of the three concepts--prime vendor, supplier park, and
integrated supplier--we believe the integrated supplier offers DOD
the greatest opportunity for streamlining its logistics operations,
reducing costs, and improving customer service.\5
Table 2
Best Practices Recommended By GAO
Concept Description
-------------- ------------------------------------------------------
Prime vendor A single vendor (prime vendor) buys inventory from a
variety of suppliers and stores the inventory in its
own warehouse. This concept is characterized by a
close partnership between the prime vendor and the
customer. The customer orders supplies from the prime
vendor, using electronic ordering systems that, in
some cases, are provided by the prime vendor. The
prime vendor delivers inventory to the customer within
hours of receiving the order.
Local One or more suppliers locate a distribution center
distribution within close proximity to their customers. From this
centers/ location, the supplier delivers items to the customer
supplier parks within 24 hours or less of receiving an order. The
supplier is linked electronically with the customer.
In some cases, the supplier can perform the receiving
function for the customer in the local distribution
center, before the inventory leaves the facility.
Integrated An integrated supplier assumes almost total inventory
supplier management responsibilities for a customer. This is
the most aggressive form of a supplier partnership
where a supplier representative works in the
customer's facility, ordering supplies as they are
needed and replenishing storage locations. Inventory
is stored in the supplier's warehouse until ordered,
then delivered on a "just-in-time" basis. An
integrated supplier can also perform quality
inspections, maintain data on usage, test the quality
of parts, prepare parts kits, establish electronic
data interchange links and bar coding, and provide
vendor selection management.
----------------------------------------------------------------------
The companies that have adopted these best practices have
significantly reduced their logistics costs. For example, as we
reported in December 1991, Vanderbilt University Medical Center
reduced inventory levels by $1.7 million (38 percent) through the use
of a prime vendor program. In 1993, we reported PPG Industries
eliminated $4.5 million
(80 percent) in maintenance and repair supplies and saved about
$600,000 in annual operating costs by locating 10 suppliers'
activities at a supplier park about 600 yards from the PPG facility.
In 1996, we found that a leading distributor of aircraft supplies
reported its integrated supplier program reduced one customer's
inventory by $7.4 million (84 percent) while filling 98 percent of
the customer's orders within 24 hours.
DOD has demonstrated that best practices can be applied to DOD
operations. Starting in 1993, DOD successfully applied the prime
vendor concept to its management of medical supplies. The prime
vendor, which delivers items to DOD hospitals when ordered, has
enabled DOD to reduce the need to store and distribute medical
supplies. As the prime vendor concept was established nationwide,
inventory levels began to decline, and warehouses once filled with
medical items were emptied. DOD's prime vendor for medical supplies,
along with other inventory reduction efforts, has resulted in savings
that we estimate exceed $700 million.
--------------------
\4 Consumable items are discarded after use rather than repaired.
\5 The use of an integrated supplier is discussed in our testimony
Inventory Management: Greater Use of Best Practices Could Reduce
DOD's Logistics Costs (GAO/T-NSIAD-97-214, July 24, 1997).
DOD COULD BUILD ON EFFORTS TO
USE BEST PRACTICES FOR HARDWARE
ITEMS
------------------------------------------------------------ Letter :5
To its credit, DLA has tried new inventory practices for managing
hardware items. However, despite DOD's success with its prime vendor
program for medical supplies, its efforts for hardware items are
limited in scope and represent only a small part of DLA's logistics
operations. To achieve greater inventory reductions, infrastructure
savings, and improved customer service that we have seen in the
private sector, we believe DOD needs to expand its use of private
sector inventory practices, such as prime vendors and integrated
suppliers, and use the full range of services offered under these
programs.
DLA'S INITIATIVES HAVE NOT
PROGRESSED MUCH BEYOND
DIRECT VENDOR DELIVERY
---------------------------------------------------------- Letter :5.1
Since 1992, one of DLA's main initiatives has been a direct vendor
delivery program. Under this program, DLA uses long-term contracts
and electronic data systems to enable certain suppliers to deliver
items directly to military installations instead of delivering the
items to DLA storage sites. In fiscal year 1996, DLA reported that
17 percent of hardware sales were filled using the direct vendor
delivery program. As shown in figure 3, this percentage has not
varied much since 1992.
Figure 3: Direct Delivery
Sales of Hardware Items (fiscal
year 1992 to 1996)
(See figure in printed
edition.)
While DLA's use of direct vendor delivery has remained fairly stable
since 1992, so have DLA's hardware inventory levels (see fig. 4).\7
Figure 4: DLA Hardware
Inventory Levels (fiscal year
1992 to 1996)
(See figure in printed
edition.)
While the direct delivery program eliminates the need to store and
distribute inventory from DLA warehouses, lowering the cost to DOD
customers, it has not provided a quick response to customer orders
because the traditional DOD ordering process has not changed. With
this program, requisitions are still sent from the services to DLA,
where the orders are then relayed to a supplier. Upon receipt of an
order, the supplier ships the items to the appropriate military
installation. According to DLA records, with the direct delivery
program, in 1996 it took an average of 54 days for customers to
receive ordered items, or twice as long as the 25-day delivery
average for items stocked in DLA warehouses. Both of these delivery
times are significantly longer than the times prime vendors or
integrated suppliers have achieved--within 24 hours of receiving an
order (see fig. 5).
Figure 5: Delivery Time
Comparison
(See figure in printed
edition.)
--------------------
\7 DLA's reported value of hardware inventories includes inventory
transferred from the military departments as part of DOD's consumable
item transfer program, the majority of which were transferred between
fiscal year 1992 and 1994.
DOD HAS APPLIED A LIMITED
FORM OF THE PRIME VENDOR
CONCEPT TO HARDWARE ITEMS
---------------------------------------------------------- Letter :5.2
In fiscal year 1997, DOD began using a prime vendor concept, called
the Virtual Prime Vendor program, for hardware supplies on a limited
basis. One of the two testing areas was supply support of depot
repair operations. In February 1997, DOD began using a prime vendor
program to support the C-130 propeller repair shop at the
Warner-Robins Air Logistics Center (ALC). DLA established this
program to determine the feasibility of using prime vendors for
hardware items instead of the traditional military supply system and
to improve service, reduce inventories, and lower costs. Because the
program was only recently initiated, DOD had not yet evaluated the
program's results at the time of our review. By the second quarter
of fiscal year 1998, the Air Force plans to expand the prime vendor
program at Warner-Robins ALC and begin programs at two other Air
Force repair depots. The Navy plans to test the concept at one depot
location (see table 3). The Army has not yet developed a program to
test the prime vendor concept at a repair depot or at any operating
base repair activities. We estimate that DOD's programs, when
implemented, will apply to about 2 percent of DLA's $3.1 billion
annual sales of hardware items.
Table 3
DLA Prime Vendor Programs at Repair
Depots
(Dollars in millions)
Estimated
annual
Location Types of items Contract award sales
--------------------- --------------------- ---------------------- ----------
Warner-Robins ALC C-130 aircraft parts October 1996 (actual) $22
Warner-Robins ALC Avionics items 1st quarter FY 1998 $10
(estimated)
Warner-Robins ALC Industrial items 2nd quarter FY 1998 $8
(estimated)
Oklahoma City ALC Industrial items 2nd quarter FY 1998 $10
(estimated)
Ogden ALC Industrial items 2nd quarter FY 1998 $4.5
(estimated)
North Island Naval Industrial items 2nd quarter FY 1998 $4.5
Aviation Depot (estimated)
--------------------------------------------------------------------------------
Also in February 1997, DLA began using the prime vendor concept for
facilities maintenance supplies such as plumbing, electrical, and
lumber items. Under this concept, a prime vendor serves a geographic
region where all military facilities within the region can elect to
order maintenance supplies from the vendor. As of July 1997, 9 of 73
military facilities in the first region had elected to use the prime
vendor program. By June 1999, DLA plans to have a prime vendor under
contract for
10 geographic regions, covering the United States and overseas
locations. As of July 1997, facilities in only 4 of the 10 regions
had committed to use the program.
In June 1997, the Under Secretary of Defense (Comptroller)/Chief
Financial Officer endorsed this concept and asked the Director of
DLA, in conjunction with the military services, to develop a regional
implementation plan for the DLA prime vendor program for facilities
maintenance supplies. He asked that the plan identify the critical
events and site designations for regional implementation within 12
months and provide for nationwide availability by the middle of
fiscal year 1999. We believe this plan is critical to the program's
success because it demonstrates top-management support, and it will
further encourage military units to use the prime vendor services
once they are established.
DOD COULD FURTHER EXPAND
PRIME VENDOR AND INTEGRATED
SUPPLIER PROGRAMS
---------------------------------------------------------- Letter :5.3
DOD's prime vendor programs for hardware items, which are similar to
the best practices we observed in the private sector, can be expanded
to achieve greater savings while improving service. For example,
neither DLA's direct delivery nor prime vendor programs streamline
the services' base-level logistics systems to the extent we have seen
in the private sector. DOD personnel still order, receive, store,
and distribute material to the end users. If DOD transferred these
functions to a prime vendor or to an integrated supplier, it could
achieve substantial reductions in resource requirements and improve
service to its customers. This action would also allow items to be
bought at the time when they are actually needed, therefore
minimizing the potential of inventory obsolescence.
As figure 6 shows, the DLA wholesale system, and at least two of
three primary storage points in the base-level supply system, could
be bypassed by applying the integrated supplier concept because the
integrated supplier would deliver inventory directly to maintenance
shops or end-user locations. The integrated supplier could also
monitor storage bins, order parts, and restock bins once parts are
delivered. In the private sector, having the supplier deliver
inventory directly to these locations improves the availability of
inventory and actively involves the supplier as a "partner" in the
customer's operations. The supplier also becomes involved in testing
parts for quality and monitoring part usage and ordering supplies
when needed.
Figure 6: Potential Impact of
an Integrated Supplier on DOD's
System
(See figure in printed
edition.)
KEY FACTORS IN FURTHER
ADOPTING BEST PRACTICES
---------------------------------------------------------- Letter :5.4
According to DOD officials, there are no major impediments to
adopting best practices such as prime vendor, supplier park, and
integrated supplier concepts. However, DOD's success in expanding
these concepts to encompass a larger part of its operations will
depend on its ability to address two key factors. Specifically, (1)
DOD may need to prepare a cost comparison between government and the
commercial providers in accordance with the Office of Management and
Budget (OMB) Circular A-76 and (2) military customers will have to
overcome their reluctance to trying new business practices.
According to Air Force officials, a prime vendor program that would
replace the base-level supply system and would involve more than
10 government personnel may not be contracted out without a cost
comparison in accordance with OMB Circular A-76. According to the
Air Force, the Warner-Robins ALC has about 219 government personnel
involved in supply operations. Air Force officials stated that if
these positions were eliminated through the prime vendor program, a
cost comparison would first be required, which may take 2 years to
complete. We agree that a cost comparison could be a significant
issue in implementing these programs. Our work has consistently
shown, however, that this process is cost-effective because
competition generates savings--usually through a reduction in
personnel--whether the competition is won by the government or the
private sector.
Another factor is that military service customers have been reluctant
to try the new business practices. DOD has traditionally relied on
its own internal logistics system to support its logistics needs--a
philosophy that private companies have moved away from to lower the
cost of doing business, provide better service, and remain
competitive. According to DLA, it has been a challenge to get the
services to agree to use the prime vendor programs. For example, DLA
has laid out an implementation schedule for its facilities and
maintenance prime vendor program, but, to date, the services have
committed to use this program for less than 20 percent of the demands
for these items. In another example, the Army has yet to establish a
test program to determine the feasibility of using prime vendors or
integrated suppliers at its repair facilities. Without the
commitment of the services to these programs, DOD's success in
improving its operations will be limited.
The "corporate culture" within DOD has been traditionally resistant
to change. Organizations often find changes in operations
threatening and are unwilling to change current behavior until
proposed ideas have been proven. In June 1994, we convened a
symposium on reengineering that brought together executives from five
Fortune 500 companies that have been successful in reengineering
activities.\8 Panel members at the symposium expressed the view that
committed and engaged top managers must support and lead
reengineering efforts to ensure success because top management has
the authority to encourage employees to accept reengineered roles.
Also, top management has the responsibility to set the corporate
agenda and define the organization's culture and the ability to
remove barriers that block changes to the corporate mindset.
--------------------
\8 Reengineering Organizations: Results of a GAO Symposium
(GAO-NSIAD-95-34, Dec. 13, 1994).
CONCLUSIONS
------------------------------------------------------------ Letter :6
There is a high potential for DOD to greatly expand the use of the
private sector best practices we have recommended to improve
logistics operations and lower costs. DOD has adopted the prime
vendor concept to improve the management of medical inventories,
demonstrating that such private sector practices can be applied to
DOD operations. However, DOD has adopted a prime vendor program for
hardware items only in a limited way and the other changes that have
been introduced have not resulted in significant improvements.
In addition, the services have been slow to adopt these initiatives
into their operations. For example, the Army has yet to establish a
plan to test the prime vendor concept at repair depots and the Navy
plans to only begin testing this concept in fiscal year 1998. To
ensure the military services pursue best practices to the maximum
extent possible, DOD's top management needs to continue its
commitment to changing its inventory management culture and further
motivate the services to use these practices.
RECOMMENDATIONS
------------------------------------------------------------ Letter :7
To encourage DLA and the services to more aggressively apply best
practices to its operations, we recommend that the Secretary of
Defense:
-- Identify a "Champion of Change" within the Office of the
Secretary of Defense that would be responsible for coordinating
and overseeing improvement initiatives throughout DOD's
operations and ensuring the prime vendor and integrated supplier
concepts (1) encompass a broader part of DOD's operations, (2)
fully use the services offered in the private sector, and (3)
are used by all military services whenever it is cost effective
to do so.
-- Direct (1) the Secretary of the Army to identify at least one
repair depot location that will join the other services in
testing the prime vendor concept and (2) the secretaries of the
military services to identify repair activities at operating
bases as test sites.
-- Direct the Director of DLA and the secretaries of each military
service to establish a test of the integrated supplier concept
at one or more repair depots. DLA and the military services
should (1) establish aggressive milestones for testing and
implementing the prime vendor and integrated supplier programs
so as not to delay implementing such programs if the tests find
them to be feasible and (2) develop the means to expeditiously
measure the total costs and benefits under the prime vendor and
integrated supplier programs to compare them to the total costs
and benefits incurred under the traditional system.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :8
In commenting on a draft of this report, DOD generally concurred with
the findings and recommendations. DOD stated that the Office of the
Deputy Under Secretary of Defense (Logistics) is responsible for
coordinating and overseeing material management improvement
initiatives throughout DOD and will be responsible for ensuring that
private sector practices are used by the military services to the
maximum extent possible where it meets readiness requirements and is
cost-effective to do so. According to DOD, it will direct the Army
to identify a repair depot that will test the prime vendor concept.
It will also direct DLA and the military services to identify one or
more repair depots to test the integrated supplier concept. DOD also
agreed to identify repair activities at operating bases that would
test the prime vendor concept and DOD expects to have test sites
designated by June 30, 1998. We plan to closely monitor DOD's
progress in establishing aggressive milestones for testing and
implementing these concepts and in developing the means for measuring
the total costs and benefits incurred from these tests. DOD's
comments are included in appendix I.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :9
We reviewed documents and interviewed officials on DOD's logistics
policies, practices, and efforts to improve its operations. We
contacted officials at the Office of the Deputy Under Secretary of
Defense for Logistics, Washington, D.C.; DLA Headquarters, Fort
Belvoir, Virginia; Air Force Materiel Command, Wright-Patterson Air
Force Base, Ohio; Naval Supply Systems Command, Mechanicsburg,
Pennsylvania; Naval Air Systems Command, Arlington, Virginia; and the
Army Industrial Operations Command, Rock Island, Illinois. Also, we
discussed the potential applications of private sector logistics
practices to DOD's operations and any impediments to using these
practices with these officials.
To determine the nature and extent of DOD's progress in adopting best
practices, we visited the following organizations:
-- Defense Supply Center Richmond, Richmond Virginia;
-- Defense Supply Center Columbus, Columbus, Ohio;
-- Defense Industrial Supply Center, Philadelphia, Pennsylvania;
and
-- Warner-Robins ALC, Robins Air Force Base, Georgia.
These locations are involved in initiatives that are intended to
improve DOD's logistics operations. At these locations, we discussed
(1) inventory management practices that DOD is using for hardware
items; (2) best practices, programs, and tests underway or planned to
improve DOD operations; and (3) DOD officials' positions on the use
of best practices as alternatives to traditional DOD inventory
practices. At Warner-Robins ALC, the pilot location for several of
DOD's initiatives, we discussed with supply and maintenance personnel
the results of the initiatives and the impacts on supply operations.
Also during our review, we obtained and analyzed detailed information
on inventory levels and usage, supply effectiveness and response
times, operating costs, and other related logistics performance
measures. Except where noted, our data reflected inventory valued by
DOD using its standard inventory valuation method--inventory valued
at latest acquisition costs and inventory classified as excess valued
at salvage prices (3.2 percent of its latest acquisition costs). We
did not test or otherwise validate DOD's inventory data.
To identify leading business practices, we used information from our
series of 10 reports that have been issued since 1991. This
information included the results of an extensive literature search of
leading inventory management concepts and detailed examinations and
discussions of logistics practices used by companies such as PPG
Industries, Bethlehem Steel, British Airways, United Airlines, and
Tri-Star Aerospace. We also participated in roundtables, symposiums,
and conferences 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. We
did not independently verify the accuracy of logistics costs and
performance measures provided by the private sector organizations.
We conducted our review from January 1997 to October 1997 in
accordance with generally accepted government auditing standards.
---------------------------------------------------------- Letter :9.1
We are sending copies of this report to the appropriate congressional
committees; the Secretaries of Defense, the Army, the Air Force, and
the Navy; the Directors of DLA and OMB; and other interested parties.
We will make copies available to others upon request.
Please contact me on (202) 512-8412 if you or your staff have any
questions concerning this report. The major contributors to this
report are listed in appendix II.
Sincerely yours,
David R. Warren, Director
Defense Management Issues
(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================== Letter
(See figure in printed edition.)
The following is a GAO comment on the Department of Defense's (DOD)
letter dated December 8, 1997.
GAO COMMENT
1. In commenting on a draft of this report, DOD stated that the
reported value of hardware inventories includes inventory transferred
from the military departments as part of DOD's consumable item
transfer program. According to DOD, when those transferred items are
excluded, the Defense Logistics Agency's (DLA) inventory of
consumable items decreased 36 percent between fiscal year 1992 and
1996. We qualified our report to address DOD's concerns. However,
since these items are now a part of DLA's total hardware inventories,
we believe aggressive steps are needed to reduce such inventories,
which are currently large enough to meet DOD's requirements for the
next 2 years. By expanding the use of best practices, DLA could
further reduce its hardware inventories and lower its operating
costs.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II
NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C.
Charles I. (Bud) Patton, Jr.
Kenneth R. Knouse, Jr.
DAYTON OFFICE
Matthew B. Lea
Robert L. Repasky
Frederick J. Naas
DALLAS OFFICE
Robert D. Malpass
ST. LOUIS OFFICE
Robert C. Sommer
RELATED GAO PRODUCTS
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).
Commercial Practices: Opportunities Exist to Reduce Aircraft Engine
Support Costs (GAO/NSIAD-91-240, June 28, 1991).
*** End of document. ***