Inventory Management: DOD Can Build on Progress by Using Best Practices
for Reparable Parts (Letter Report, 02/27/98, GAO/NSIAD-98-97).

Under Section 395 of the National Defense Authorization Act for Fiscal
Year 1998, the Defense Logistics Agency is required to submit to
Congress a schedule for implementing "best practices" for the
acquisition and distribution of certain types of consumable supplies and
equipment. Best practices are defined in the act as techniques that will
reduce inventory levels and costs and improve the responsiveness of the
logistics systems to user needs. This report discusses (1) private
sector practices that streamline logistics operations, (2) Defense
Department initiatives to improve its logistics systems, and (3) best
practices that can be used to improve the military's aircraft reparable
parts pipeline.

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

 REPORTNUM:  NSIAD-98-97
     TITLE:  Inventory Management: DOD Can Build on Progress by Using 
             Best Practices for Reparable Parts
      DATE:  02/27/98
   SUBJECT:  Logistics
             Equipment repairs
             Military materiel
             Inventory control systems
             Defense cost control
IDENTIFIER:  Army Velocity Management Program
             Navy Regional Maintenance Program
             Navy Regional Supply Program
             Navy Direct Vendor Delivery Program
             Air Force Lean Logistics Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

February 1998

INVENTORY MANAGEMENT - DOD CAN
BUILD ON PROGRESS BY USING BEST
PRACTICES FOR REPARABLE PARTS

GAO/NSIAD-98-97

Inventory Management

(709321)


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

  DLA - Defense Logistics Agency
  DOD - Department of Defense

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


B-279179

February 27, 1998

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

The Honorable Floyd Spence
Chairman
The Honorable Ike Skelton
Ranking Minority Member
Committee on National Security
House of Representatives

Section 395 of the National Defense Authorization Act for Fiscal Year
1998 requires the Director of the Defense Logistics Agency (DLA) to
develop and submit to Congress a schedule for implementing best
practices for the acquisition and distribution of categories of
consumable-type supplies and equipment listed in the section.  Best
practices were defined in the act as techniques that the Director of
DLA determines will reduce inventory levels and costs and improve the
responsiveness of the logistics system to user needs.  The act also
requires the implementation of such practices no later than November
2000.  In addition, the act requires us to report on the feasibility
of adding reparable parts to the list of items covered by section
395.  This report responds to that mandate. 

As agreed with your offices, this report specifically addresses (1)
private sector practices that streamline logistics operations, (2)
Department of Defense (DOD) initiatives to improve its logistics
systems, and (3) best practices that can be used to improve the
military services' aircraft reparable parts pipeline.  Our analysis
relates to work performed in public repair facilities rather than
contractor repair operations.  Because aircraft parts represent a
large portion of DOD's secondary inventory investment, we focused our
best practices analysis on DOD's management of these items.  However,
many of the logistics system improvements identified through our
analysis could be applied to DOD's management of other reparable
parts.\1


--------------------
\1 We have reported on the opportunities that exist for DOD to use
best practices for consumable items as well.  See Related GAO
Products at the end of this report for a listing of these and other
reports that discuss our best practices analyses of DOD logistics
systems. 


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

As of September 30, 1996, DOD reported the value of its secondary
inventory--consumable items and reparable parts--at $68.5 billion. 
Consumable items, such as clothing and medical supplies, are managed
primarily by DLA.  Reparable parts are generally expensive items that
can be fixed and used again, such as hydraulic pumps, navigational
computers, wing sections, and landing gear.  Each military service
manages reparable parts that are used for their operations.  These
management functions include determining how many parts will be
needed to support operations, purchasing new parts, and deciding when
broken parts need to be repaired.  As shown in figure 1, aircraft
reparable parts represent an estimated 59 percent of DOD's secondary
inventory. 

   Figure 1:  Estimated
   Composition of DOD's Secondary
   Inventory (as of
   Sept.  30, 1996)

   (See figure in printed
   edition.)

To provide reparable parts for their aircraft, the military services
use extensive logistics systems that were based on management
processes, procedures, and concepts that have evolved over time but
are largely outdated.  Each service'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 investment in personnel, equipment,
facilities, and inventory.  In our recent reports on the Army, the
Navy, and the Air Force logistics pipelines, we highlighted many of
the problems and inefficiencies associated with the services' current
logistics systems.  Findings from these reports are summarized in
appendix I. 


      LEGISLATIVE FRAMEWORK
---------------------------------------------------------- Letter :1.1

DOD must operate its logistics activities within the framework of
various legislative provisions and regulatory requirements.  Various
legislative provisions govern the size, composition, and allocation
of depot repair workloads between the public and private sectors. 
For example, the allocation of the depot maintenance workload between
the public and private sectors is governed by 10 U.S.C.  2466. 
According to the statute, not more than 50 percent of the funds made
available for depot-level maintenance and repair can be used to
contract for performance by nonfederal government personnel.  Other
statutes that affect the extent to which depot-level workloads can be
converted to private sector performance include (1) 10 U.S.C.  2469,
which provides that DOD-performed depot maintenance and repair
workloads valued at not less than $3 million cannot be changed to
contractor performance without a public-private competition and (2)
10 U.S.C.  2464, which provides that DOD activities should maintain a
government-owned and operated logistics capability sufficient to
ensure technical competence and resources necessary for an effective
and timely response to a national defense emergency. 

Another provision that may affect future DOD logistics operations is
10 U.S.C.  2474, added to the United States Code by section 361 of
the Fiscal Year 1998 National Defense Authorization Act.  Section
2474 requires the Secretary of Defense to designate each depot-level
activity as a Center of Industrial and Technical Excellence for
certain functions.  The act further requires the Secretary to
establish a policy to encourage the military services to reengineer
their depot repair processes and adopt best business practices. 
According to section 2474, a military service may conduct a pilot
program, consistent with applicable requirements of law, to test any
practices that the military service determines could improve the
efficiency and effectiveness of depot-level operations, improve the
support provided by the depots for the end user, and enhance
readiness by reducing the time needed to repair equipment. 

Further, efforts to outsource functions other than depot-level
maintenance and repair must be accomplished in accordance with the
requirement of the Office of Management and Budget Circular A-76,
various applicable provisions of chapter 146 of title 10 of the
United States Code, as well as recurring provisions in the annual DOD
Appropriations Act. 


      DEFENSE REFORM INITIATIVE
---------------------------------------------------------- Letter :1.2

In November 1997, the Secretary of Defense announced the Defense
Reform Initiative, which seeks to reengineer DOD support activities
and business practices by incorporating many business practices that
private sector companies have used to become leaner, more agile, and
highly successful.  The initiative calls for adopting modern business
practices to achieve world-class standards of performance in DOD
operations.  The Secretary of Defense stated that reforming DOD
support activities is imperative to free up funds to help pay for
high priorities, such as weapons modernization. 


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

Our work shows it is feasible for the list of items covered by
section 395 to be expanded to include reparable parts.  In fact, all
of the services and DLA have initiatives underway designed to improve
their logistics operations by adopting best practices.  Since 1996,
we have issued a series of reports that identify other best practices
that present opportunities for DOD to build on these improvement
efforts.  However, if section 395 were expanded to include reparable
parts, the responsibility for the development and submission of a
schedule to implement best practices would also have to be expanded
to include the military services, since responsibility for
service-managed reparable parts is beyond the purview of the Director
of DLA. 

Private sector companies have developed new business strategies and
practices that have cut costs and improved customer service by
streamlining logistics operations.  The most successful improvement
efforts included a combination of practices that are focused on
improving the entire logistics pipeline--an approach known as
supply-chain management.  The combination of practices we have
observed include the use of highly accurate information systems,
various methods to speed the flow of parts through the pipeline, and
the shifting of certain logistics functions to suppliers and third
parties. 

DOD recognizes that it needs to make substantial improvements to its
logistics systems.  The Army's Velocity Management program, the
Navy's regionalization and direct delivery programs, and the Air
Force's Lean Logistics initiative are designed to improve logistics
operations and make logistics processes faster and more flexible. 
Although these initiatives have achieved some limited success,
significant opportunities for improvement remain. 

Our work indicates that best practices developed by private sector
companies are compatible with DOD improvement initiatives.  However,
we recognize the use of these best practices must be accomplished
within the existing legislative framework and regulatory requirements
relating to defense logistics activities, such as the Office of
Management and Budget Circular A-76 . 


   PRIVATE SECTOR PRACTICES
   STREAMLINE LOGISTICS OPERATIONS
------------------------------------------------------------ Letter :3

We previously reported that several commercial airlines have cut
costs and improved customer service by streamlining their logistics
operations.  The most successful improvements include using highly
accurate information systems to track and control inventory;
employing various methods to speed the flow of parts through the
pipeline; shifting certain inventory tasks to suppliers; and having
third parties handle parts repair, storage, and distribution
functions.  One airline, British Airways, has substantially improved
its logistics operations over a 14-year period.  British Airways
approached the process of change as a long-term effort that requires
steady vision and a focus on continual improvement.  Although the
airline has reaped significant gains from improvements, it continued
to reexamine operations and make improvements to its logistics
system.  Adopting practices similar to British Airways and other
commercial airlines could help DOD's repair pipelines become faster
and more responsive to customer needs. 


      COMMERCIAL AIRLINE
      REENGINEERING EFFORTS
---------------------------------------------------------- Letter :3.1

British Airways used a supply-chain management approach to reengineer
its logistics system.  With this approach, the various activities
encompassed by the logistics pipeline were viewed as a series of
interrelated processes rather than isolated functional areas.  For
example, when British Airways began changing the way parts were
purchased from suppliers, it considered how those changes would
affect mechanics in repair workshops. 

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

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

Four specific practices used by British Airways and other airlines
that appear to be suited to DOD operations to the extent they can be
implemented within the existing legislative and regulatory framework
include the (1) prompt repair of items, (2) reorganization of the
repair process, (3) establishment of partnerships with key suppliers,
and (4) use of third-party logistics services.  These initiatives are
interrelated and, when used together, can help maximize a company's
inventory investment, decrease inventory levels, and provide a more
flexible repair capability.  They appear to address many of the same
problems DOD faces and represent practices that could be applied to
its operations.  We recommended in our reports that DOD test these
concepts in an integrated manner to maximize their potential
benefits. 


      REPAIRING ITEMS PROMPTLY
---------------------------------------------------------- Letter :3.2

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

Prompt repair involves inducting parts into maintenance shops soon
after broken items arrive at repair facilities.  However, prompt
repair does not mean that all parts are fixed.  The goal is to
quickly fix only those parts that are needed.  One commercial airline
routes broken items directly to holding areas next to repair shops,
rather than to stand-alone warehouses, so that mechanics can quickly
access these broken parts.  The holding areas also give mechanics
better visibility of any backlog.  It is difficult to specifically
quantify the benefits of repairing items promptly because that
practice is often used with other ones to speed up pipeline
processes.  One airline official said, however, that the airline has
kept inventory investment down partly because it does not allow
broken parts to remain idle. 


      REORGANIZING THE REPAIR
      PROCESS
---------------------------------------------------------- Letter :3.3

One approach to accelerate the repair process and promote flexibility
in the repair shop is the "cellular" concept.  Under this concept, an
airline moved all of the resources that are needed to repair broken
parts, such as tooling and support equipment, personnel, and
inventory, into one location or repair center "cell." This approach
simplifies the repair of parts by eliminating the time-consuming
exercise of routing parts to workshops in different locations.  It
also ensures that mechanics have the technical support to ensure that
operations run smoothly.  In addition, because inventory is placed
near workshops, mechanics have quick access to the parts they need to
complete repairs more quickly.  British Airways adopted the cellular
approach after determining that parts could be repaired as much as 10
times faster using this concept.  Figure 2 shows a repair cell used
in British Airways' maintenance center at Heathrow Airport.  Another
airline that adopted this approach in its engine-blade repair shop
was able to reduce repair time by 50 to 60 percent and decrease
work-in-process inventory by 60 percent. 

   Figure 2:  A British Airways
   Repair Center Cell

   (See figure in printed
   edition.)


      ESTABLISHING PARTNERSHIPS
      WITH KEY SUPPLIERS
---------------------------------------------------------- Letter :3.4

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

Local distribution centers are supplier-operated facilities that are
established near a customer's operations and provide deliveries of
parts within 24 hours.  One airline that used this approach has
worked with key suppliers to establish more than 30 centers near its
major repair operations.  These centers receive orders electronically
and, in some cases, handle up to eight deliveries a day.  Airline
officials said that the ability to get parts quickly has contributed
to repair time reductions.  In addition, the officials said that the
centers have helped the airline cut its on-hand supply of consumable
items nearly in half.  Figure 3 shows a local distribution center,
located at Heathrow Airport, that is operated by the Boeing Company. 

   Figure 3:  A Local Distribution
   Center at Heathrow Airport

   (See figure in printed
   edition.)

Integrated supplier programs involve shifting inventory management
functions to suppliers.  Under this arrangement, a supplier is
responsible for monitoring parts usage and determining how much
inventory is needed to maintain a sufficient supply.  The supplier's
services are tailored to the customer's requirements and can include
placing a supplier representative in customer facilities to monitor
supply bins at end-user locations, place orders, manage receipts, and
restock bins.  Other services can include 24-hour order-to-delivery
times, quality inspection, parts kits, establishment of data
interchange links and inventory bar coding, and vendor selection
management.  One manufacturer that used an integrated supplier
received parts 98 percent of the time within 24 hours of placing an
order, which enabled the manufacturer to reduce inventories for these
items by $7.4 million--an 84-percent reduction.  Figure 4 illustrates
how an integrated supplier could reduce or eliminate the need for at
least three inventory storage locations in a typical DOD repair
facility. 

   Figure 4:  Potential Impact of
   an Integrated Supplier on DOD's
   System

   (See figure in printed
   edition.)



      USING THIRD-PARTY LOGISTICS
      PROVIDERS
---------------------------------------------------------- Letter :3.5

Third-party logistics providers can be used to reduce costs and
improve performance.  Third-party firms take on responsibility for
managing and carrying out certain logistics functions, such as
storage and distribution.  As a result, companies can reduce overhead
costs because they no longer need to maintain personnel, facilities,
and other resources that are required to do these functions in house. 

Third-party firms also help companies improve various aspects of
their operations because these providers can offer expertise that
companies often do not have the time or the resources to develop. 
For example, one airline contracts with a third-party logistics
provider to handle deliveries and pickups from suppliers and repair
vendors, which has improved the reliability and speed of deliveries
and reduced overall administrative costs.  The airline receives most
items within 5 days, which includes time-consuming customs delays,
and is able to deliver most items to repair vendors in 3 days.  In
the past, deliveries took as long as 3 weeks. 

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


      POTENTIAL IMPACT OF BEST
      PRACTICES ON DOD OPERATIONS
---------------------------------------------------------- Letter :3.6

If DOD were to adopt a combination of best practices, similar to
those employed by commercial airlines, the time items spend in the
services' repair pipelines could be substantially reduced.  For
example, the cellular concept enables a repair shop to respond more
quickly to different repair needs.  An integrated supplier can
provide the consumable parts needed to complete repairs faster and
more reliably.  Both of these concepts are needed to establish an
agile repair capability, which in turn enables a company to repair
items more promptly.  A much faster and responsive repair pipeline
would allow DOD to buy, store, and distribute significantly less
inventory and improve customer service.  For example, an
Army-sponsored RAND study noted that reducing the repair time for one
helicopter component from 90 to 15 days would reduce inventory
requirements for that component from $60 million to $10 million.\2

Figures 5 and 6 uses the Army's pipeline for reparable parts to
illustrate the potential impact that the integrated use of best
practices would have on DOD's logistics system.  Figure 5 illustrates
the current repair pipeline at Corpus Christi Army Depot, 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.  The consumable parts flow includes hardware inventory
stored in DLA warehouses and repair depot inventory, which in 1996
totaled $5.7 billion and $46 million, respectively.  Despite this
investment in inventory, the supply system was completely filling
customer orders only 25 percent of the time.  Also, as of August
1996, mechanics had more than $40 million in parts on backorder, 34
percent of which was still unfilled after 3 months.  In addition,
reparable parts flowing through this system took an average of 525
days to complete the process. 

   Figure 5:  Current Repair
   Pipeline at Corpus Christi Army
   Depot

   (See figure in printed
   edition.)

Figure 6 illustrates a modified Army system, incorporating the use of
an integrated supplier for consumable items, third-party logistics
services, parts induction soon after they arrive at the depot, and
cellular repair shops.  If the military services were to adopt these
practices, they could substantially reduce the number of days for a
part to flow through the repair pipeline and reduce or eliminate much
of the inventory in DLA and repair depot storage locations. 

   Figure 6:  Best Practices
   Applied to the Army's Repair
   Pipeline for Aircraft Parts

   (See figure in printed
   edition.)

DOD's application of concepts such as third-party logistics and
integrated suppliers, however, may require a cost comparison between
government and commercial providers in accordance with Office of
Management and Budget Circular A-76.  This circular requires, in
general, that a public-private competition must be held before
contracting out of functions, activities, and services that were
being accomplished by more than 10 DOD employees.  Our work has
consistently shown 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.\3


--------------------
\2 Weapon System Sustainment Management:  A Concept for
Revolutionizing the Army Logistics System, RAND Arroyo Center
Documented Briefing, 1994. 

\3 Defense Outsourcing:  Challenges Facing DOD as It Attempts to Save
Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar.  12,
1997). 


   CURRENT DOD INITIATIVES SEEK TO
   IMPROVE LOGISTICS SYSTEMS
------------------------------------------------------------ Letter :4

Each of the military services has programs underway to improve
logistics operations and make its processes faster and more flexible. 
The Army established its Velocity Management program to eliminate
unnecessary steps in the logistics pipeline that delay the flow of
parts through the system.  The Navy is using a regionalization
concept to reduce redundant capabilities in supply and maintenance
and is testing a direct delivery concept for a few component parts. 
The Air Force established its Lean Logistics initiative to
dramatically improve logistics processes.  Although these initiatives
have been underway for several years, the results are limited, and
the overall success of these programs is uncertain. 


      ARMY VELOCITY MANAGEMENT
      PROGRAM
---------------------------------------------------------- Letter :4.1

In January 1995, the Army established its Velocity Management program
to develop a faster, more flexible, and more efficient logistics
pipeline.  The program's goals, concepts, and top management support
parallel 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. 
The Army plans to achieve this goal in a similar manner as the
private sector:  by changing its processes and not by refining the
existing system.  The Army's Vice Chief of Staff has strongly
endorsed the program as a vehicle for making dramatic improvements to
the current logistics system.  In anticipation of these improvements,
the Army has reduced its operating budgets for fiscal years 1998
through 2003 by $156.5 million. 

The Velocity Management program consists of Army-wide process
improvement teams for the following four areas:  ordering and
shipping of parts, the repair cycle, inventory levels and locations
(also known as stockage determination), and financial management. 
For each of these areas, the Army is examining its current processes
and attempting to identify ways to improve them.  The Army's
implementation strategy for these improvement areas includes three
phases:  defining the process, measuring process performance, and
improving the process.  As shown in table 1, the four improvement
areas are in various implementation phases. 



                                Table 1
                
                Status of the Army's Velocity Management
                                Program

                               Velocity Management improvement areas
                              ----------------------------------------
                                                              Financia
                              Order     Stockage              l
                              and       determinat  Repair    manageme
                              shipping  ion         cycle     nt
Implementation phase          --------  ----------  --------  --------
Phase 1: Define the process   Complete  Completed   Complete  Underway
                              d                     d

Determine customer needs

Understand process

Phase 2: Measure process      Complete  Underway    Underway  Not yet
performance                   d                               started

Define metrics and identify
data

Determine baseline
performance

Develop progress reports

Phase 3: Improve the process  Underway  Not yet     Not yet   Not yet
                                        started     started   started

Establish goals

Develop improved processes

Implement changes
----------------------------------------------------------------------
The order and shipping improvement area is in phase 3 and the
farthest along in the implementation process.  In this area, the Army
has reduced the time it takes to order and deliver parts to a
customer located in the United States from approximately 22 to 11
days, or by 50 percent.  According to Army officials, this
improvement was achieved by automating the ordering process and
having delivery trucks dedicated to servicing a single customer.  The
Army plans to continue work on other functions in this area, such as
the receiving process. 

The stockage determination and repair cycle initiatives are both in
phase 2.  According to Army officials, these improvement areas have
not advanced as quickly as planned due to difficulties in obtaining
reliable data to measure the current processes.  Also, Army officials
have not precisely determined what metrics to use for measuring
future improvements.  The financial management area, the last
initiative to be started, is currently in phase 1. 


      NAVY REGIONALIZATION AND
      DIRECT DELIVERY PROGRAMS
---------------------------------------------------------- Letter :4.2

The Navy has three major improvement efforts underway that are aimed
at reducing infrastructure costs and streamlining operations.  The
first initiative, called regional supply, consolidates decentralized
supply management functions into seven regionally based activities. 
Under the old system, naval bases, aviation repair depots, and
shipyards each had supply organizations to manage needed parts. 
These activities often used different information systems and
business practices and their own personnel and facilities.  This
initiative does not consolidate inventories into fewer storage
locations.  The consolidation is intended to provide central
management of spare parts for these individual operations, improve
parts visibility, and reduce the overhead expenses associated with
separate management functions.  The Navy hopes that the centralized
management approach will lead to a better sharing among locations and
reductions in inventories.  In fiscal year 1997, the Navy reported
inventory reductions of $4.9 million through its regional supply
program, and it expects to reduce inventories by an additional $24
million in fiscal
year 1998.  The Navy expects that 90 percent of the supply management
consolidations will be completed by the end of fiscal year 1998. 

The second initiative, called regional maintenance, similarly
identifies redundant maintenance capabilities and consolidates these
operations into regionally based repair facilities.  For example, in
one region the Navy is consolidating 32 locations used to calibrate
maintenance test equipment into 4 locations.  The regional
maintenance program is mainly focused on reducing infrastructure
costs, but its other objectives include improving maintenance
processes, integrating supply support and maintenance functions, and
providing compatible information systems.  Through fiscal year 1996,
the Navy identified a total of 102 regional maintenance initiatives: 
55 were started in fiscal year 1997, and 47 are to be implemented
between fiscal years 1998 and 2001.  The Navy estimates that its
regional maintenance efforts will save $944 million between fiscal
years 1994 and 2001. 

We recently reported that, although the Navy has made progress in
achieving its infrastructure streamlining objective under regional
maintenance, the progress thus far has not been as great as
anticipated and challenges remain for accomplishing future plans.\4
Full implementation, initially projected for fiscal year 1999, is now
projected for fiscal year 2000 and could take longer.  Many of the
initiatives identified have not been completed, and projected savings
are not being achieved.  For example, one initiative to consolidate
planning and engineering functions for certain repairs is not
progressing as planned, delaying planned personnel reductions and
affecting up to $92 million in savings projected to occur between
fiscal years 1998 and 2001.  The Navy has classified many of its
initiatives as high risk because of barriers to implementation,
including institutional resistance to change, inadequate information
systems, and poor visibility over maintenance-related costs. 

The Navy's third initiative, called direct vendor delivery, is a
logistics support technique intended to reduce the costs of the
inventory management and distribution functions.  Under this
initiative, a contractor (typically an original equipment
manufacturer) will be responsible for repairing, storing, and
distributing weapon system components.  The contractor agrees to meet
certain delivery timeframes and supply availability rates for the
components.  When a component fails at an operating location, it is
sent directly to the contractor rather than to a Navy repair
facility.  The contractor in turn ships a replacement part back to
the operating location.  If a future demand for the item is
anticipated, then the contractor fixes the broken component so it can
be used again.  According to the Navy, the direct vendor delivery
concept will motivate the contractor to increase the reliability of
the component so it needs to be repaired less frequently, which may
reduce the component's life-cycle costs. 

The direct vendor delivery concept is in the early stages of
development.  As of January 1998, the Navy had placed only 3
subsystems, consisting of 96 components, under contract.  The value
of these three contracts represent about 1 percent of the Navy's
fiscal year 1998 purchase and repair budget.  The Navy plans,
however, to apply this concept to additional weapon system components
in the future. 


--------------------
\4 Navy Regional Maintenance:  Substantial Opportunities Exist to
Build on Infrastructure Streamlining Progress (GAO/NSIAD-98-4, Nov. 
13, 1997). 


      AIR FORCE LEAN LOGISTICS
      PROGRAM
---------------------------------------------------------- Letter :4.3

In 1994, the Air Force initiated a reengineering effort called Lean
Logistics to dramatically improve logistics processes.  The Air Force
describes Lean Logistics as the cornerstone of all future logistics
system improvements.  This effort, spearheaded by the Air Force
Materiel Command, is aimed at improving service to the end user while
reducing pipeline time, excess inventory, and other logistics costs. 
The Air Force expects to save $948 million in supply costs between
fiscal years 1997 and 1999 as a result of Lean Logistics initiatives. 

Under Lean Logistics, the Air Force developed a program to redesign
the current repair pipeline.  In June 1996, the Air Force began
testing certain concepts at 10 repair shops, and the tests involve
less than 1 percent of the Air Force's inventory items.  The concepts
include repairing items quickly after they break, using premium
transportation to rapidly move parts, organizing support (supply and
repair) personnel into teams, and deploying new information systems
to better prioritize repair actions and track parts.  Each shop
tested some of these concepts and identified system improvements
needed to adopt these practices on a broader scale. 

As part of its demonstration projects, the Air Force tracked overall
performance in four general areas:  customer impact, responsiveness
to the customer, repair depot efficiency, and operating costs. 
According to an October 1997 cost-benefit analysis of these projects,
the tests were not a complete success.  For example, 70 percent of
the shops showed improvement in depot repair efficiency, but only 10
percent of the shops showed improvements in improving the
responsiveness to the customer.  Also, three of the four performance
areas showed mixed results for 50 percent or more of the shops. 
According to the Air Force analysis, full implementation of the
concepts may need to be re-evaluated and refined to achieve desired
improvements in customer service and operating costs.  Table 2 shows
the impact of the demonstration projects on the four performance
areas. 



                                Table 2
                
                    Results of the Air Force's Lean
                    Logistics Demonstration Projects

                         (Figures in percents)

                              Shops with     Shops with     Shops with
                                improved      decreased          mixed
Performance area             performance    performance    performance
-------------------------  -------------  -------------  -------------
Customer impact                       20             30             50
Responsiveness to the                 10             20             70
 customer
Repair depot efficiency               70              0             30
Operating costs                       30             20             50
----------------------------------------------------------------------
Notwithstanding the results of the demonstration projects, the Air
Force began expanding these concepts servicewide in April 1997 and
plans to complete this effort by the spring of 1998.  According to
the Air Force, the concepts will be refined as implementation
continues. 


   BEST PRACTICES CAN BE APPLIED
   TO REPARABLE PARTS
------------------------------------------------------------ Letter :5

The military service's current improvement efforts could be expanded
to include a wider application of the best practices discussed in
this report.  In addition, the services have not established specific
locations where a combination of several practices could be tested to
achieve maximum benefits.  These expanded efforts would be consistent
with recent legislative provisions and the Defense Reform Initiative,
which encourage the adoption of best business practices.  However, a
wider application of best practices by DOD must be accomplished
within the current legislative framework and regulatory requirements. 

Our previous reports recommended the testing and implementation of
best practices, specifically, prompt repair of items, cellular
repair, supplier partnerships, third-party logistics, as well as an
integrated test of these practices.  The Navy and the Air Force have
initiated programs to adopt certain forms of supplier partnerships,
and the Air Force is pursuing the prompt repair of items throughout
its operations.  Table 3 summarizes the status of the services'
efforts in implementing best practices. 



                                     Table 3
                     
                     Status of Recommended Best Practices for
                             Aircraft Reparable Parts

                                       Best practices
            --------------------------------------------------------------------
            Prompt                                                  Integrated
            repair        Cellular      Supplier      Third-party   test
Service     of items      repair        partnerships  logistics     of practices
----------  ------------  ------------  ------------  ------------  ------------
Air Force   Yes           No            Limited use   No            No

Army        No            Limited use   No            No            No

Navy        No            No            Test planned  No            No
--------------------------------------------------------------------------------
As part of its Lean Logistics program, the Air Force has adopted the
concept of prompt repair of items to help speed the flow of parts
through the repair process.  In February 1997, the Air Force also
began using a prime vendor program to support the C-130 propeller
repair shop at the Warner Robins Air Logistics Center.\5 In fiscal
year 1998, the Air Force plans to expand the prime vendor program at
Warner Robins and begin programs at two other Air Force repair
depots.  The Navy plans to test the prime vendor concept at two
depots during 1998.  As of April 1997, the Army was using the
cellular repair concept at two maintenance shops in the Corpus
Christi Army depot.  The Army, however, has not initiated any
additional tests of the practices recommended in our reports at the
Corpus Christi depot.  Finally, none of the services have developed a
plan to combine these new practices at one facility. 

In commenting on a draft of this report, DOD highlighted additional
initiatives that it believes demonstrate the use of best commercial
practices.  For example, the Army is pursuing an initiative to
rapidly repair 20 different circuit cards at two Army depots and
return the cards using premium transportation.  The Army plans to
expand this concept later this year to engine components.  DOD also
highlighted Navy efforts to reduce the administrative lead times
involved in repairing maritime parts and have a third-party provider
build repair kits for hydraulic parts.  In addition, DOD cited an Air
Force initiative related to the contractor support for certain C-17
aircraft parts.  Under this arrangement, the contractor is
responsible for interim contractor support, depot repair, materiel
and program management, and system modifications. 


--------------------
\5 The prime vendor concept is a form of a supplier partnership in
which a 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. 


      MILITARY SERVICES AND DLA
      RESPONSIBILITIES FOR
      ADOPTING BEST PRACTICES
---------------------------------------------------------- Letter :5.1

Section 395 of the National Defense Authorization Act for Fiscal Year
1998 requires the Director of DLA to develop and submit to Congress a
schedule for implementing best practices for the acquisition and
distribution of categories of consumable-type supplies and equipment
listed in the section.  However, each military service manages
reparable parts that are used in its operations; DLA stores and
distributes these parts and manages consumable items.  Each service
and DLA, therefore, would be responsible for developing and
implementing a strategy to adopt best practices for the items they
manage if section 395 were broadened to include reparable parts. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

Our work shows it is feasible for the list of items covered by
section 395 to be expanded to include reparable parts.  For example,
each of the services and DLA have initiatives underway designed to
improve their logistics operations by adopting best practices.  Our
reports identify additional best practices that present opportunities
for DOD to build on these improvement efforts.  However, if section
395 were expanded, the responsibility for the development and
submission of a schedule to implement these practices would go beyond
the purview of the Director of DLA.  Thus, expanding the list of
items covered by the provisions included in section 395 would also
appear to warrant broadening the responsibility for responding to the
legislation to include the military services. 

Our previous reports recommended that DOD test and adopt best
practices where feasible; therefore, we are not repeating those
recommendations in this report.  However, testing a combination of
several key best practices is an option that DOD has yet to explore
as it considers the extent to which successful techniques used in the
private sector could be applied to its logistics operations.  This
action would be consistent with recently enacted Centers of
Industrial and Technical Excellence legislation and the Defense
Reform Initiative.  This wider application of best practices by DOD
must be accomplished within the framework of existing legislative and
regulatory requirements. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :7

If Congress decides it wants to expand the provisions of section 395
to include reparable parts, it may wish to consider (1) broadening
the responsibility for responding to this legislation to include the
military services and (2) developing provisions, similar to those in
section 395, to encourage DOD to test combinations of best practices
using a supply-chain management approach. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

In written comments on a draft of this report, DOD agreed that
further progress is possible in using best practices for reparable
parts.  However, DOD has concerns in two areas.  First, DOD believed
that our draft report did not include all ongoing initiatives by the
military services to adopt best business practices in the management
of reparable parts.  Second, DOD did not agree with our Matters for
Congressional Consideration that the Congress may wish to consider
developing statutory guidance related to best practices for reparable
parts.  DOD believed that, because of its actions underway, statutory
guidance is not needed.  DOD's comments appear in appendix II. 

We incorporated several of the examples DOD provided into our report. 
However, some of these initiatives, particularly the newly awarded
contract for C-17 aircraft support, involve integrated supplier
support and third-party logistics predominately on the part of the
contractor.  Our past work and this report have been concerned with
efforts to improve the existing in-house repair pipeline through the
use of proven best practices adopted in the private sector,
especially for aircraft parts, once the decision has been made to
keep the repair function at public facilities.  This C-17 contract
represents a different arrangement and we are not in a position to
comment on the merits of that approach. 

With regard to the Matters for Congressional Consideration, our
intent is to highlight two actions that we believe may be useful to
Congress if it decides to expand section 395 to include reparable
parts.  Therefore, we modified this section to clarify our intent. 


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

We used information from our three prior reports that compared Army,
Navy, and Air Force logistics practices to those of commercial
airlines.  For these reports, we examined operations at 20 DOD
locations involved in the logistics pipeline.  At these locations, we
discussed with supply and maintenance personnel the operations of
DOD's current logistics system, customer satisfaction, planned
improvements to the logistics system, and the potential application
of private sector practices to DOD 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.  Unless otherwise noted, inventory
values reflect DOD's standard valuation methodology, in which excess
inventory is reported at an estimated salvage value and reparable
parts requiring repair are reduced by an average estimate of repair
costs. 

We also used information from our reports to identify leading
commercial practices.  This information, which was collected by
making an extensive literature search, and through detailed
examinations and discussions of logistics practices with officials
from British Airways, United Airlines, Southwest Airlines, American
Airlines, Federal Express, Boeing, Northrop-Grumman Corporation, and
Tri-Star Aerospace.  We also participated in roundtable discussions
and symposiums with recognized leaders in the logistics field to
obtain information on how companies are applying integrated
approaches to their logistics operations. 

We reviewed documents and interviewed officials on DOD's 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.; Army Materiel Command, Alexandria, Virginia; Naval
Supply Systems Command, Mechanicsburg, Pennsylvania; Naval Inventory
Control Point, Mechanicsburg, Pennsylvania; Air Force Headquarters,
Washington, D.C.; and Air Force Materiel Command, Wright-Patterson
Air Force Base, Ohio.  Also, officials at these locations provided us
with detailed information on their efforts to adopt the specific best
practices we recommended in prior reports. 

We conducted our review from December 1997 to January 1998 in
accordance with generally accepted government auditing standards. 


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

We are sending copies of this report to other congressional
committees; the Secretaries of Defense, the Army, the Navy, and the
Air Force; the Directors of the Defense Logistics Agency and the
Office of Management and Budget; and other interested parties.  We
will also make copies available to others on 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 III. 

David R.  Warren, Director
Defense Management Issues


THE DEPARTMENT OF DEFENSE
LOGISTICS PIPELINES
=========================================================== Appendix I

The Department of Defense's (DOD) depot repair pipelines for
reparable parts are slow and inefficient.  Since February 1996, we
have issued three reports that compared commercial logistics
practices with similar Army, Navy, and Air Force operations for
reparable aircraft parts.  In these reports, we highlighted four
factors that contributed to the services' slow and inefficient repair
pipelines.  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) work processes at repair depots are inefficiently
organized, and (4) consumable parts are not frequently available to
mechanics when needed.  As a result, the services can spend several
months or even years to repair and distribute repaired parts to the
end user.  The amount of time it takes to repair parts is important
because DOD must invest in enough inventory to resupply units with
serviceable parts during the time it takes to move and repair broken
parts. 


   ARMY LOGISTICS PIPELINE
--------------------------------------------------------- Appendix I:1

In April 1997, we reported that the Army's current repair pipeline,
characterized by a $2.6-billion investment in aviation parts, is slow
and inefficient.\1 To calculate the amount of time the Army 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 being shipped to a field
unit.  The parts we selected took an average of
525 days to complete the repair process.  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 to more than 1,000 days. 
Table I.1 details the fastest, slowest, and average times the Army
needed to complete each of the four pipeline segments. 



                               Table I.1
                
                 Amount of Time Used by the Army Depot
                 Repair System for 24 Types of Aviation
                                 Parts

                           (Figures in days)

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

Depot storage before repair         Less than   887         158
                                    1

Depot repair time                   1           1,067       147

Depot storage before 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. 

A comparison of the Army's engineering estimate of the repair time
that should be needed to complete repairs with the actual amount of
time taken is a measure of repair process efficiency.  Of the 525-day
average pipeline time from our sample, the Army estimates that an
average of
18 days should be needed to repair items.  The remaining 507 days, or
97 percent of the total time, was spent transporting or storing parts
or was due to unplanned repair delays. 

Another measure of repair process efficiency is a calculation of how
often an organization uses its inventory, called the turnover rate. 
The higher the turnover rate, the more often a company is utilizing
its inventory.  At British Airways, the inventory turnover rate for
reparable parts was
2.3 times each year.  In comparison, we calculated that the Army's
turnover rate for fiscal year 1995 repairs was 0.4 times, or about 6
times slower than British Airways. 


--------------------
\1 Inventory Management:  The Army Could Reduce Logistics Costs for
Aviation Parts by Adopting Best Practices (GAO/NSIAD-97-82, Apr.  15,
1997). 


   NAVY LOGISTICS PIPELINE
--------------------------------------------------------- Appendix I:2

In July 1996, we reported that the Navy's system, characterized by a
$10 billion inventory of reparable parts, is slow and complex and
often does not respond quickly to customer needs.\2 For example,
customers wait an average of 16 days at operating bases and 32 days
on aircraft carriers to receive parts from the wholesale system.  If
the wholesale system does not have the item in stock, customers wait
over 2-1/2 months.  Many factors contribute to this situation, but
among the most prominent is a slow and complex repair pipeline. 
Within this pipeline, broken parts can pass through as many as 16
steps, taking as long as 4 months, before they are repaired at a
repair depot and are available again for use. 

Specific problems that prevent parts from flowing quickly through the
pipeline include a lack of consumable parts needed to complete
repairs, slow distribution, and inefficient repair practices.  For
example, the Navy's practice of routing parts through several
workshops at repair depots increases the time needed to complete
repairs.  One item we examined had a repair time of 232 hours, only
20 hours of which was spent actually repairing the item.  The
remaining 212 hours, or 91 percent of the total time, was spent
handling and moving the part to different locations. 

In contrast, leading firms in the airline industry, including British
Airways, hold minimum levels of inventory that can turn over four
times as often as the Navy's.  Parts are more readily available and
delivered to the customer within hours.  The repair process is
faster, taking an average of 11 days for certain items at British
Airways compared with the Navy's 37-day process for a similar type of
part.  Table I.2 compares several key logistics performance measures
of British Airways and the Navy. 



                               Table I.2
                
                   British Airways and Navy Logistics
                          Performance Measures

Key performance
measure                 British Airways (1994)  Navy (1995)
----------------------  ----------------------  ----------------------
Consumer-level supply
availability rates

Reparable parts         86 percent              75 percent

Consumable parts        97 percent              57 percent\a

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

Inventory turnover

Reparable parts         1 time every 5 months   1 time every 2 years\c

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

Avionics repair times   11 days                 37 days\d
----------------------------------------------------------------------
\a This figure applies to Defense Logistics Agency-managed items
only. 

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

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

\d This figure does not include time awaiting parts. 


--------------------
\2 Inventory Management:  Adopting Best Practices Could Enhance Navy
Efforts to Achieve Efficiencies and Savings (GAO/NSIAD-96-156, July
12, 1996). 


   AIR FORCE LOGISTICS PIPELINE
--------------------------------------------------------- Appendix I:3

In February 1996, we reported that Air Force had invested about $36.7
billion in aircraft parts.\3

Of this amount, the Air Force estimated $20.4 billion, or 56 percent,
was needed to support daily operations and war reserves, and the
remaining $16.3 billion was divided among safety stock, other
reserves, and excess inventory.\4 These large inventory levels were
driven in part by the slow logistics pipeline process.  For example,
one part we examined had an estimated repair cycle time of 117 days;
it took British Airways only 12 days to repair a similar part.  We
reported that the complexity of the Air Force's repair and
distribution process creates as many as 12 different stopping points
and several layers of inventory as parts move through the process. 
Parts can accumulate at each step in the process, which increases the
total number of parts in the pipeline. 
Figure I.1 compares the Air Force's pipeline times with British
Airways' times for a landing gear component. 

   Figure I.1:  Air Force's and
   British Airways' Pipeline Times
   for a Landing Gear Component

   (See figure in printed
   edition.)



(See figure in printed edition.)Appendix II

--------------------
\3 Best Management Practices:  Reengineering the Air Force's
Logistics System Can Yield Substantial Savings (GAO/NSIAD-96-5, Feb. 
21, 1996). 

\4 These Air Force inventory values are based on an item's last
acquisition cost.  With the use of DOD's standard valuation
methodology, in which excess inventory is at salvage values and
reparable parts requiring repair are reduced by the estimated cost of
repair, the Air Force's $36.7 billion would be valued at about $31
billion. 


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



(See figure in printed edition.)


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

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

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

CHICAGO FIELD OFFICE

Robert Repasky
Matthew Lea
Frederick Naas

DALLAS FIELD OFFICE

Vijaykumar Barnabas
Robert Malpass

RELATED GAO PRODUCTS

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). 

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


*** End of document. ***